Has Housing Bust Bottomed Out?
Tuesday February 26, 2008
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Similarly, January saw 57% more foreclosures than the year before - better than December's 97% increase year-over-year. (Source: Realtor.org, Foreclosure Rate Climbs More Slowly, February 26, 2008)
Although this doesn't mean that the pain is over, it does mean that it might be stabilizing. That's because of several reasons:
- Home prices have decreased 4.6% in the last year.
- There is a 10 month inventory of homes for sale.
- Interest rates are lower - a 30-year conventional loan was at 5.76% compared to 6.22% last January.
- Many buyers are waiting for the President's Economic Stimulus Plan to take effect, which will increase limits for FHA loans, and allow Freddie Mac to repurchase jumbo loans. (Source: FoxBusiness, Existing-Home Sales Slip in January, February 25, 2008)
What It Means to You
If price declines were to follow sales declines, it would compare to the 24% decline experienced during the Great Depression of 1929. Prices probably won't fall as far, however, since most homeowners will take their homes off the market before selling at such a loss. Furthermore, mortgage rates are around 6%, only half the rate they were in the '80's. This allows mortgage holders to refinance, reducing foreclosures.However, we aren't out of the woods yet. Real estate contributes 10% to the economy, so GDP will suffer. Watch for the Preliminary GDP Report, due February 28th. The housing decline has already caused a stock market correction. Even if it doesn't get worse, a continued housing could turn the correction into a bear market, and the economy could suffer a recession.
More on Real Estate and the Economy
- How Does Real Estate Affect the U.S. Economy?
- Definitions of Commonly Used Real Estate Terms
- A Primer on Interest Rates
- Selling in a Falling Market
- Avoid Mistakes When Selling in a Slow Market
- When Is the Time Right to Reduce Price?
Comments
Kimberly, we are so far from the bottom, it is not funny!
Your piece reflects the sentiment of a person who jumps out the window of a 50 story building yells out “It really isn’t that Bad!” as he hurtles past the 28th floor!
The foreclosure disaster we have seen does not even reflect the resetting off sub prime mortgages because the majority have not yet reset! When they reset, the market will be flooded with more inventory at fire sale prices trapping more people in their homes.
By trapped in their homes I mean home owners with negative equity who cannot refinance, sell or afford their mortgage payments.
It is estimated that right now, 30-35% of people who bought homes in the last 3 years have no or negative equity.
And please don’t think that the “window dressing” measures Bush has proposed are going to make any substantial difference. He is putting band aids on a gunshot wound.
I could go on with reasons to support my conclusion, which is that home prices will fall another 20-30%, but you can request the Special Report I did, called, “The Truth Behind the Biggest Housing Disaster to Ever Hit the United States!”
but I will sum it up with this fact:
The total value (equity) of all 1-4 family dwellings in this country is $20 Trillion. However, approximately 1/3 do not have any mortgage, so if we account for their value, we deduct 1/3 of 20 which leaves about $14 Trillion in total equity in the US housing market.
Total outstanding mortgage debt is about $12 Trillion, leaving only $2 Trillion in equity in the housing market, meaning that a further decline of only 10-12% in housing value will leave the housing market totally devoid of ANY equity!
By the way, Merrill Lynch’s analyst forecast a drop of another 25-30% in prices! That will necessary to bring prices back into historical equilibrium with long term price trends, rental income and affordability. Historically, over the past 65 years, it took 2.8 times the income of the average worker to buy a house. These days it takes 3.9 times.
By the way, Davenport, Iowa and several California cities have already suffered price declines of over 20%!
Hold on, we have a long way to go!
Bill Young
Hi Bill,
I would love to see your data sources. Also, if 1/3 of the houses don’t have a mortgage, doesn’t that mean the owners have 100% equity?
Kimberly
I second Bill’s comments that we are far from the bottom on house prices, which have been artificially inflated by speculative investment. I would also caution against reliance on statistics provided by the National Association of Realtors, a group that understandably may have a self-interest in painting a rosier picture than actual sales data supports. I don’t quite understand why a 10 month inventory and falling prices are positive, given that these both suggest a glutted market that cannot clear. Most reputable real-estate analysts had pegged the market as a bubble by no later than 2002, and the unwinding of that popped bubble will signal a significant contraction of the U.S. and world economy.
Re: using the NAR data…I agree that they have a reason to be overly optimistic, but the other alternative, Case Shiller, is focuses on major metro areas, and so it is biased that way.
I’m not saying that a 10-month inventory and falling prices are great news, but that inventory levels are stabilizing and that falling prices mean that homes are becoming more affordable, and so at some level will attract buyers back into the market.
Furthermore, I don’t agree that the world economy will see a significant contraction…there is still a lot of liquidity and growth, and the world is not a dependent on the U.S. as it was in the last downturn.