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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."

Reference
Home Prices Keep Falling, Prolonging Financial Crisis, CNBC.com article

When will housing reach bottom? Not too soon according to a Wall Street Journal survey.

Reference
U.S. Economy Hasn't Hit Bottom, Survey Says -- WSJ.com ($$$)

Reference
Pace of Decline In Home Prices Sets a Record, WSJ

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.

Reference
The 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.

Reference
Housing Slump Could 'Reset' Itself Again, WSJ

Excellent article on state of the housing... and things to come.

The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.

“When all these people see their mortgage payment and it’s up 40 or 50 percent, they’re going to say, `We can’t stay in this house,”’ Pimco’s Kiesel said. “And there are millions of people in this situation.”

Some owners are selling their homes at “fire sale” prices to avoid foreclosure after seeing their adjustable mortgage rates spike, said Lawrence White, an economics professor at the Stern School of Business.

“Prices will continue to soften for as long as we have distressed sellers,” White said. Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months, he said. The slump probably won’t cause a recession, he said.

Reference
Rate Rise Pushes Housing, Economy to `Blood Bath' - Bloomberg.com: Worldwide

More bad news for housing...

The average for the benchmark 30-year fixed-rate home mortgage rose sharply in the week ended yesterday, to 6.74% from 6.53% last week, according to Freddie Mac.

The mortgage agency said its weekly survey showed the 15-year loan also spiked, to 6.43% from 6.22%.

The one-year Treasury-indexed adjustable-rate mortgage increased to 5.75% from 5.65%, while the five-year hybrid ARM averaged 6.37%, up from 6.24% last week.

Reference
Mortgage Rates Jump the Most In Over 3 Years - WSJ.com

U.S. foreclosure filings have spiked 90% in the last year and have risen 19% between April and May alone.

That's some bad news in the housing market. But that's not all...

To put this in perspective, when did we have the most activity in the Adjustable Mortgage lending? In 2005 and 2006. Thus, the worse will be in 2007 and 2008, and maybe 2009, when these mortgages adjust. In my opinion, we have not see everything yet and things might, and probably will, get worse.

RealtyTrac does provide a free 7-day pass to get a service to see the foreclosed houses in your area. I tried a similar service from some other firm before, but was not totally satisfied. I might try RealtyTrac, as they're the biggest tracker. I would like to get tips/more info on how to navigate and take advantage of foreclosures. Share it if you know anything.

Reference
Mortgage foreclosures climb steeply - InvestmentNews

Contrary to the popular belief, house prices do come down. Check out this historical chart (from '88 to '06), from NY Times.

That's what Stephen S. Roach from Morgan Stanley in this report, The Great Unraveling, writes. The report is quite long but very exhaustive. I think it illustrates one thing: the worse is yet to come.

Here are some excerpts.

From bubble to bubble – it’s a painfully familiar saga. First equities, now housing. First denial, then grudging acceptance. It’s the pattern and its repetitive character that is so striking. For the second time in seven years, asset-dependent America has gone to excess. And once again, twin bubbles in a particular asset class and the real economy are in the process of bursting – most likely with greater-than-expected consequences for the US economy, a US-centric global economy, and world financial markets.

Sub-prime is today’s dot-com... Seven years ago, the optimists argued that equities as a broad asset class were in reasonably good shape.... That view turned out to be dead wrong. The dot-com bubble burst, and over the next two and a half years, the much broader S&P 500 index fell by 49% while the asset-dependent US economy slipped into a mild recession, pulling the rest of the world down with it.

Fast-forward seven years, and the actors have changed but the plot is strikingly similar. This time, it’s the US housing bubble that has burst, and the immediate repercussions have been concentrated in a relatively small segment of that market – sub-prime mortgage debt, which makes up around 10% of total securitized home debt outstanding. As was the case seven years ago, I suspect that a powerful dynamic has now been set in motion by a small mispriced portion of a major asset class that will have surprisingly broad macro consequences for the US economy as a whole.

