US supply of homes below historical median

[Guest kawikaho]

http://www-ac.northerntrust.com/content/media/attachment/data/econ_research/0911/document/dd112309.pdf

 

Does not include the supposed "backlog" of homes, but I think that inventory is grossly exaggerated.  Home pricing is stabilizing quite nicely too.

[Parsad]

The question is will inventories stay low as those houses come on the market and when the tax credits stop by June of 2010?  The U.S. has spent $21B already on the tax credits before November, and then extended those benefits till April 2010...so say another $20-30B, since they expanded the range of people that can qualify for credits.  Will Congress extend them again in June?  Cheers!

[shalab]

Buffett has said that the inventory should stabilize by mid 2010. He is probably right as the demand is very low. There is a house construction going on near my house, the builder had permit for six houses in 2008 and nothing got built till now. He has put up one house now and dont see any customers flocking to buy the house. He has already pulled in water, sewer and power for all the houses.

 

cheers!

Shalab

[oldye]

Sokol recently said it was about 18 months.

[onyx1]

The backlog of homes is not a myth.  The Mortgage Bankers Association reports that 13.5% of existing homes are 30 or more days deliquient.  With about 55mm homes, 7.5mm are in various degrees of distress.  Once deliquent 60 or more days, almost all loans default; and once 30 days about 75% eventually default.  This suggests that about 7mm of the 7.5mm will eventually enter foreclosure.  That will add 12 months to the 7 months of current inventory supply leaving 19 months of supply, and that assume no additional defaults in the future!  We are currently at the end of the subprime tsunami, but the next wave of option arem and alt-a mortgages wont begin until mid-2010 and will peak in 2011.  This wave is bigger that subprime, will overrun the rate of houshold creation, and will likely add years of additional inventory to the pipeline.

 

What may appear as housing stabilization is far removed from equilbrium because of a of several factors (all of which are unsustainable): 1) Very low rates, 2) $8000 tax credit, 3) pause between subprime and option arm/alt-a reset tsunamis, and 4) massive support to the housing market from the FHA where they are lending out more in 2009 than in all of 2005-2007, with terrible underwriting standards.  (18% of FHA's loans are 30+ days deliquent)

[omagh]

This graph is mind-blowing -- it's deflation in action!  The impairment of homeowner capital is permanent.  If you're a homeowner on the left hand side of the side of the curve, do you keep paying or do you walk away and force your bank to take the loss? 

 

http://1.bp.blogspot.com/_pMscxxELHEg/SwwiMIoaTVI/AAAAAAAAG4s/Q0pSaNCwU_w/s1600/Q3NegEquity3.jpg

 

I suspect that inventories will continue to grow through 2010.  The current price:rent payment ratio is 1:1 which bodes well for reduction in inventories IF consumers can get credit.  There is ample room for the ratio to fall further using the 1990 recession as a proxy.

 

http://4.bp.blogspot.com/_pMscxxELHEg/SwwLMNmxidI/AAAAAAAAG4U/YExykMMJm5Q/s1600/Q3PriceRent.jpg

 

 

-O

 

The question is will inventories stay low as those houses come on the market and when the tax credits stop by June of 2010?  The U.S. has spent $21B already on the tax credits before November, and then extended those benefits till April 2010...so say another $20-30B, since they expanded the range of people that can qualify for credits.  Will Congress extend them again in June?  Cheers!

[Parsad]

A perfect example of those that are now underwater, with good credit histories and are now considering walking away.  Cheers!

 

http://finance.yahoo.com/loans/article/108229/distressed-homeowners-ponder-whether-to-stay-or-go;_ylt=AvwHgVFbeb8gTmluEa01Xw.7YWsA;_ylu=X3oDMTE1NzJhNzNmBHBvcwM3BHNlYwN0b3BTdG9yaWVzBHNsawNkaXN0cmVzc2VkaG8-?sec=topStories&pos=5&asset=&ccode=

 

Seven years of bad credit or twenty years of payments for something worth half as much?  I'm guessing alot of these people will be walking...especially if their work situation changes or finances become a little more distressed.  Cheers!

