Housing: Barron's Calls a Bottom

Barron's magazine's cover story boldly calls a bottom to the ravaged housing market. 

Chip Case (of S&P/Case-Shiller fame), whose knowledge of the housing market goes back decades and is based on the voluminous collection of data, is among those who think home prices may be nearing a bottom. Case notes, among other things, that new housing starts fell to 975,000 in April from a peak rate of 2.27 million in January 2006, and that three declines of similar magnitude -- from more than two million to less than one million -- have occurred in the past 35 years. "Every time this has happened before, housing-market activity has rebounded within a quarter and caught experts by surprise." 

Author Jonathan Laing does a convincing job gathering data to support his argument that a housing bottom is either in, or in the process of forming. A sampling:

• Total inventories of unsold existing homes is down to 10.8 months from 11.2 months in April.
• Despite last month's biggest ever 15.3% home price drop, eight of the 20 markets covered saw price increases - up from just two a month prior.
• Home price indexes are skewed by steep drops in the value of subprime properties - which account for only 10% of the all U.S. housing.
• A $300B congressional effort to allow FHA support of troubled mortgages, and/or a government takeover of Fannie (FNM) and Freddie (FRE), would ease lack-of-credit concerns.
• Home sales of 5M/year are the same as a decade ago - yet the population has grown by 25M and the job market by 10M since then.
• The much-feared hump in adjustable-rate-mortgage resets has been blunted by early mortgage defaults.
• Early- and late-stage delinquencies on subprime properties have been falling for the past 6-8 months. 

In hindsight, the housing bust hasn't been nearly as calamitous as depicted in the media, or as Wall Street's woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.

 

It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over. 

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Tim Plaehn also notes spots of recovery in certain housing markets. "It appears it is not 'different this time' for the U.S. real estate market... I see the market working off excess inventory and a leveling of home prices."

Judy Weil last week collected data points from across the U.S. that demonstrate falling home prices - and sales declines.

Comments

[Crapneck]

Nope, wishful thinking is nice but we're only about half way there. Housing will continue to decline well into, if not all of 2009. We've already had these steep declines with unemployment at 5.5%. Now that housing and the financial sectors are affecting the overall job economy and people are losing jobs, housing will continue to slide, especially as lending standards tighten.

[bearfund]

Two words: neg-am recasts. That is all.

[richjoy]

Oh how I wish this article were true. However, methinks the economy is getting worse (I won't bother with the stats); therefore, I just can't believe the housing market is bottoming now. But ask me again in the spring!

[jimmy46]

makes sense to me,
why would banks make construction loans if they are repo-ing
old houses.

[borisb]

wow finally some good numbers.

[poor&unemployed]

If it went up by 100% then it has to come down equally to make any real sense. It is a wishful thinking of past two years that has made the problems worst. If the banks don't cut the losses and get back to sound financial priciples - they will end up like Indymac.

Market has to correct another 50% to make it to the bottom.

[Chris White]

Without investment in job creation and household income?
There's no support for housing prices till someone remembers how to create pay checks substantial enough to pay bills without borrowing. Sorry, he can have all the numbers he wants, he still needs to be able to think about what's right before he starts counting.

[E Nuff Sed]

Going by what happened here in Canada (after a similar bubble) starting in 1990 the sharp declines were over by 1993. From 1994 to 1999 the housing market was essentially flat.

[Russell Upsomgrubb]

Using historical drops in housing starts to state your case doesn't work this time. The exotic loans available today- interest only, negative amortization, etc. with no money down weren't available before. The banks did the same thing with credit card debt and auto loans, packaged them as securities and sold them to other banks. How many car ads have there been over the last five years advertising no money down and no interest for 60 months? That shoe has yet to drop. And, because of the mark to market rule on CDOs, the banks themselves really can't predict their writedowns because if no buyers step up to purchase these risky securities, the market will dictate lower prices.

[ArnoldCountry]

No offense, but this is just a pipe dream. The problems have not even begun yet. The litigation machine is just getting warmed up. I know that I am involved in approximately 10 new lawsuit filings per month as we finalized a more standardized template to address hybrid mortgage products. My prediction? (of which I am no body) We have just entered a full fledged housing depression and things are about to get a whole lot worse.

I just drove around a relatively new neighborhood in the Sacramento, CA region (2005) and was shocked. In this pocket of nice homes that sold for 500k, 2 houses for sale but 8 houses had bad front yards and had the infamous Notice of Trustee Sale posted on the front door. I would say this neighborhood has about 50 homes in it. In effect, this is what I was worried about. Inventory is not going down, people have thrown in the towel.

Many many homeowners owe more than the property is worth even with putting 20% down and have resetting loans and have given up. We will never solve this problem as long as everyone is focused on getting to a bottom. A 300 billion package does not make a dent. I think we have about a 2 trillion dollar problem.

