My Investing Notebook
:: Useful notes on investing. ::
My Investing Notebook
:: Useful notes on investing. ::
Not according to this chart.
This article, Is It Time to Buy a House Yet?, was part of today’s Must Read newsletter from Seeking Alpha (a good resource for investors). It caught my attention. I like to read stories about housing. But what really caught my attention was the chart you just saw.
Do we really have a few more years of downturn? I think so. I don’t think we’re out of the woods yet. But as with everything, and especially money issues, you never know.
Mr. Smith does have some valid and interesting points. Here a few.
Simply put: if the bubble took seven years to reach its blow-off top, then its decline will typically take a similar length of time as prices fully retrace to pre-bubble levels.
As for supply: it is common knowledge that hundreds of thousands of homes are currently in the limbo of “shadow inventory”–homes the lenders won’t foreclose on for fear they can’t be sold, homes held off the market by owners who are deeply underwater on their mortgages, etc. As soon as demand appears, then supply rockets up as those anxious to sell move properties from the “shadow inventory” into the market.
Interesting article to read.
NY Times reports:
In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.
I agree that we should let the process, however painful, correct itself and not try to interfere with it. By doing so, we’re just delaying it!
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
Continue reading U.S. Loan Effort Is Seen as Adding to Housing Woes
There is a lot of conflicting, mixed news about housing lately. Some believe housing recovery is well under way. This group is largely supported by the month-over-month sales increases. Yes, the recent 7% increase is impressive.
The second group is much less optimistic. Foreclosure level just reached a record. (I am referencing a few articles.) Recent sales increases are driven by the $8K tax credit. Also, summer is usually the most active period.
I believe housing is not out of the woods yet. Until several conditions improve, it’s going to be a slow ride. Mainly unemployment, foreclosures, and supply of homes for sales. Until these improve, they will hold housing in check — read, slow down the recovery.
I read an excellent, and sobering, view on housing yesterday, Prime Mortgages Are Also Going Sour. There was a similar article on WSJ yesterday.
The percentage of residential mortgages either in foreclosure or with at least one payment past due hit 13.16% in the second quarter, the highest percentage ever recorded by the Mortgage Bankers Association, the industry group reported on Thursday.
The average homes are selling for 4.7 times average earningsnow. It should settle close to 2.8 or 3 times, so we still have a ways togo.
Let’s do some math here. If youare making $60K (household income, gross), which is roughly the national average, thenyou can afford to buy a house for $60 x 3 = $180K (or less).
Last time I checked, not manyhouses in NJ sold for less than $300K. Even now, it’s hard to find a really nicehouse for that price.
Am I missing something? Or dohouses have still further to go. I think so.
I had hoped to buy a house in2008 or 2009. Now I think I will wait a littlelonger.
The Panic of 1893 was a real estate bubble-induced depression thatscared people away from building houses for a long time. Housing pricesand real estate values in general declined for the next 27 years afterthe 1893 Panic. Think about that. For twenty seven years, not until1919 or 1920, could you buy a new home with the expectation it wouldincrease in value. In other words, housing was a commodity, speculativeat best, certainly not an investment.I see talking heads on TV nearly every week, self-professed realestate experts, who say the real estate contraction is almost over.Housing values have declined over 25% since 2006. That percentage isgreater than the percentage that real estate values declined in the1930’s during the Great Depression. So their argument is that realestate prices have already declined as much as they did during theworst economic period in American history. If you listen to theexperts, mortgage rates are low, home prices are low, so there is nobetter time to buy a house than right now. But, as Paul Harvey wouldsay, here’s the rest of the story…
There were very few new home owners in 1929 when the stock marketcollapsed ushering in the Great Depression. Why? Because the value ofindividually owned homes had only recently, the last 9-10 years or so,started to rise. It wasn’t until after World War I ended that new homesbegan to be built again and housing prices began to increase in value.Most people either lived in or near the cities and rented apartments,or they lived on rural farms as hired hands or tenant farmers or sharecroppers. Not only did very few people buy new houses at that time,there aren’t even any government statistics available on home buildingor home ownership from that time period. Therefore, when the stockmarket collapsed in 1929, housing prices were already near theirall-time lows having barely recovered from the Panic of 1893, as youcan see in the link below which is Case/Shiller Housing Index datadating back to the Panic of 1893.
