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.

...

[pbrower2a]

We may yet see housing get reasonable again, reflecting economic realities as Americans adjust to huge reductions in pay and cutbacks in paid working hours as jobs disappear (I could imagine employers insisting upon 'volunteer' effort off the clock if they could get away with it, but minimum wage laws are unlikely to be repealed). When people had the money to pay for a golf game, a condo near a golf course had value. Now it is more important that the condo be near what most consider what passes for a mass employer these days -- like a Wal-Mart or a Target. Maybe a hospital.

Let's see -- the house available for  $200K in 2006 might be available for $70K by 2010 soon. Many who expected to sell out their high-priced suburban housing as a source of retirement funds might find themselves with a white elephant instead.

Just think of what that does to tax revenues for city and county governments!

[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.

[Torie]

The buzz is that in the more "desirable" parts of Los Angeles, housing prices seem to be stabilizing now. We shall see. Stuff is still tanking some more in the Inland Empire, and still eroding, albeit more slowly, in Orange County.

[??????????]

Houses around here are dropping under 100k. To bad I'm not in the market to buy at this time and thankfully I bought my house right before the boom so I'm not upside down.

[Sbane]

The buzz is that in the more "desirable" parts of Los Angeles, housing prices seem to be stabilizing now. We shall see. Stuff is still tanking some more in the Inland Empire, and still eroding, albeit more slowly, in Orange County.

I think the pattern is the same everywhere. Locations close to jobs and city life are holding their prices relatively well, while in the exurbs they are crashing. It is also dependent on where the foreclosures are occurring. For example similar houses are on average about $50,000 more pricey in Pleasanton as compared with the slightly more distant, hotter and exurban Livermore. They have been having a lot of foreclosures and now that difference is on average about $100,000. But in the long term things should even out as more and more short sales come on the market.

[opebo]

Interestingly this means that we can print trillions without causing inflation.

[Torie]

Interestingly this means that we can print trillions without causing inflation.

No, matters will stabilize when housing prices get in sinc with incomes. In many places, we are about there.

[Sam Spade]

Torie - Two questions...

What are house prices like now in the area where you have rentals or where you own?  Also, what is the average salary of those specific areas?

[Fmr. Pres. Duke]

The media home value here has fallen from $1.8M in 2005 to about $1.6M in late 2007. Otherwise, homes still are selling, but I have been told that buyers are trying to nickel and dime real estate agents all the way through. Outside of that, buying has help up well here, as well as in downtown Charleston. The Johns Island area outside of Kiawah though has seen massive drops in home values.

[??????????]

Home sales are up 30% here in FL. I think the cheap prices are deceiving people into thinking things are improving.

[Sam Spade]

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

[opebo]

Interestingly this means that we can print trillions without causing inflation.

No, matters will stabilize when housing prices get in sinc with incomes. In many places, we are about there.

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

Isn't part of the difficulty of prediction, gentlemen, that 'median income' is plummetting at present?

In any case, Tory, we can make any price we want 'in sinc with incomes' if we print more money and make that newly printed money 'income'.  In other words, reflate.

[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

[Torie]

Interestingly this means that we can print trillions without causing inflation.

No, matters will stabilize when housing prices get in sinc with incomes. In many places, we are about there.

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

Isn't part of the difficulty of prediction, gentlemen, that 'median income' is plummetting at present?

In any case, Tory, we can make any price we want 'in sinc with incomes' if we print more money and make that newly printed money 'income'.  In other words, reflate.

Ya, substantial dollar inflation would cause housing prices to "stabilize," and maybe even increase in nominal dollars, but alas not in real dollars.

[opebo]

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.

[Torie]

Torie - Two questions...

What are house prices like now in the area where you have rentals or where you own?  Also, what is the average salary of those specific areas?