[fatcat]

I believe the biggest problem could be these predictions come from people who live in N.Y.City. They are so insulated from whats happening in the real world!

[TraderGreg]

Barron's - garbage paper. Why would anyone bother reading it? It's like theNational Enquirer - shear fantasy,t hat has nothing to do with real life. How many times before, they were wrong calling bottoms?

Stop reading this garbage.

[dcc]

Where you live has a lot to do on your perspective of the housing market. I live in New England and in my subdivision of 100 houses, all built since 1998, there are only 5 houses for sale, non due to forclosure. I purchased in 2000 and even with the correction estimate that I am up 70 percent.

I just came back from the west coast of FL and I have never seen so many for sale signs. Real estate is local.

[secmaven]

Home buyers need purchasing power. To even hold this market at this level requires way more purchasing power than is available from employment or increasingly tightened credit standards. Prices will have to drop much further,say 15-20% before affordable. And remember, in the aggregate a decline in home values, coupled with a decline in the stock market, will reduce consumer purchasing and reinforce the decline in purchasing power. The 2% interest rate this time around the track has had no effect. The old nostrums will not fix this economy.

[CLH]

Sounds reasonable to me. Three years down and now about 5 years flat. I still dont see any recession and employment is still good.

People can only stay frightened so long.

[Maquiavelli]

Well any "analysis", "news" etc that comes from a US based outfit has the credibility of Paulson when he says he wants a stronger dollar...

[Jason J]

Housing is always local. Sure some markets are going up, because they didnt experience the massive bubbles that occurred in states like California, and Nevada.
In california, foreclosures out number homes for sale by 2 to 1.
Foreclosures ARE the market in california now, its shocking.
The last housing crash in california took 6-7 years to hit bottom and the current housing bubble makes the last one look harmless.
Maybe they can call a bottom soon for the whole USA median, but not for states where the bubbles really occurred.
California home prices didnt start going up until after the trend of foreclosures started going down.
Right now, foreclosures are sky rocketing at a rate and magnitude, in california, never seen before.
If you include foreclosures in the housing numbers, there is over 4 YEARS of inventory in california!!!!

[E.D.Hart]

What happens to the cost of mortgages when the interest rates catch up with the real inflation rate? And ARM's re-set?

Real estate falls...

You can believe the Barrons piece if you beleive that inflation is coming down and interests rates are not headed appreciably higher.

But we are in a huge housing bear market, and we are at a very low point in the rate rising cycle.

The capitulation ( low point) will come when interest rates are 10-15%.

Say in 5-10 years.

[oregonrain]

In the past few weeks I have been surprised at the overall negative tone here at Seeking Alpha. Aren't most of the people who read and write her supposed to be "professionals?&q... That is what has me more negative. You folks are supposed to know what the heck is going on...right?

My outlook is that we may hit a "ledge" here. When I used to rock climb you would make these crazy moves...(scared)..then you would find this nice safe ledge to stand on...but..guess what...you had to make the next move. Paulson et al have in essence but us on a ledge..a nice "safe place." But...its only a rest on the way down..not up.

[been there before in ca.]

liivin in the bay area of california I certianly hope things are turning. I do see lots of foreclosurers,but they seem to sale quickly once through the process and new families are moving in. I have been through three of these collaspes in california it always comes back bigger and better.

[ritelminos]

Housing markets are local but the financing is global. I've seen convincing arguments pro and con on outlook for residential RE but the credit bubble will continue to deflate. This has long-lasting and deeply-felt national and international repercussions.

[Medici]

Barrons did a great job calling GM going much higher in the 20's- Lol, A great SELL Indicator, Sheep following wolves into the forest-

[DingoJoe]

BR over at the Big Picture had great fun poking holes in this one and pointed out some huge misfires by Barron's over the last 6 months

bigpicture.typepad.com...

[user80210]

Prices must fall to 1968 levels before it's over.
Just kidding. The negativity in housing is part of our poor consumer 'confidence', which will erode until oil crashes, we have a new President, and stocks start to pick up on a consistent level again. We're already back to 2004 prices nationally, and the long term trend line is pretty much back to reality. Once the other feel-good factors start to happen and get some press, prices will stabilize. Sales are already increasing, and though we might be stagnant for a while, things will in fact, get better.

[Did U Think The Ponzi Scheme Would Last?]

Jingle mailers have until 12-31-2009 in order to jingle mail and take advantage of their no recourse home loan without the IRS treating the amount you bailed on as taxable income.

Existing homeowners who do not see a bounce will bail on their homes in record numbers before the end of 2009 in order to hit the IRS window.

As these people walk away, the home prices will fall even faster and banks will dump them at hyper depressed market prices. I will be looking to pick up income real estate around June 2009 but ONLY if I think the credit bubble has completely deflated by then. There is an excellent chance that it will not have done so by that time.

You ain't seen nothing yet.

[NewTech]

The Great Correction continues...

