Is the US Housing Bust Over?
Some pretty big names in the financial prognostication business are recommending that investors start buying [US] houses. Jim Grant has devoted lots of space in Grant’s Interest Rate Observer to the idea. Marc Faber, Donald Trump, Warren Buffett and Chris Mayer all like sticks and bricks.
Five years ago, the unthinkable began to happen. It got worse and worse. By the end, housing prices nationwide were down 35%. In some markets like Las Vegas, where I spent time as a banker, the shellacking has been much worse. The bulls figure now’s the time to buy. You know, buy low and sell high.
In a piece for The Daily Reckoning, Mr. Mayer talks about how affordable housing is in the U.S. He points to the ratio of median home price to median income. The lower the ratio, the more affordable the market.
Hong Kong is an unaffordable 12.6, while a number of U.S. cities come in at less than 2, especially in economically ravaged Michigan (maybe because these cities are bankrupt and municipal services are sketchy). But U.S. bargain hunters must steer clear of expensive Honolulu and Boulder.
“I turned bullish on U.S. housing in January 2011,” writes Mayer. “I did this after being a housing bear for about a decade. But the housing bubble that I feared has long since popped. Good bargains abound.”
There are always people looking for houses, because life circumstances change. However, the only reason this tepid demand is moving the price needle at all is the lack of supply. As Nick Timiraos writes in The Wall Street Journal:
Low inventory isn’t necessarily a sign of strength. One problem is that many sellers can’t or won’t become buyers. Millions still owe more than their homes are worth, and even more — about 45% of all homeowners with a mortgage, according to data firm CoreLogic Inc. — have less than 20% in equity.
In some cases, the amount is hundreds of thousands of dollars. These folks are imprisoned by their debt. They have been told all their lives they must honor their debts no matter the cost.
They desperately keep paying to protect their precious credit rating, handing their savings and their futures over to wards of the state Fannie Mae and Freddie Mac or too-big-to-fail zombies like Wells Fargo and Bank of America.
Many homeowners naively go to their banks and try to negotiate a modification of their loan. They are stunned when the lender either ignores them or refuses to consider a rewrite if the loan is current. Eventually, many give up. But they don’t go anywhere. They just stop paying.
Bank servicers are overwhelmed and don’t file defaults for months, sometimes years. In Las Vegas alone, there are hundreds of thousands of borrowers who haven’t made a mortgage payment in years. Timiraos writes that it’s ironic that “prices are rising fastest in markets that have the most underwater borrowers because so few homes are for sale.”
The latest numbers in Las Vegas reflect an inventory that has dwindled to 3,981 units, compared with more than 11,000 a year ago. Last month, 44% of all sales were short sales. And currently, “About 85% of homes under contract are short sales waiting for lender approval,” reports Hubble Smith for the Las Vegas Review-Journal.
“We’re really struggling with inventory,” Robyn Yates of Windermere Prestige Properties in Henderson told the Review-Journal. “That’s the challenge. Even though it’s great that prices are going up, it’s not great from the perspective of real estate firms and buyers. It’s very frustrating.”
This legal tangle is keeping the market from clearing. Literally millions of homes are just waiting to be sold, foreclosed upon, or liquidated. This is not the sign of a recovering market. Instead, the clogged foreclosure pipeline artificially elevates prices.
Timiraos makes the point that mortgage rates are at historic lows. If you can qualify for the money, that is. Qualified buyers are few and far between, post crisis.
However, for those that do qualify, “Mortgage rates allow borrowers to take out about 12% more in debt without increasing their monthly payment,” writes Timiraos. This boost in sales and prices will not last once rates go back up.
And to top all of this off, wages and employment are just not growing enough to spark a rally in home prices. The only thing bringing down the unemployment percentage is people giving up on finding work. This would have been fine back in the NINJA (no income, no job, no assets) loan days. Bankers are again tightfisted.
There could come to be a time when houses are a good investment, but that day has not arrived.
Douglas French
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that first appeared in Laissez-Faire Today
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