have changed quite a bit since the summer. I have an eye on just a few
parts of the country. From my perspective there has been a markdown of
prices of late. The sign “Just Reduced” is now being replaced with, “Reduced Again”.
The story is the same. Too many distressed sellers (REO) and a total
shortage of buyers. Sure rates are low, but not many contracts are
getting signed. Liquidity has dried up. This is especially true for
high-end homes. There are many owners that have been looking for a bid
for two years now. Case had this to say:
“I don’t think anybody is predicting that it’s going to go up very much in the next couple of years unless we see a resurgence of economic growth,”
That’s just polite talk. Case knows full well that there is a “0”%
chance of a resurgence in economic growth. We will be lucky if growth
stays positive at all. So what Case really meant was: “There is no upside”. And that is why we have a buyers strike.
A question to ask is, “Where might the rock solid bottom of housing be?” If you could answer that question you could ask, “How far from the bottom are we?”
I will put a number out that I think will hold for house values. My
number is 10X’s annual rent. At that number you will find financial
buyers. My bottom side estimate assumes we do not fall off a cliff into a
deep recession. If that happens my bet is off. Some numbers that
express rents and values at the 10Xs ratio:
Looking at it the other way:
Question: Are single-family properties priced higher than 10Xs where you live? (Be fair on your rent estimates)
From what I see the lower numbers in the charts are in the ballpark. But
there appears to be a disconnect at the higher levels. For example;
north of NYC you can buy a home for $1mm or you can rent it for $5,000 a
month (implied value of $600K). The suggestion is that high end RE has
farther to fall. That would take us back to price levels of around 2000.
There are quite a few areas around the US where RE values have fallen by
40%. But I am quite sure that property values have not fallen to
anywhere near 10X’s rent. Many areas in the country (California) have
values close to 20X’s rent. My guess is the average is about 15x’s.
10Xs is a worst case number. It would probably be a good deal for a
buyer. But absent any other class of buyers stepping up, the market will
probably gravitate to where the demand is.
You're not taking into account a new factor:
the United States has forgiven mortgage indebtness.
The factors showing U.S. debt forgiveness are both legal and factual:
1. ownership stake in banks (creating Fifth Amendment Due Process rights to what is in FACT--not the arbitrary 31%--minimization of the risk of housing loss(on this prong, please see online the Huxtable v. Geithner Order (not the Order to Dismiss--sounds like a settlement was reached since Huxtable filed no opposition).
The reasoning of Huxtable is sound and is pretty generally accepted now. There IS a Fifth Amendment Due Process right based on U.S. ownership of banks, and this Due Process right is a right to a modification based on what is in FACT the minimization of risk of default--this means that the 31% is simply the Government's assertion on this point--it is LITIGABLE;
2. contracts with servicers (creating the same rights as above, but on a third party beneficiary theory--see Marques v. Wells Fargo--online). The reasoning of Judge Lorenz is also sound and is simply another basis for claiming a factual minimization of the risk of default, rather than simply accepting the Government's 31%. Again, the 31% is going to be litigated. People have to get used to that--it's not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of economic incentive to foreclose (this is Reggie Middleton's analysis on his blog). The Middleton analysis is new (it's at www.boombustblog.com, the September 23 story on housing prices).
Litigants in HAMP will certainly have the right to civil discovery as to what the United States has concluded with respect to the economics of foreclosure. It will probably turn out to be just what the facts show: that the policy is in FACT to minimize the risk of default because there is no economic incentive to foreclose.
Of course this seems impossible, unacceptable, blah blah blah. But if the economic facts bear it out, then the economic facts bear it out and you just have to wrap your head around it.
What will happen next/is happening now:1. litigants will sue to quiet title (among other causes of action such as fraud, conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS commissioner and the United States, among others); and
2. the U.S. is scrambling right now to decide what to do if people who have a gazillion dollars and are sitting in a house which is soaring in value, nevertheless decide to simply stop paying on their mortgages.
Of course, the first instinct of Uncle Sam will be some sort of coercion. When that fails in court, the next gambit will be to try to provide some incentive to people to keep paying those damned mortgages. Who knows how this will end?
In any event, it's Reggie Middleton's analysis which broke the back of this. Indeed, I'm sure his analysis was already made in the dark of night at the Treasury Department.
That's been the entire tendency of this mortgage mess: to separate out what is in FACT the policy of the U.S., as opposed to what the U.S. SAYS its policy is. If you believe the latter, you don't get your day in court. But if you assert the facts in court, then your house is free.
So where's the bottom? That's an economic question, and it should be obvious by now that there is no longer any economics associated with housing. So-called economic concepts are, when used with respect to housing, simply political statements.
