November Home Sales Moved Barely Above the Worst Crash Readings [View article]
bbro - - -
Good observations. While it still may be true that the three most important factors in real estate are location,l location and location, the next three most important factors are employment, employment and employment.
There is a second aspect of employment that you did not mention. That is income. In the 1990s, when housing values grew, median and average real incomes were increasing, even in an era of moderate inflation. People felt more optimistic because employment was at a high level and they felt there prospects were improving, their "wealth" growing. We are now facing stagnant and even negative real wage growth in addition to the high unemployment rate. People are less optimistic about their prospects and may stay that way for some time. The "equilibrium" ratio of median home price to median income may well be lower today than 20 years ago. People will take on less risk when they are less optimistic.
I submit that we are entering a period of tighter lending underwriting, more conservative real estate appraisals and less buyer optimism about their personal prospects. What if equilibrium for the next few years is 3.0 instead of 3.34 or 3.27?
If the equilibrium ratio were 3.34, the current 3.53 is ~6% above "fair value". If the equilibrium is at 3.27 (like 1995-1999), 3.53 is ~8% above "fair value".
However, if equilibrium today would be somewhere around 3.0%, we would currently be ~19% above "fair value" for median home prices.
These numbers bracket the range of price decline that many speculate are possible (5% to 20%) in order to get to the final bottom. A few project 25% declines, possibly considering that an overshoot below equilibrium is likely when there has been a bubble.
bbro, you have highlighted an area which many consider to be the second most important factor in getting to a stable housing market, employment. The most important factor, of course, is clearing up this foreclosure overhang, which also puts downward pressure on prices and makes the cost of building a new home uncompetitive with existing homes.
The bottom for housing sales and prices is likely to take a long time if we are within a few percent of the bottom in prices. If we have a steep further drop (into the 20% further decline range), the recovery in price from the bottom could be more dramatic (a "V"). In either case I would not be surprised for it to take 3, 4 or even 5 years for the national median home price to return to current levels.
If we have another recession things could get worse. If we get into 4%+ average real GDP growth within the next couple of years, things could be better.
Sorry for being long winded, but I had a lot on my mind here.
November Home Sales Moved Barely Above the Worst Crash Readings [View article]
Andrew and other commenters - - -
You all have very good points. I believe Andrew's estimate of a final bottom in about one year is the best guestimate (most optimistic). I think the window for a bottom in both prices and demand likely falls within a 12-24 month window. I don't think the bottom in prices is likely to be the 20% or more below current levels, but much less - maybe 5%-10%. If so, then I thinbk the bottom will be broad and take 36 months or more to get back to current levels. All these guesses are too pessimistic if the economy enters a strong recovery phase with 4%+ GDP growth rate over the next two years. I just don't think we will get there.
All this is subject to revision in the next month as I do my annual in depth analysis of the housing market.
New Housing Crash Trend and Obvious Severe Risks in 15 Key Charts [View article]
Michael - - -
I have thanked you for your great summary of housing data before, but I'll do it again.
Commenters are asking for further analysis and it is needed. However, don't take that as criticism of what you have compiled. Others can go further but your overview of data can stand on its own and provide a basis for further analysis.
On a separate note - One thing that is causing so much angst on this subject is the desire for this debt/credit/financial/... crisis to end quickly. I would offer a general guideline: $/t = a constant.
$ represents the size of the dislocation (dollars) and t is the time to resolution. The great the $, the longer the time.
We have a super sized problem so it won't be resolved quickly.
Mortgages: One in Five Borrowers Will Default [View article]
Prof. Wheaton, MIT, has a detailed proposal for an equity sharing process between government and mortagors to reduce foreclosures. econintersect.com/word... This raises some questions with me about taxpayer costs and ultimate effectiveness. Since home ownership turnover is near 20% a year, the plan could burn taxpayer money if home prices do not appreciate significantly in the next 5-10 years. If prices go much lower, it probably would end up costing hundreds of billions of tax dollars.
This general idea has been mentioned before but the current article is a precise summary of a plan and worth reading.
Mortgages: One in Five Borrowers Will Default [View article]
bbro - - -
Is your point that the worst of the problem is highly localized? If so, what do you propose? A quarantine?
I just don't think that 69% of the populace having only 38% of the problem (these are the inverse of your numbers, 31% having 62% of the problem) is a very effective quarantine situation.
Of course I don't want to argue that the problem is isolated at all. There may be some "lumpiness" geographically, but the default and underwater problem is a national problem with only a few areas not experiencing some significant stress.