They are down around 20% from the peak where I live in Orange County, about 40% in the desert, and about 15% in the Los Feliz and Silverlake districts of Los Angeles.  In Portland, Oregon, prices are down maybe 15% as well as a guess, but I am less sure. I don't know about average salaries; that would have to be looked up. I read an article that stated that in some areas incomes to housing prices were reaching "normal" ratios for those areas. In the area around my census tract very little is on the market, and there are almost no foreclosures. The same is true in the LA neighborhoods that I mentioned. Folks just are holding on and not selling, waiting for better times. Also it is hard to find jobs elsewhere, so folks are staying put. The housing market in the desert is a mess because it is a resort area, incomes are way down, and it was way overbuilt anyway, with a lot of speculation.

[opebo]

Interestingly this means that we can print trillions without causing inflation.

No, matters will stabilize when housing prices get in sinc with incomes. In many places, we are about there.

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

Isn't part of the difficulty of prediction, gentlemen, that 'median income' is plummetting at present?

In any case, Tory, we can make any price we want 'in sinc with incomes' if we print more money and make that newly printed money 'income'.  In other words, reflate.

Ya, substantial dollar inflation would cause housing prices to "stabilize," and maybe even increase in nominal dollars, but alas not in real dollars.

No, it wouldn't be 'inflation', Torie, it would be 'reflation'.  In other words printing now would just prevent deflation, not cause inflation. 

[Torie]

Interestingly this means that we can print trillions without causing inflation.

No, matters will stabilize when housing prices get in sinc with incomes. In many places, we are about there.

Gentlemen, prices are nice.  But in order to calculate what a "housing bottom" is, you have to at least have a guess at median income.  There's some historical benchmarks here.

Isn't part of the difficulty of prediction, gentlemen, that 'median income' is plummetting at present?

In any case, Tory, we can make any price we want 'in sinc with incomes' if we print more money and make that newly printed money 'income'.  In other words, reflate.

Ya, substantial dollar inflation would cause housing prices to "stabilize," and maybe even increase in nominal dollars, but alas not in real dollars.

No, it wouldn't be 'inflation', Torie, it would be 'reflation'.  In other words printing now would just prevent deflation, not cause inflation. 

Ya, maybe for the short term. I am highly skeptical about the medium term.

[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.

[opebo]

OH christ well there you have it - this is just 'household income'.  I'd like to see the chart of median individual income.  Household income is a useless figure because most households used to be a single earner, now they have two.

[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.

[opebo]

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.

YES!  I thought so.  Thanks for the link.  And perfectly timed to the politics which caused it..

[Beet]

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

[Sam Spade]

The reason why I am playing the numbers game here is because there is a relatively simple formula for determining major housing market price (not sales) bottoms after crashes.

You see, the average formula (in normal times) for median household income to median house price is roughly about 3.0.

However, major market bottoms in housing coincide with this figure reaching about 2.0.

So, if the median household income is $68,000 (as Beet says for 2007), then in a housing market bottom, the median house price should be around $136,000.  I believe the present median house value in the US is about $165,000.  Therefore, if wages have stagnated since 2007, that means we would have somewhere in-between 15%-20% more drop before the bottom.

Now, I don't expect wages to be stagnating or rising, I expect them to be falling.  A drop of 10% in wages would mean that housing prices would need to fall a further 25%.  A drop of 20% in wage would require a further housing price decline of 35%.  And so on and so forth.

I also note two other things in passing: 1) Given the size of this bubble and the government's continued attempts to keep it from complete collapse, it is quite possible in this housing bubble that the bottom may be at some point below 2.0 - in fact I consider that quite possible; 2) This will be an L-shaped housing crash - don't expect any type of quick recoveries or much at all - I grew up in Houston during the 1980s, the housing bottom there lasted nearly 10 years.

Also, I ask for local wages and local housing prices because different markets have different amounts yet to fall based on this figure, and especially since this is a "national housing market crash".

Although I am on the record predicting a wage crash of some sort, I'll ignore that for the time being and say that prices have, at minimum, about 30%-40% more to fall in the US before "bottoming".