For Housing Crisis, the End Probably Isn’t Near

[Beet]

Not to post 3 articles in an hour, but the NY Times has a very good graphic on regional housing markets.

http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html?_r=1

And the article-

The closest thing to a real estate crystal ball in the last few years has been the house auctions that are regularly held around the country

In 2006 and early 2007, the official housing statistics were still showing that house prices were holding up. But that was largely because so many sellers were refusing to sell. The auctions, made up mostly of foreclosed homes, showed the truth: house values were starting to plummet in many places.

So a few weeks ago, I decided to go to an auction at a hotel ballroom in Washington — and to study the results of several others elsewhere — with an eye to figuring out whether prices may now be close to bottoming out.

That’s clearly a huge economic question. Last week, JPMorgan’s chief financial officer told Eric Dash of The New York Times that JPMorgan, and presumably other banks, would be under pressure “until home prices stabilize and unemployment peaks.” As long as home prices are falling, foreclosures are likely to keep rising and the toxic assets polluting bank balance sheets are likely to stay toxic.

There are reasons, though, to think that prices may be on the verge of stabilizing. Relative to fundamentals, like household incomes and rents, houses nationwide now appear to be overvalued by only about 5 percent. You can make an argument that the end of the housing crash is near.

But that’s not what I found at the auctions.

...

The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

On Sunday, my colleague Carmen Gentile went to a larger auction, in Miami, to see if my experience had been unusual. It wasn’t. The homes there also sold for just a fraction of what they would have even a year ago. The rate of decline in Miami hasn’t even slowed noticeably in recent months, according to data kept by Real Estate Disposition Corporation, known as R.E.D.C., which runs the auctions.

A recently transplanted New Yorker named Michael Houtkin won the bidding on a one-bedroom condominium on the outskirts of Boca Raton, a few blocks from three golf courses, for the incredible price of $30,000. “Things were almost being given away,” he said later.

As is often the case at these auctions, the seller of the condo — Fannie Mae — retained the right to refuse the winning bid and keep the property. But Mr. Houtkin told me he was optimistic his bid would be accepted. An R.E.D.C. employee suggested to him that $30,000 wasn’t much below the minimum price that Fannie Mae had hoped to receive.

How could that be? Because Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.

The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the “massive amount of excess supply” means that home prices nationwide will probably fall an additional 15 percent.

This estimate hides a lot of variation, too. In Miami, Goldman forecasts, prices could drop an additional 33 percent, which is pretty amazing since they’ve already fallen 50 percent from their 2006 peak.

...

[Beet]

Indeed, the chart above shows that house prices in many local markets have already dropped most of the way and some never really had a boom in the first place.

But the FHFA numbers show we're still near the top of the bubble, down only about 11% thus far and have about 35% more to fall nationwide to return to historical levels-- it also shows home prices rising in January and February.

http://www.fhfa.gov/webfiles/2118/1Q09m02F.pdf

The FHFA HPI is more comprehensive than ever Case-Shiller. If they're correct, the author of the article and Case-Shiller are only looking at certain localized markets, and there must be other markets where prices surged and haven't come down at all. Are the buyers in those markets crazy?

Also it means the banks are screwed. Suspension of mark to market is only going to make the pain come out in a drip, drip, drip. But what I really can't understand is why people are still paying April 2005 prices for houses on average. A rise in sales in areas with stronger markets should only cause prices to depress even further in areas with weaker markets to begin with, as well as weaker relative sales.

[Beet]

Even at the top of the bubble-based economy, median income had not improved since 1999. I can't wait to see the 2008 and 2009 numbers. :

 Table H-5.  Race and Hispanic Origin of Householder--Households

 origin, and           Number   Current      2007   Current      2007
 year                (thous.)   dollars   dollars   dollars   dollars
 ____________________________________________________________________
 ALL RACES

 2007                 116,783   $50,233   $50,233   $67,609   $67,609
 2006                 116,011    48,201    49,568    66,570    68,459
 2005                 114,384    46,326    49,202    63,344    67,277
 2004 35/             113,343    44,334    48,665    60,466    66,373
 2003                 112,000    43,318    48,835    59,067    66,590
 2002                 111,278    42,409    48,878    57,852    66,677
 2001                 109,297    42,228    49,455    58,208    68,171
 2000 30/             108,209    41,990    50,557    57,135    68,792
 1999 29/             106,434    40,696    50,641 (all time peak)    54,737    68,114

http://www.census.gov/hhes/www/income/histinc/h05.html

[Beet]

Even at the top of the bubble-based economy, median income had not improved since 1999. I can't wait to see the 2008 and 2009 numbers. :

 Table H-5.  Race and Hispanic Origin of Householder--Households

 origin, and           Number   Current      2007   Current      2007
 year                (thous.)   dollars   dollars   dollars   dollars
 ____________________________________________________________________
 ALL RACES

 2007                 116,783   $50,233   $50,233   $67,609   $67,609
 2006                 116,011    48,201    49,568    66,570    68,459
 2005                 114,384    46,326    49,202    63,344    67,277
 2004 35/             113,343    44,334    48,665    60,466    66,373
 2003                 112,000    43,318    48,835    59,067    66,590
 2002                 111,278    42,409    48,878    57,852    66,677
 2001                 109,297    42,228    49,455    58,208    68,171
 2000 30/             108,209    41,990    50,557    57,135    68,792
 1999 29/             106,434    40,696    50,641 (all time peak)    54,737    68,114

http://www.census.gov/hhes/www/income/histinc/h05.html

Interesting.  And I do suspect that if we corrected for the dishonesty of the figures, real income for working class people has not improved since about 1973.

I don't know about dishonesty in the figures (perhaps you are referring to the debate over chain-weighted inflation), but the main point is that certain baskets of goods have gotten more affordable since the seventies and other baskets less affordable. Also, in the 1970s and 1980s, women entered the labor force at a rapid clip, and this should show up in upward pressures on median income- when in fact median income hardly increased at all between the mid-70s and mid-80s. But since the mid-90s, the increase in labor force participation among women has stalled while the more general trend of lower overall labor force participation, particularly at the ends of the age scale (teens, near retired) should have biased the number down, although by a miniscule amount.

As for inflation-- currency devaluations often come with inflation particularly for economies dependent on imports. If the dollar significantly devalues you could see these pressures start to show up. Of course, I would argue that mild inflation is preferable to mild deflation.

[Beet]

But that has no bearing on the housing market. Since most home purchases are made by a household as a unit, household income is the most pertinent statistic.

In any case, for the evidence you seek, look to Figure 2 of this chart.
http://www.census.gov/prod/2008pubs/p60-235.pdf
The line entitled "earnings of men" shows distinct stagnation since 1973.

[Beet]

Actually, it's better timed to a certain supply shock (shrug).