The main thing to notice in this chart is how housing priceshyper-inflated beginning around 1998. The home prices in 2000 servewell as a baseline for a historical median. You can see that homeprices have pretty much hovered around that relative median value sincethe 1800’s. But in 1998 home prices took off like a rocket ship as theFederal Reserve began to lower interest rates creating the largesteasy-money housing bubble in recorded history.
Housing prices have only fallen about halfway down from their 2006highs to the historic median price I alluded to above. Empirically,this would mean housing prices still need to fall another 50% just toget back to a stable median price. But this is obviously the biggesthousing bubble in the history of America. It would not be surprising ifhousing prices fell to levels comparable to the crash after the Panicof 1893. Should that happen, housing prices could easily decline toless than 75% of their 2006 peak values.
Bottom line, it simply would not be wise to invest in housing untilwe have a much better idea how this recession is going to play itselfout. The data doesn’t lie, particularly Case/Schiller data. Justbecause a house is down 30% in the last two years does not make it abargain. There is no reason it can’t lose another 30% or more in thenext two years. So just be careful.
Reference
Five reasons why buying a house is a right move – the comments are the real value here
New York-White Plains-Wayne, N.Y.-N.J., was the nation’s leastaffordable major housing market for the second consecutive quarter.
That’s been my experience as well. Trying to find a decent house in northern Bergen county for around $300K is still not really possible. Are people really making that much money? I don’t think so. I think house prices, especially in Bergen county, are still overpriced. More pain ahead. And perhaps I can find something “affordable.”
Reference
Least Affordable: NY Metro Area, New Jersey Real Estate Report
Housing market is a mess right now. But house prices are still expensive. I believe we have ways to go. And this article, Home Prices Keep Falling, Prolonging Financial Crisis, supports my view. Here are a few excerpts…
“It looks to us that at least one half of the peak-to-trough price decline has already occurred and that we should see an outright bottom either late next year or in the first part of 2010.”“If prices were to moderate back to where they were relative to income in the mid and late 1990s, the S&P/Case-Shiller 20 City index would have to decline 35.1 percent in total compared with its 17.5 percent fall thus far.”
“Regardless of which index you believe, the important measure is that we are only 50-60 percent of the way down.”
ReferenceHome Prices Keep Falling, Prolonging Financial Crisis, CNBC.com article
When will housing reach bottom? Not too soon according to a Wall Street Journal survey.
ReferenceU.S. Economy Hasn’t Hit Bottom, Survey Says — WSJ.com ($$$)
Take a look at the chart.
And we’re not at the peak yet!
According to The Economist…
Nationally, people are defaulting on mortgages at a faster pace than at any point in recent decades. According to the Mortgage Bankers Association, some 5% of all mortgages are delinquent and the share rises to almost 15% for “subprime” mortgages—those lent to people with shaky credit histories. In the second quarter of 2007, almost 3% of subprime loans entered foreclosure (the process of default and repossession). RealtyTrac, a company that tracks foreclosures, reckons up to 1.5m households will enter the process this year (see chart), double last year’s figure. And with some 2.5m adjustable-rate mortgages resetting to higher rates before the end of 2008, everyone knows there is much worse to come.
I think we will not see a recovery in housing till at least 2009. But in housing, everything moves slowly. So this downturn might not be over well after 2010.
ReferenceThe hummer drops, The Economist
I don’t think housing is out of the woods yet. In my opinion, the worse is still to come. Take a look at these stats released by the WSJ today.
$31.8 billion in subprime adjustable-rate mortgages got adjusted this month – the highest amount of subprime ARMs due to reset over a one-month period in this housing cycle.
In August, foreclosure filings rose 36% from the previous month and were up 115% from last year, according to RealtyTrac. As ARM resets reach a peak, more homeowners will have trouble meeting payments.
It would take 9.7 months to sell all of the single-family homes now on the market, near the previous peak set in May 1989.
All this means that housing in the months to come will most likely get worse, not better.
ReferenceHousing Slump Could ‘Reset’ Itself Again, WSJ