[Polabair]

I'm with Chris White,
American workers, American products, Americans buying houses.
I liked the 50's and 60's, had a 57 Caddy!
Get back to where we once belonged...

[hanson001]

Home prices. No telling how far they might fall or move sideways. If one looks at the purchaser of homes, I have never seen the consumer so tapped out. And during the escalation of the price, the consumer's wages could not keep up with the price changes. This brought about creative financing along with people cashing out equity in an ever increasing asset class.

Happy birthday! Add to this inflation (headline inflation doesn't begin to caputure it), sinking dollar, and interest rates that have no where to go but up, and the only remedy I see to the problem is decreasing the price, greatly reducing inventory, or building much smaller homes that people can afford.

I read some time ago (maybe two years) that people were buying homes two times the size they grew up in. I thought this strange, but knowing human behavior, "look at me I am successful", knew we would dig our own grave. I mean are we not producing less children now? Why such a big house. Back in the day, one could not purchase a home if the payments were more than 30% of his/her income. Looks like we are going back to the day.

Dang! We didn't raise our kids to watch what they spend.

[Tim Plaehn]

Interesting article. As linked above, I have been watching the numbers of home sales continue to rise in Sacramento and Las Vegas. 6 straight months in Vegas!

Those who actually want to own a home realize there are tremendous values out there in the foreclosed market and are making the deals of their lifetime. The bottleneck is tight lending standards which will loosen as soon as the bankers see prices stabilizing, their business is to make loans and they will do so at the first signs of stability. Also, I believe there is a huge reservoir of buyers (none commenting here)waiting for prices to stabilize that will quicken the turnaround.

[Southern Cali Cyclist]

No Way are we near a bottom. The picture on the front cover should be a roller coaster that plateaus flat, not one that goes right back up. I used to respect Barrons. Don't know if I'll ever trust them again.

[Dusty]

Credit Suisse published a chart of "Mortgage Resets" last winter. It showed a mountain range of "Subprime" all spring, a high, rough valley or plateau this summer and another mountain range of "Alt-A" on top of "Agency Resets" this Fall (September through December). From then to the early summer of 2012 it continues like now. My own take is that the Market has followed the Credit Suisse chart very well so far. When Mortgage Resets went up, the market went down. Each month as the next month's crisis loomed the big boys panicked and there were craters.

It all started in November from a significant high. Phase two is about to commence from a serious low. It will be very interesting to see how far down it can go by, say, Chinese New Year. Then it will still have a long way to go before the mortgage mess is actually "over."

Our economy has actually never recoverd from the Telecom Crash. It has just been riding the Housing Bubble. YYZ (above) reminded us that it took Canada five years to recover in the '90's. It could take the US ten or more, there is a lot more to fix. Add 10 to 2012 and the clear start of the recovery is in (gulp!) 2025?

[mkttrdr]

Many good comments here, but Dusty is right and Tim is wrong.

Most Vegas buyers are speculators from across the pond. Why buy in Vegas when you can rent or get deals from the hotels on the strip.

Yes, people will always buy for needed shelter if the banker gets some of the "skin"off the borrowers backs.

We buy and sell everyday with 20% down-and don't see this price decline ending for at least 3 more years. Then it will be flat for a year or two until the economy picks up steam.

What and when will a need be created to encourage growth in the economy again?
The only things to carry the cycle is survival-food, shelter, water, transportation and comfort. If you have assets and control your own destiny-great.

Waves are not V shaped they go up and down in a U shape-the market is no different.

Therefore, this has been a bear market rally in both stocks and real estate going back to the 1999 crash. The usual cycle for bull or bear markets run 17 years on average.
How long do you think this wave will last?
2012 is the start of an upswing in both!
Hang on until then.

[PhillyD]

I live in Canton Michigan and purchased my house 2 years ago and have lost about $150,000 in equity since then. Yet in my sub-division (and experimental sub in what's known as the "New Ubranism" - they built nice old fashioned looking homes on smaller lots), which when I bought two years ago couldn't build a shed and sell it now has over 30 new homes, and counting, going up that are not spec homes but presold!

Maybe Michigan, which started off our housing recession, will be the first to lead us out?

[Did U Think The Ponzi Scheme Would Last?]

Philly d:
"and have lost about $150,000 in equity since then"

Word to the wise. That is gone and you will never see it again in your lifetime. Do not expect housing prices to come back like that for decades. So many reasons but the most important are:
- can't buy an expensive house if nobody will loan the money. banks creating those loans are out of the business or heading that way.
- interest rates are on the rise. Expect 10+% soon. Nobody will be able to afford the interest on an overpriced home so builders will be creating "green, economy homes" like the little shitbox cars showing up on our highways now. Your modern home that is overpriced will not be an option for children of the coming depression whose salaries will be much lower than this generation's.

You may want to plan to take advantage of the window created by the mortgage debt relief act of 2007 which allows you to jingle mail without owing the IRS any taxes until Dec 31 2009.