Reference
The Great Unraveling, Global Economic Forum

I'm kicking myself a bit. How come I did not know about the subprime lenders before?! I had been talking about a housing downturn for some time now. However, till last couple of weeks, when the meltdown actually began, I did not know that there were lenders that were doing subprime lending only. Had I known, I would have shorted New Centrury (NEW, almost bankrupt, from $30), Accredited (LEND), Novastar (NFI and Fremont (FMT).

Either way, shorting is very risky. I tried shorting Countrywide (CFC), but I only did it for a day. I chickened out after I read a favorable report on the stock. Countrywide, even though it has the biggest exposure to subprime, is a sound company. Plus, it's already down a lot.

Housing downturn has only begun. I am still hoping things will settle down in 2008, but it might be even longer than that.

Has housing hit bottom? A lot of people seem to think so. I don't. I think houses are still too expensive and have a long way to go before they become "affordable." In the latest issue of BusinessWeek I found a short snippet that supports my view.

If history is any guide, using data from the seven previous housing cycles since 1959, Hugh Moore concludes that the sector will fall further -- and land hard. Take housing starts. In the past, they fell an average 51% from peak to trough. Currently, housing starts are off about 30%. Recession might be on the way, as well. In six of the seven cycles, when starts fell more than 25%, the economy tanked.

In the same seven cycles, the amount people spent on new housing as a percent of gross domestic product fell an average 28% from market peak to trough. Currently, that ratio has fallen 10.5% from its fourth-quarter peak.

History also shows that housing corrections take an average 27 months. Thus, the current doldrums may linger a year or more. She notes, that month-to-month housing stats producing relief rallies are "just noise."

Like I said, I think this downturn has ways to go.

Do really people make that much money? Or are they (or they were) just stretching themselves? Or maybe they are not aware of the rule of affordability: you should not spend more than 28% of your income on mortgage.

To add to that, here in NJ, you would be lucky if you found a house for less than $350K. Everybody must be rich -- just not me. :-)

Take, for example, the Baltimore area, where Johns Hopkins Hospital is based. The median home price there is $275,000, according to the report. Assuming that not more than 28% of household income would be spent to pay the mortgage, property taxes and insurance -- and factoring in a 10% down payment -- the annual income needed to purchase a home of that price in Baltimore is $94,206, the study found.

Reference
Many health-care workers priced out of homes, MarketWatch

This summary from RealEstate Weekly (recommended newsletter, my previous entry) sums up the market quite nicely.

Conditions in the housing market have continued to deteriorate, if you're a seller. If you're a buyer, you are wringing your hands with glee.

The latest survey of market conditions from HouseHunt Inc., an Internet real estate firm, showed just how tough it is: All six of the market measures the Web services uses in its surveys of real estate agents across the country posted declines in the third quarter.

First, the time a house stays on the market before selling has continued to lengthen. Only 26% of houses now sell within 60 days compared with the 45% of houses that sold that fast in the first quarter and 75% that sold that quickly two years ago.

Second, 52% of real estate agents say there are more sellers than buyers in the market versus 36% who say the opposite; 12% report a 50-50 split. Two years ago, buyers outnumbered sellers 66% to 14%, with 20% of markets split 50-50.

Third, the inventory of unsold houses is growing. The number of agents reporting a "good supply" of homes on the market hit 89% at the end of the third quarter, up from 81% in the first quarter and up from just 36% two years ago.

Fourth, barely half of sellers say they are getting 95% or more of their asking price when they sell. That number was 75% in the first quarter of this year and 90% two years ago.

Fifth, only 25% of sellers report multiple offers on properties for sale, down from almost 80% two years ago.

Finally, selling agents confirm that home-price appreciation has cooled considerably. Only 11% report prices increasing 10% or more and one-third report price declines. Two years ago, one-half of agents said prices were rising 10% or more and none reported declines.