The entire role of housing in any notion of an economy, is changing as I write. So frankly, I would avoid putting any money in housing of any type whatsoever. It should be obvious that nothing has been decided as to the fate of our housing establishment. Watch out!
For one thing, it means that Lindsey v. Normet minimum scrutiny for housing is out the window, because the United States' policy is a higher level of scrutiny for housing.
Maybe the U.S. will try to keep homeowners paying their mortgages, through coercion or incentive, but once it becomes clear that the U.S. will never again allow foreclosures--and this is something individuals can enforce--then you tell me what kind of economy has that kind of housing establishment in it.
We cannot begin to imagine the dimensions of such a society.
And it is here!
I do not know where you see all these forgivers of mortgage debt. In Pa. so let me just say. I know three individuals who lost thier houses. Two bought after 2008 and one just remortgaged over and over that you might as well say they did also. All are out and renting. The strange thing is, all three of these houses remain empty and only one has a fore sale sign on it. I just don't get it. WTF is going on with these houses that are not even for sale.
Tell them to get a lawyer and sue to recover their houses. They will win.
We will eventually (in a few days, weeks, months, years, decades...)have to pay for our imports by actually exporting something.
Whatever we export will not be dug up, farmed, cut down, etc, in an urban area. Whatever we export will need labor (farmers, miners, foresters, etc), which will need support labor (hairdressers, lease buyers, firemen, babysitters, restaurant chefs, etc).
So our 1% of labor in primary production will go to 2%, and they will need around another 5% of support workers.
Which is going to do what to rents in urban areas?
Answer: Dive, dive -- 15 degree down-bubble...
Nice effort Bruce, but I think you are way high. Rents are being held at ridiculous levels by the amount of vacant property, and the desperate needs of landlords/owners to cover their negative cash flow.
Look at it from a renter's perspective. Paying more than 25% of your take home for housing spells disaster. With no job market and 20% unemployment, most young people can afford to live in a relative's basement or sleep on a friend's couch. That's what is happening.
Where I live, midatlantic, asking prices are stuck at the 06 bubble, or ABOVE. Go figure, nothing is moving. The little old lady living in the place can no longer afford the taxes, insurance, repairs, etc. even though she has no mortgage, but she is sure some nice young couple can cover all of that plus two or three grand for the bank. Good grief.
Then there is financing. Bill Gross told us what is needed. Until there is an honest to god 20 percent down, there is no commercial market for US real estate debt. None, nada, diddly squat. Who has that? As to "financial market" if you are not living in the property and don't lie about that, it's commercial, meaning 50 percent down, if you can get the loan.
Why are there any sales? It's the same old con. FHA 3% down with a lot more than 3% kicked back by the seller in "concessions". Florida agents are still advertising, walk away from the closing with cash. Six months or a year down they road, they will just walk away.
"I think you are way high"
Maybe,but I stick with it. That estimate is well below where we are today.
"Neither your worst fears nor your highest expectations will be realized". Who said that?
Bruce, I like Doctor Bubble's inflation calculator for an idea on valuations in SoCal. He overlays an average income-to- value comparison that is interesting, too.
I lean toward the accuracy of the income model, but your argument about rents is a worthy one too. The theories get to the same place from different directions, I think.
www.doctorhousingbubble.com
When you see experts honking the benefits of renting versus ownership - flexibility, no repair expenses, etc - well, then we will be near a bottom.
Wet finger in the air:
Over a very long timeframe, home prices have oscillated fairly closely around 3x household income. In 2005 - 2006, this peaked around 4x-5x on the way up.
*Absent massive intervention*, on the way down, you'd expect similar overshoot, call it to 2x - 2.5x. This would imply a national average home price of about 108K - 125K.
This would represent horrific losses for the banks.
How would this represent horrific losses for the banks?
The banks never had the money they lent.
Meanwhile, they have been collecting interest.
Try this yourself and see if you don't go to jail.
Ding ding! We have a winna! Give the (wo)man a Kewpie Doll!
I would guess that houses have to fall 80% (with a clear title), 95% for the current, messed-up situation with property titles.
Anecdotally, I agree with your assessment the lower values are around your 10x annual rent bogey. Actually, I'm currently below 10x on some multi-unit RE I own here in Chicago. But I think this is more a reflection of the strength of the lower-end rental market, i.e. this demographic is wholly unable to get financing to purchase housing so they're renting. No doubt there is still room to fall at the higher-end...
More good news that dovetails with this article Bruce.
http://finance.yahoo.com/news/Home-prices-to-take-hit-next-apf-59620238.html?x=0&sec=topStories&pos=5&asset=&ccode=
Strawberry fields forever