[Guest kawikaho]

Well, I've lived through a major housing bubble collapse in Hawaii during the late 80's - early 90's.  People who bought then were under water by 40-50% as well; but, for the most part, people stayed in their homes.  What did happen was it took those people nearly 15 years to recover their home equity (and considering the taxes, interest payments, etc..., they still lost equity).  I've read similar things regarding other regional housing busts, e.g. southern California's housing bust related to the aviation industry collapse, Houston's housing bust related to the oil industry collapse, etc...  I believe people with little equity built into their homes may walk away, but even in those cases, I think people will just hold on to their homes.  This reasoning is based on what I see from people's behavior with stocks, mutual funds, 401k's, and RRSP's.  They usually believe that their stocks, etc... will rebound if down by 50%, so they just hold for the long term, unless they're forced out due to economic, or social reasons like divorce.  I think that's what most people will do with their homes that are underwater.  What is interesting is some of the dynamics that might play out: if people shift from renting to buying, this could cause some excess pressure on rents and create negative feedback with housing.  Although, I think these sort of factors are pretty negligible in the grand scheme of things. 

 

The big caveats are obviously employment, and interest rates--the latter being the most important.  Employment is getting better, who knows what will happen to rates.  I think rates will stay low for atleast by mid 2010.  My guess is that we've seen the bottom in housing.  It's a slow trudge upward from here.

[ERICOPOLY]

Reasons for not walking away from an underwater mortgage (from my perspective):

 

I simply don't like renting.  I like to be an owner.  I want to cut down that tree that blocks my light, buy furniture that suits the home, put in the patio that I want.

 

I don't want the owner calling me one day and say "I'm selling the house out from under you.  Pack your bags, you have 30 days to get the hell out of my house.  Meanwhile, I'm listing the property right away and you are going to have realtors walking clients through your home. So sorry!".

 

Last...

Many Americans had all of their "savings" plowed into their home and today if they walk away they "lose" it all... you could rightly argue that it's already lost but... they are still in a home they own (benefits of which I listed above).  Once they walk away, they have no down payment for the next house because they don't have any meaningful savings outside of their home.  It's either stay in the house they love or go and rent and be treated as second class by the landlord who tells you he is selling too (a month after you move in no less).

 

[Parsad]

I agree with you Eric.  There are a lot of reasons to own your own home. 

 

Although, the problem for the average in-debted homeowner in the U.S.:

 

Current Mortgage:  $2800/month + $5000 a year in property taxes, maintenance, etc.

 

Same Property Rent:  $1800/month

 

Do they want to continue paying $2800/month for the next ten-fifteen years, only to recoup the 40% drop in their nestegg?  Or they can put about $1400 a month ($1000 rent & $400 in other costs) away towards savings?

 

Alot will choose the latter.  Especially if they are under the stress of delinquency, foreclosure or collection.  Cheers!

[ERICOPOLY]

The present situation is not pretty.

 

You're right, people can easily find an extra $1,000 in their pocket each months from just walking away.

 

I find the term "predatory lending" to be curious... it would seem that the lenders were the rubes here, and the zero-down I/O crowd are the savvy ones who are taking no loss.

 

Predatory borrowing is perhaps more like it.

[tzuri]

 

Interesting discussion.

 

I think one advantage that people having by owning a US property and paying US federal taxes is that the moprtgage interest and property tax can be deducted from US federal taxes which is usually not the case with rent payments.

 

Using the example of mortgage payment of $2,800, If for example a person took $450,000 30 year fix mortgage with 6.25% interest. monthly payment is about $2,770 a month and the first year tax savings is $8,672 (average tax savings over the 30-year loan term is $5,657.09 per year). In some states you can also deduct the property tax from US federal taxes.

 

http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx

 

[ERICOPOLY]

 

Interesting discussion.

 

I think one advantage that people having by owning a US property and paying US federal taxes is that the moprtgage interest and property tax can be deducted from US federal taxes which is usually not the case with rent payments.

 

Using the example of mortgage payment of $2,800, If for example a person took $450,000 30 year fix mortgage with 6.25% interest. monthly payment is about $2,770 a month and the first year tax savings is $8,672 (average tax savings over the 30-year loan term is $5,657.09 per year). In some states you can also deduct the property tax from US federal taxes.

 

http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx

 

 

There is the $9,000 or so standard deduction that a married couple foregoes in order to chase the mortgage interest and tax deductions.  For a median home, it's nearly a wash.

