8 Reasons Why Housing Hasn’t Bottomed


From the Big Picture by Barry Ritholtz

Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon.

Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different.

Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue – Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses – a big source of Real Estate activity. Plus, more unemployment means more…

Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures – which are healthy in the long run but wrenching during the process of dislocation – are very likely. These will pressure prices yet lower. And Loan Mods are not working – they are re-defaulting in less than a year between 50-80%, depending upon the mod conditions themselves.

Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which…

Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.

Notes:
When differentiating between real and nominal returns – we refer to returns before and after the effects of inflation (7% growth minus 3% inflation = 4% Real return).

Loan Mods refers to Loan Modifications, typically involving a reduction in the interest rate on the loan, an credit extension, a different type of loan or a combination of the three.

Advice:
Don’t bet on capital gains any time soon. If you’re an investor, focus instead on cash flow by making more in rent than you pay on your mortgage.

Better a bad job than no job. During good times people quit for better opportunities. Today there’s strong reason to remain where you are at least until employment picks up.

The fact that many are losing confidence is a plus for conservative and patient investors. Stock yields from dividends are becoming the most attractive in over a decade and with fear of opportunity comes an abundance of it.

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