The Massive Affordability Trend Hits 75 Percent
A good gauge of prices looks good at 75 percent and looks to have a better good future.
The Housing Opportunity Index measures housing affordability by tracking price against median income – now at $64,400 (See chart below).
At the bubble high in 2006 only 40 percent of homes were affordable to the median-income family. Now we are at 75 percent and rising.
You will never guess who has been working to stop this growing trend toward affordability. It’s your federal government obviously.
“Since the housing market began to turn in 2007, Washington has tried to keep prices from falling with every policy gimmick known to politics: Foreclosure mitigation, more guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer’s tax credit … “ (The Housing Illusion, WSJ)
The editors at the Wall Street Journal suggest money is better spent elsewhere on “capital investment in plant and equipment, new ideas and new companies.”
That would be a money-for-jobs program. Not the money-for-bubbles thing which has been so successful and so destructive.
Economist Paul Dales at Capital Economics calls the Great Depression fall in housing prices a loss of 31 percent (MarketWatch). How bad was it then? The post-depression turnaround to re-attain the bubble high took 19-years.
That means if we start today and our rebound mimics the Great Depression, we are good and back to normal in 2030. Which raises the obvious question: Will we be alive?
On the bright side: Dales says housing is currently undervalued by 24 percent.
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Barry Ritholtz calls the greater-than-the-depression call unjustified. Says Case-Shiller uses hypothesized data for the Great Depression. He throws out baby and bath water. Mentions new home sales have fallen 82% in our cycle versus 80% in 1929-33. The other Great Depression falls: GDP fell 30 PERCENT. Peak-to-trough Dow crashed 89 PERCENT. Wow. “Banks were failing by the 1000s.” I’m starting to believe Barry.
A point against him: Our current bubble was radically greater than any previous bubble (If you believe the hypothesized Case-Shiller numbers. I do.). That would mean we could fall much further.
Ritholtz mentions a cause of the difference between the two periods. Mortgages back then were 3-to-5 year loans. Not 30 years. He seems to suggest the short loans favored a greater fall in prices.
The opposite is true. Our current gargantuan loan periods allow the same income to pay a ton more for a house. Thus did the Affordable Homes’ geniuses crank up the price of real estate by creating the 30-year mortgage.
Ritholtz has hard numbers on real estate prices in a study of Manhattan from 1920 to 1939. The fall in prices? 67 Percent.
If they were far less leveraged back then, then our fall in prices should logically be greater. Some say it already is (see first paragraph). Check out our Case-Shiller chart immediately below showing a fall in prices of 37 Percent.
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Core Logic reported today a gain in prices of .7 percent in April. This is the first gain following the home-buyer tax credit expiration in mid-2010 according to Calculated Risk. The same report shows a price fall of 7.5 percent over the year from April 2010.
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Stephen Meister at the New York Post reports the following price-reducing trend: “The economy still isn’t producing enough jobs to keep up with the growing workforce. So people are reluctant to become first-time homebuyers because they’ve lost (or fear losing) their jobs, and because they fear further price drops. That means “trade-up” buyers can’t buy — even if their jobs are secure — because there’s no one to buy their current (starter) homes at a price that will pay off their mortgages.”
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I’m trying an experiment this month and posting every business day (I hope). My philosophy has been that I should only post when I have deeply researched a subject or have command of breaking facts. Now I’m going to try to summarize interesting facts and opinions as they fly in.
Please send the interesting to mike@mynewmortgage.com.
The Case-Shiller 20-city index released today has fallen under the bubble-crash low of April 2009 and confirms a double-dip in home prices. S&P reports a 4.2% national fall in values just in the first quarter of this year.
“Home prices continue on their downward spiral with no relief in sight,” said David Blitzer, chairman of the S&P index committee (See his comment “How the Cities Did“).
Prices have declined for 57 consecutive months in Zillow’s price index. The 10-City S&P Index has fallen 33% from the peak.
“In real terms, all appreciation in the last decade is gone,” said Bill McBride, author at Calculated Risk, a leading source of breaking news in charted format (see Case Shiller data above).
The April reading of pending home sales fell by 11.6% from March. Mortgage delinquencies have flattened out and may be a lone positive indicator.
“Mortgage delinquencies are off their peak highs,” said the Wall Street Journal today (See their post today “Five Questions on Tuesday’s S&P/Case-Shiller“). “This suggests that, for now, the problem isn’t getting worse.”
A Hall of Property Bubbles in the Mirrors
The world of property values is bifurcating and at the same time running toward the same bad end.
Economies which sailed through the financial crisis are galloping ahead on their way to the cliff where many leading economies flew and fell down dead.
In an excellent story today by Wall Street Journal columnist David Wessel (Housing Bubbles Percolate Far From Crisis Elsewhere), a stark picture is drawn comparing the economies which had a banking crisis and those which didn’t.
Among those countries which did not have a financial crisis, property values in Australia, China and Singapore have increased in value by 50% to 75% since 2004. Hong Kong is off the charts. Prices have appreciated 125% in the same period (Please see the right chart above for “No banking crisis” countries.).
The governor of the Bank of Israel, Stanley Fischer, is quoted as to how this has come about:
“In countries where the financial system was not seriously damaged during the global crisis, housing prices have risen rapidly. That’s because when interest rates were cut sharply to deal with the crisis, mortgage interest rates also fell rapidly, and people responded by borrowing to buy houses—thereby driving up the price of houses.”
This description of the new bubble describes the old bubble. We all know the bubble-broken countries of Spain, Great Britain, Ireland, and the United States. We all know how it happened.
Cheap money given freely and widely created a boom in prices. The bust created massive losses for homeowners and mortgage lenders. Instead of facing up to losses which we created, we exported our failure by reinventing cheap money – the devil which created the first crisis.
Free money has been Fed policy through much of the last decade and the period of the end of 2008 to today is the most extreme period of free money.
It reminds me of Mexico and Columbia. The American drug habit creates underworld organizations which rivals or surpasses their nations’ armies.
If we legalized drugs, the violent criminal organizations in those countries would disappear. So too if we had honestly come to terms with huge losses in mortgages, we would not have exported our failure to innocent countries. Now we see a huge run in the price of gold, oil, and food, in addition to the run in property which we have just shown, which all have in common that they are not the U.S. Dollar which earns a return of nothing.
“Some big countries had a housing bubble that burst, provoking the biggest financial crisis in half a century,” writes Mr. Wessel. “To avoid a depression, they flooded the world with credit. And that credit threatens to create new housing bubbles in other countries. No one ever said globalization was easy.”
Thus do bad investments held by banks protected by a policy where they are presumed too big to fail — thus do they create a world of failure where everybody will fall.
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PRINT A Hall of Property Bubbles in the Mirrors
Michael David White is a mortgage banker in Chicago.