[Santayana]

And if you live in state without income tax, you're even less likely to have enough deductions to make it worthwhile.

[uncommonprofits]

Although, the problem for the average in-debted homeowner in the U.S.:

 

Current Mortgage:  $2800/month + $5000 a year in property taxes, maintenance, etc.

 

Same Property Rent:  $1800/month

 

Do they want to continue paying $2800/month for the next ten-fifteen years, only to recoup the 40% drop in their nestegg?

 

 

With inflation on the horizon (??) ..... what will the increases be to that same rental property.  If there were a mass exit like you suggest ... I don't know that rental properties could keep up to the demand (particlarly of comparable nature).  A good majority would likely need to downgrade significantly.... is that what they want?  Not if they can help it.  I realize that vacancy rates are currently pretty high .... but don't forget to factor in domestic population growth + immigration factor here.... and also a point where you reach maximum unemployment: egs. Since graduating from college a couple years ago the young guy/gal (who's been hanging out in the parents basement) might want to get a place of his/her own now that work has been found.  

 

Or they can put about $1400 a month ($1000 rent & $400 in other costs) away towards savings?

 

Alot will choose the latter.  Especially if they are under the stress of delinquency, foreclosure or collection.  Cheers!

 

While what you say perhaps makes sense for those with keen investor intellect and/or money thrift savy.... most people are Not wired this way.  The majority of citizens are Not going to think about it that way ... let alone execute on it.  If they like the idea of home ownership ... and if they can struggle by .... a good majority will hang in there.  If the bank forecloses - well that's another story.    It also sounds easy to go save that $1400/mo difference and invest it in the nest egg ... but most will fail.  They will spend it on travel, fancy vehicles or other lavish things in life.   Perhaps a time will come when folks once again save up to have never had a loan .... and buy their dream house outright; however, the forces at play work against it.  The best that can be hoped for is real returns similar to the past 50 years; however, we seemed to have entered an era of negative real returns (if lucky - flat).  

 

I have always said that owning a home is a luxury ... Not an investment.  The only thing that appreciates with a home is the land it sits on.  The building and landscape features depreciate.  Yes there is maintanence ..... and moreover everything (excluding the land itself) has a life cycle of replacement.   The style can get out-dated, there are perhaps (minor/major) upgrades along the way.  When people look back at what a terrific investment their home was (say in 30-40 years) -- most are not going to include all these extras.   Add in property taxes + the cost of borrowing; and home ownership is a very poor proposition from an intelligent investment perspective.  But again, most people won't look at it this way.... their home is THEIR HOME and in the end for most will be the best investment they ever made (in preserving their hard earned dollars from the forces of inflation).

 

The bottom line is most people desire home ownership and most will think of it as a primary investment.  Think of it this way: a senior couple today are about to downsize and rent a small condo ... hence are selling the home they bought just prior to the recession of 1958.  Where would they be today -- if back in 1958 they walked away from their $140/mo mortgage (+taxes, maint, etc)  .... in favour of $90/mo rent down the street?  Despite the depressed housing prices of today ..... such long term home owners are likely much further ahead than the average rental type over all those years.    Sure there are exceptions ... but one thing you can be sure of is that over the years a lot of money will get soaked into a home -- most of those dollars get preserved in tomorrows currency.  I definitely agree there are a lot better things to do with excess cash ..... but there are a lot worse things too.  

 

UCP / DD

[prevalou]

two remarks/questions:

1) if the price to rent ratio is about 1 (see shiller index), how can i have to pay 1000$ per month to rent and 2800$ per month to buy a home?

2) A lot of ARM and pick a pay mortgages changed hands during the crisis. For instance Wells Fargo bought a portfolio of more than 100 billions$. Thes portfolios were bought with  big discounts (like 35%), and now loan terms can be converted. What I mean is losses already were taken on a lot of ARMs. So I don't expect a blow up from these.

[Guest kawikaho]

I'm very much in accord with what uncommonprofits said.  I believe everyone on here is somewhat frugal, mindful of their savings and money, and make smarter decisions with their money than most.  You have to realize most people are not like you folks.  Most people would still buy a house right now vs. rent.  Most people will still stay in their house.  I tried to convince my parents to sell their house a year and a half ago at the height of the housing bubble, and they wouldn't have any of it.  Most people aren't wired to trade over valued and wait for under valued.  I don't know anyone personally that thinks like that. 

