Are We There Yet?

Is housing near the bottom of the cycle?:

Home economics, The Economist: The American housing market has deteriorated so sharply in the past two years that it is easy to fall prey to profound pessimism. Recent weeks have brought yet more bad news. ...

Amid the despondency, however, supply and demand are moving towards balance. Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn. ...[C]onstruction of homes built for sale, not counting units that already have a buyer, had dropped to 13% below the level of new-home sales in the first quarter... That is why the inventory of unsold homes, though still near recent highs relative to monthly sales, has fallen sharply in absolute terms.

By the standards of previous cycles, residential construction should be nearing the bottom. ... [H]ome prices have dropped about 18% from their mid-2006 peak  ... and incomes have steadily grown, homes are returning to more typical levels of affordability in some regions. ...

There are numerous caveats, however. First, the scale of the housing boom means history is a flawed guide to how big a retrenchment is in store. ... David Seiders, chief economist at the National Association of Home Builders (NAHB)..., thinks that in normal times, 3.6% of America’s housing stock ... should be vacant. The figure is now 4.8%..., one reason Mr Seiders thinks construction is going to keep falling until the second quarter of next year.

Some believe that with banks and other lenders dumping huge numbers of foreclosed homes, prices could fall well below equilibrium. That is debatable. A recent paper by Charles Calomiris of Columbia University and Stanley Longhofer and William Miles, both of Wichita State University, argues that foreclosure sales will impact prices less than commonly thought. ...

Most serious is the prospect of a further squeeze on credit. The fate of the mortgage market has increasingly rested on the shoulders of Fannie Mae and Freddie Mac, as well as Ginnie Mae, their wholly government-owned counterpart. But they may not have much more staying power; last month, their issuance of mortgage-backed securities plunged by 41% from June... Even if Fannie and Freddie’s capital constraints do not stop them guaranteeing mortgages, they have tightened their underwriting terms. Banks, which lack capital themselves, are passing these tighter terms on to customers. ...

This has left both optimists and pessimists pinning hopes for a rebound on the federal government. Last month’s housing-rescue law offers up to $7,500 to first-time homebuyers... The law also made the government’s implicit backing of Fannie and Freddie explicit, if necessary by injecting capital into them. Ms Coronado admits her optimistic case goes out of the window if the two firms can no longer do their job. Which is why, she says, the government will ensure that they can.

I don't think we are there yet. Housing prices are still above historical trends, and the recovery from housing bubbles is notoriously slow.

Comments

[Other People's Money]

On most supply/demand curves, demand increases as price goes down. This relationship does not change just because highly leveraged speculative bets were made using other people's money during a bubble.

The bubble prices were never sustainable, because the other people were never willing to lose ever increasing sums on bad loans. The other people just didn't realize what was happening, until it was too late.

[IdahoSpud]

"Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March."

This parameter is meaningless unless compared to the previous March, or Year-over-year. There is a dramatic seasonality to housing sales. Buyers with school age children typically want escrow to close during summer recess. A March sale with a 90 day escrow puts you right there. Year over Year, sales in March were down about 30%, IIRC. So housing demand is in reality dropping at a faster pace, not stabilizing.

"That is why the inventory of unsold homes, though still near recent highs relative to monthly sales, has fallen sharply in absolute terms."

Disagree here too. Several bloggers have reported "shadow inventory" and/or "paid squatters".

Banks do not want to repossess houses. Banks with no capital remaining are certainly loathe to do so. If these impaired banks take properties onto their books they will have to recognize a loss that they cannot afford.

Wells Fargo recently redefined non-performing mortgages as those being 180 days late from the previous industry standard of 90 days late. Voila! A higher percentage of performing mortgage loans, and a much smaller quarterly loss. Note that this gimmick does not affect what will eventually be unpaid loans, quarterly losses, and extra houses in Well's REO inventory - it merely makes things look better than they really are for a while by changing the metric.

