Wikinvest Wire

Housing bottom? It depends who you ask

Friday, December 05, 2008

Via Jon Lansner over at the Orange County Register, here's an interesting contrast in the outlook for the nation's housing market over the next few years based on two surveys - one from real estate brokers, the other from OC Register readers.

The box in the lower right of the graphic below has been provided by yours truly to neatly summarize the findings. Not surprisingly, those in the business of selling real estate are far more sanguine than are potential home buyers and sellers.

But there is something even more interesting about this data that too few housing market watchers will immediately realize, helping to explain why the results are not all that surprising after all.

Here's the survey:
IMAGE How is this data not surprising?

As noted here before on many occasions, sales volume and sales price are two very different components of the housing market and, while home buyers and sellers are more interested in sales price, those in the business of selling real estate are surely more interested in sales volume.

Both surveys simply asked about a "housing bottom".

As a result, both survey results may prove to be correct - realtors forecasting a bottom in sales volume next year and OC Register survey respondents forecasting a bottom in sales price in 2010.

This goes back to one of those Freakonomics stories where, with just a little thought, it should become painfully clear that realtors care a lot more about making the sale than they do about the sale price.

For example if a $300,000 home is sold through a realtor, a six percent commission would result in $18,000 to be divvied up between the agents and brokers for the buyer and seller. If the sale is not made, the commission is zero. Whether the sale price is a little higher or lower has no significant impact on the commission amount, relatively speaking. What's important is that the sale is made.

Realtors will naturally think of a "housing bottom" in terms of home sales and the number of commissions they are likely to generate rather than home prices and the size of those commissions.


Anonymous said...

Housing is regional. That said, it is definetely not at a bottom in most places where people can't afford to take out the 30+ year mortgage that is required to pay for the damn house.

Until homes are affordable and don't require 30 year mortgages, they should be considered expensive.

Giovanni DiSalvo-Greenler said...

Its ugly, but it’s the only solution

1.Prices are still falling. This is due to tighter lending standards and the fact that current salaries still cannot cover current house prices in most places. A safe mortgage is a maximum of 3 times the buyer's yearly income, but mortgages have been 5 to 10 times incomes in the last few years. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices fall into line with tighter lending and stagnant salaries.

2.It's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 5%, so it costs almost twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it may make sense to buy in Michigan and some other places where prices have fallen into line with salaries.

3. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and Congress is taking $700B of our money to pay the mortgage investment losses for banker friends of Henry Paulson. The plan is to overpay the banks for bad mortgages, claiming that this will support the housing market. It will not work, since Wall Street profits have nothing to do with housing prices.

Now we also have legal contracts being modified to stop even well-justified foreclosures. No one was forced to borrow money. Grown ups should be responsible for their own actions. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price, not to mention what this does to faith in contract law.

Should taxes and inflation be used to pay the debts of irresponsible borrowers, no matter how much they over-borrowed or overpaid for a house? Should savers be forced to pay the debts of people who cannot afford "their homes" no matter what price they paid or how far it is beyond their actual financial means? If so, go buy the most expensive house you can right now! Borrow as much as you possibly can and don't pay it back, knowing that Congress and Bush will force the real repayment obligation onto others, onto people who are living within their means.

Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in foolish mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get.

A return to traditional lending standards means a return to traditional prices, which are far below current prices.

4.Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go.
For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428

Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed's rate cut, because rate cuts cause higher inflation.

5.Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.

It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

6.Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you'll save more on your next house than you'll lose in selling your current house.

Every "affordability" program drives prices higher by pushing buyers deeper into debt. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage interest deduction.

Canada has no mortgage-interest deduction at all, and has a more affordable housing market because of that.

The government keeps house prices unaffordable through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except (and please forgive me for saying this) Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every "affordability" program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each.

7.Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."

8.Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.

9.Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.

10.Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.

11.The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken."

The only way through this mess is to re-underwrite every single loan made between 2003-2007, especially anything that is not a full-doc 30-year fixed not underwater vs. value. Currently, there are roughly $7 trillion in loans still on the book made during the years in question.

It is my opinion that unless the borrower is re-qualified on a market-rate 30-year fixed rate loan with a debt-to-income (DTI) ratio of 28/36 and their loan amount dropped accordingly, it has a high likelihood of failure.

Remember, what makes most of the loans originated in the past six years so shaky other than exotic features such as stated income, interest only and high-CLTV is the high allowable DTI ratios.

Most ‘Prime’ loan programs allowed up to a 50% DTI ratio meaning half of the borrowers GROSS income is going out every month in debt.

Many added a second mortgage, cars, boats and lots of other consumer debt pushing DTI’s much higher.

Re-underwriting and reducing principal balances according to what a person actually earns undoes the past five years. At 28/36, the borrower becomes de-leveraged, is able to maintain a decent lifestyle, save money, will pay down principal and ultimately own their home one day.

28/36 is time-tested whereas 50% DTI was a product of the leverage and asset bubble years. At 28/36, if home values drop borrowers are less likely to walk away because they are not totally leveraged to their house and able to save money.

For all of you who ‘did nothing wrong and are being punished’, I sympathize. Unless an effective, large scale Mortgage Modification effort at all banks is implemented and well-received by borrowers, housing will have a decade of pain ahead that will hit you hard as well. All that a loan Mortgage Modification effort does is expedite revaluation and de-leveraging process so we can move on. The leverage has to be drained from the residential real estate market or the economy will not recover. If the trillions given to banks and everyone else would have been spent here in the first place, the problem would never have become this bad in the first place. You will pay for all this one way or another. Paying to de-lever borrowers and expedite the real estate revaluation process will trickle back to you to a much greater degree than any other program I have heard yet.

Anonymous said...

I am one of the innocent victims. I briefly moved out of California because of a job transfer in 1998. Sold my house, and when the company went bankrupt in less than a year we moved b ack in 1999. We could not buy our own house! That told us---bubble time. We will rent and save. The best thing ever happened to our savngs. We saved over 50% of gross. Well we have enough to buy two houses at todays prices. CASH! But we don't want a house until the prices come down. We have been lied to dozens of times in the intreim by Realtors, loan brokers and developers, who were rude to us and laughed at us for our "last chance" to be homeowners.

Here is my solution. Round up ALL the Realtors, loan agents and bankers and ARREST them. domn't laugh. It was difficult to fight them---their LIES---finally got them--and us--as victims of their deceit. NO PAIN IS TOO small for these vermin.

Anonymous said...

Giovanni DiSalvo-Greenler,

If you are going to blantantly copy and paste and steal from Please have the decency to post the source. Thank you.

Anonymous said...

Here here on the, I love that guy and he should be credited when using his words.

That being said, Patrick wrote that quite a while ago. Things have changed a bit since then.

It seems to me that we are getting closer to the 'time to buy', at least in San Diego. In the low range < 350 housing sales have come back and many deals will put one in line with rents -- this means that for those it is time to buy. If one looks at closings in the low range ( has great data) one can find that many, if not most, of the low range closings are closing up from the list price.

In the mid range, sales are still slow and closings are still 5-10% from the list price. While houses in this range seem to be coming down slower, they are still coming down a bit. If mortgage rates do drop to 4.5% I am thinking that my opportunity to buy might be here, given a good deal on a place.

To me, the danger is that mid range stuff finally hits equilibrium and the same thing starts happening to the mid that is happening to the low, houses become hard to buy because of pent up consumer demand and, while the prices to do not necessarily rise for the next few years, we lose the ability to make a -10% offer on list and end up out of the driver's seat as buyers.

While I am not looking to buy tommorow and my finger is not on the trigger yet, I am definitely taking the safety off.

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