If I am misinterpreting the direction of your thinking please clarify.
November Home Sales Moved Barely Above the Worst Crash Readings [View article]
Here are my calculations:
(3.53 - 3.27) x 100 / 3.27 = 7.95% above 3.27
(3.53 - 3.27) x 100 / 3.53 = 7.37% below 3.53
The assumption I made is that median family income remains constant so the ratios reflect only changes in home prices.
BTW, I forgot to wish you Merry Christmas.
November Home Sales Moved Barely Above the Worst Crash Readings [View article]
Good observations. While it still may be true that the three most important factors in real estate are location,l location and location, the next three most important factors are employment, employment and employment.
There is a second aspect of employment that you did not mention. That is income. In the 1990s, when housing values grew, median and average real incomes were increasing, even in an era of moderate inflation. People felt more optimistic because employment was at a high level and they felt there prospects were improving, their "wealth" growing. We are now facing stagnant and even negative real wage growth in addition to the high unemployment rate. People are less optimistic about their prospects and may stay that way for some time. The "equilibrium" ratio of median home price to median income may well be lower today than 20 years ago. People will take on less risk when they are less optimistic.
I submit that we are entering a period of tighter lending underwriting, more conservative real estate appraisals and less buyer optimism about their personal prospects. What if equilibrium for the next few years is 3.0 instead of 3.34 or 3.27?
If the equilibrium ratio were 3.34, the current 3.53 is ~6% above "fair value". If the equilibrium is at 3.27 (like 1995-1999), 3.53 is ~8% above "fair value".
However, if equilibrium today would be somewhere around 3.0%, we would currently be ~19% above "fair value" for median home prices.
These numbers bracket the range of price decline that many speculate are possible (5% to 20%) in order to get to the final bottom. A few project 25% declines, possibly considering that an overshoot below equilibrium is likely when there has been a bubble.
bbro, you have highlighted an area which many consider to be the second most important factor in getting to a stable housing market, employment. The most important factor, of course, is clearing up this foreclosure overhang, which also puts downward pressure on prices and makes the cost of building a new home uncompetitive with existing homes.
The bottom for housing sales and prices is likely to take a long time if we are within a few percent of the bottom in prices. If we have a steep further drop (into the 20% further decline range), the recovery in price from the bottom could be more dramatic (a "V"). In either case I would not be surprised for it to take 3, 4 or even 5 years for the national median home price to return to current levels.
If we have another recession things could get worse. If we get into 4%+ average real GDP growth within the next couple of years, things could be better.
Sorry for being long winded, but I had a lot on my mind here.
November Home Sales Moved Barely Above the Worst Crash Readings [View article]
You all have very good points. I believe Andrew's estimate of a final bottom in about one year is the best guestimate (most optimistic). I think the window for a bottom in both prices and demand likely falls within a 12-24 month window. I don't think the bottom in prices is likely to be the 20% or more below current levels, but much less - maybe 5%-10%. If so, then I thinbk the bottom will be broad and take 36 months or more to get back to current levels. All these guesses are too pessimistic if the economy enters a strong recovery phase with 4%+ GDP growth rate over the next two years. I just don't think we will get there.
All this is subject to revision in the next month as I do my annual in depth analysis of the housing market.
New Housing Crash Trend and Obvious Severe Risks in 15 Key Charts [View article]
I have thanked you for your great summary of housing data before, but I'll do it again.
Commenters are asking for further analysis and it is needed. However, don't take that as criticism of what you have compiled. Others can go further but your overview of data can stand on its own and provide a basis for further analysis.
On a separate note - One thing that is causing so much angst on this subject is the desire for this debt/credit/financial/... crisis to end quickly. I would offer a general guideline: $/t = a constant.
$ represents the size of the dislocation (dollars) and t is the time to resolution. The great the $, the longer the time.
We have a super sized problem so it won't be resolved quickly.
Mortgages: One in Five Borrowers Will Default [View article]
This general idea has been mentioned before but the current article is a precise summary of a plan and worth reading.
Mortgages: One in Five Borrowers Will Default [View article]
Is your point that the worst of the problem is highly localized? If so, what do you propose? A quarantine?
I just don't think that 69% of the populace having only 38% of the problem (these are the inverse of your numbers, 31% having 62% of the problem) is a very effective quarantine situation.
Of course I don't want to argue that the problem is isolated at all. There may be some "lumpiness" geographically, but the default and underwater problem is a national problem with only a few areas not experiencing some significant stress.
If I am misinterpreting the direction of your thinking please clarify.