IMHO housing will be "stablized" when non GSA lenders have enough oversight and regain enough wherewithal to lend to the American public again.

[save_the_rustbelt]

Unemployment is headed up and the worst economic news is yet to arrive - no bottom yet.

[Vicente Fox]

2011, at the earliest.

[howard]

i stopped reading as soon as i came to the reference to growing income: this is not, i realized, an article written in good faith, and life being short, i'll take the time i would have spent finishing it to note that instead.

[kthomas]

"2011, at the earliest." Agreed. Obviously, too many people are still listening to Greenspan.

[CathyG]

Thanks, Howard. I, too, am totally sick and tired of dishonest presentations of data. The problems can't be solved until there's agreement on the uderlying premises and facts and it seems we're still a ways from that first step.

[Bruce Wilder]

I am interested in when the banks will hit bottom, and how far along the banks are in accruing their expected losses.

Reading the Calculated Risk blog, I get the idea that, while we have seen the peak of the subprime mess, Alt A is still ahead, in late 2009.

Recession and price declines of 20% will increase foreclosure rates even on prime mortgages.

Guesstimates of mortgage loan losses center around $1.2 trillion. How much of that total has been realized, and parcelled out to banks, FDIC, securities investors, etc.? How much is to come?

[Richard H. Serlin]

In an August 4th post on Princeton economist Paul Krugman's blog he showed a graph of the inflation adjusted Case Shiller 20 city index from January 2000 to April 2008. The index went from from 100 to 130.

Shiller has a highly respected data set of home prices going all the way back to 1890. He finds that although there are plenty of bubbles, busts, and flat periods, the average real (inflation adjusted) price appreciation is just 0.4% per year (See Shiller's book "Irrational Exuberance", 2nd edition, Chapter 2).

If home prices had kept following that average trend they would only have risen to 103.38 rather than the 130 they had risen to over that 8 year and 4 month period. For prices to deflate to the average trend level they would thus have had to drop in April from 130 to 103.38, a 26% drop. This is a good piece of good evidence pointing to a further drop in home prices of about one-quarter over the next few years. More details are at my post, "Real home prices still need to drop to return to the historical trend level" at:

http://richardhserlin.blogspot.com/2008/08/real-home-prices-still-need-to-drop.html

[Jas Jain]

--
Vacant Units, Year Round, as % of Total Occupied Units (Source: US census):

Dec-00 9.2%
Dec-01 9.2%
Dec-02 10.0%
Dec-03 10.7%
Dec-04 10.8%
Dec-05 10.9%
Dec-06 11.5%
Dec-07 12.0%
Jun-08 12.5%

Total Vacant (All) 2008Q2 = 18,643K = 16.7% of Occupied !!!!!!!!
Total Vacant (All) at the end of 2000 = 14M = 11.5% of Occupied

As the above table shows, economists with access to media are a bunch of propagandists and turn into intellectual whores (selling their integrity) once they acquire some recognition. They have been lying about the supply-demand of housing in the US for years. The estimates of demand during 2004-06 were in the 1.65-1.90M range when the actual demand was much lower. The proof is in the pudding because the average supply during 2001-2008Q2 was below 1.7M and yet the Vacant Units kept going up year after year.

Jas

[Ex-Worker]

Still have a couple more public homebuilder bk's with Fannie/ Freddie reorgs/bailouts to go.

[Ryan]

No way is this market near a realistic equillibrium (calling it a bottom is a misnomer.) As mentioned above, Case Shiller numbers would predict the market has quite a ways to fall. Likewise, inflation adjusted incomes are anemic (even if you assume inflation figures aren't a complete joke) and population growth rates are also anemic.

Essentially, the the base, looking to buy homes, isn't growing, and they certainly aren't earning enough to consider a second home. So, where exactly is the demand for housing going to come from?

[Ryan]

"Ex-Worker says...
Still have a couple more public homebuilder bk's with Fannie/ Freddie reorgs/bailouts to go."

Are you suggesting that would address the problem, or signify that it is over?