Reference
Real Estate Weekly Newsletter, December 1, 2006

Is is a good time to buy now?

I don't think so. It's going to take a lot longer for this market to finally settle down. It's going to be up and down for some time.

The housing market will settle down and might start going up sometime in 2008 -- I'm not the only one that thinks like that, a lot of economists have the same view. Why so long? It was an up market for a long time, 1998 - 2005. It's going to take a long time come down.

"It may not be until 2008 until the market bottoms out," predicted James Hughes, dean of the Bloustein School of Planning and Public Policy at Rutgers University. The problem, Hughes said, is the "extraordinary gains" in the market played out over seven years, from 1998 to 2005. When the highs last a long time, "it takes time to adjust," he said.

I see a lot of reductions in the current market, but they're not big enough for me. The way it looks now, I can probably buy something in the 350-400K range (in NJ). I'm looking for something around 300K. Not there yet. But I think it will get there by 2008. If not, oh well, I'll have to pay more, or continue renting.

Reference
New-home sales still declining, NJ.com

NJ one of them.

(click to enlarge)

Carl Haefling is a portfolio manager in Bainbridge Island. I found the following assesment of the housing market one of the best. I could say that my own thinking is very similar.

I believe the stock market is predictive -- not reactive -- except for relatively short periods of time.

Housing stocks topped out in Dec and are now down up to 50% in numerous cases from those highs. It will take a couple of years at least for this scenario to complete itself. A significant decline in the housing market over the next 2 to 6 years is being predicted by housing stocks.

It takes time for the housing market to fully unravel, we are in the early stages of stage 1. Stage 1 is where the market begins to recognize that prices have reached levels that reduce affordability and thus the number of possible buyers. Sellers, who have been holding back selling for fear of not selling at the top, begin posting signs advertising their home, usually at prices that reflect the highest paid for a similar home, and suddenly the inventory of homes foresale explodes. This has already happened in many parts of the country. This stage may take one to three years to fully unfold.

Stage 2 is price cuts by those who are becoming convinced that the market has softened if they want to sell their home they better cut prices. Once those "reduced" signs start appearing, buyers start reducing offers, even on properties that have been already reduced. Prices will drop far lower then anyone thinks possible in stage 2.

Stage 3 is the exhaustive phase. Buyers are afraid to buy, investors have no liquidity, mortgage requirements demand a high down payment and supporting cash flow, and the press is filled with articles claiming real estate is a terrible investment. (which happens to be true in the previous 5 years).

There are serious other problems that will contribute to this cycle, including a decline in the buying power of the middle class, tilting demographics which will reduce the number of possible buyers beginning about 2010 for real estate and possible shifts in values of owning vs. renting. There remain other problems that are related to real estate but not thought of as being directly connected. A decline in the value of the dollar may force foreign owners of commercial and residential real estate to try and liquefy. Higher interest rates because of inflation or stagflation also impact real estate prices.

And one of the unseen values will be the desire to downsize as the cost of insurance (in some high risk hurricane states you cannot get homeowners insurance except through the state at 3 times previous cost) explodes, the cost to heat and air-condition accelerates, and the cost of maintenance become detriments to ownership.

A house may go from being something that we take pride in, to becoming a burden.

Reference
Haefling on Housing, The Big Picture blog

This is where the housing market currently is:
- median home sale-price appreciation: sharply down
- new home inventory: sharply up
- single-family home sales: slowly going down
- mortgage apps: down

We should see interesting years ahead. For more detaisl and to see big charts, go to the article referenced below.

Reference
Recent Housing Data: Charts & Analysis, The Big Picture blog

If you're looking to buy a house (like me; but think house prices are crazy), this article is great to read. Wnen I was reading it, I felt music flowing in my ears. I kept telling myself: this is great stuff. If you already own one or you're looking to sell, this might be too hard to swallow, though. Great article.

Reference
Viewpoint: Housing bubble going bust nationally, found it on Economy.com

Welcome to the dead zone, Fortune Magazine