 

[Guest Broxburnboy]

 

The big caveats are obviously employment, and interest rates--the latter being the most important.  Employment is getting better, who knows what will happen to rates.   I think rates will stay low for atleast by mid 2010.  My guess is that we've seen the bottom in housing.  It's a slow trudge upward from here.

 

There are other factors that will keep the resale market depressed for a very long time.

 

Changing demographics- The height of the boom marked the very time when the working population started to decline and the retired population began downsizing.

Tax increases - In most states and cities, government deficits are completely out of control and tax revenues must go up.. this represents an instant additional monthly cost overhang on every home in such states. At the same time government subsidies such as income tax deductions, low interest rates and outright subsidies are keeping the moribund sales picture afloat...they must end before the long awaited recovery begins.

Some market segments are in very bad shape... Mcmansions, 2nd homes in sunshine states, are experiencing worse rates of decline than the general market. The much ballyhooed new construction is almost entirely entry level homes at the low end of the price scale and the high end of government incentives.

 

Personally I would be happy if this market would only stabilize for a long period, but I think there is more downside risk than upside.

 

Cheers?

[bargainman]

Predatory borrowing is perhaps more like it.

 

Ok.. let's back up a wee bit here...  What caused this in the first place?  Banks, securitization, CDOs, CDS, mortgage brokers with misaligned incentives, and the rating agencies.  People like Wamu CEO, CountryWide CEO and others who basically decided that Ponzi lending was a viable business plan.  Ie it was better for them to lend loans to people with lousy credit and have them default years later, since the bank could then repossess the house and then sell it at a profit.  Also let's go way back up and examine the reason loans in some states are non recourse to begin with, dating back to 1860.  Look here:

 

http://www.thebigmoney.com/articles/money-trail/2009/10/08/go-ahead-walk-away?page=0,1

 

In particular, these three paragraphs:

 

"The history of the recent mortgage boom is one of bankers racing to outdo one another in lending more money on the basis of ever-flimsier collateral. This is not a new phenomenon. It is a speculative mania, as has appeared in real estate time and again, and one reason for the restrictions on banks collecting the full face value of busted mortgages is to make it less common. These restrictions on banks are not some newfangled innovation. California's one-action rule, for instance, dates back to 1860, a period during which ranchers bid up the price of land, thanks to easy backing from lenders who encouraged speculation in the hope of quick returns. Even the term walkaway is by no means new—it appears in this nearly 50-year-old (and lecture-free) story from Time, which cautions bankers that if they keep making careless mortgages they'll have to deal with debtors who abandon them.

 

That old news story has things exactly right. It's banks, not home buyers, that are in the better position to judge the real estate market and how much their collateral is really worth. The bank approves the assessment and decides how much equity a home buyer will be required to put up. All the mechanics of mortgages are designed to let a lender avoid the situation in which it is owed more on a house than it is worth. The limits on banks' ability to collect on badly underwritten mortgages places the responsibility for judging the sanity of real estate loans in the hands of lenders.

 

Clearly in the last few years all these mechanisms failed utterly. They failed, not because of morally bankrupt borrowers who go back on their “promises,” but because bankers decided to count on a perpetually rising real estate market to absolve them of the necessity of responsible lending. Far from misusing the lending laws, borrowers who use the rights the law gives them to walk away from mortgages merely place the risks of insane lending where the law intends them to lie. What they do is not dishonest; on the contrary, a key reason we give borrowers the ability to do that is to keep bankers honest and responsible."

 

Here's the article from Time that they reference:

http://www.time.com/time/magazine/article/0,9171,827500,00.html

 

Now I'm not saying there weren't irresponsible buyers. Of course there were, and there were also immoral speculators flipping property, and taking advantage of the irresponsible banks.  But by and large people were trying to buy a house "before it got too far out of range".  If banks and wall street firms with teams of Ph.Ds from MIT and Chief risk officers couldn't determine that they shouldn't be lending on the basis of ever higher real estate prices, with ever lower downpayments, because the ponzi scheme was going to pop, what chance did the normal Jane and Joe off the street have?  There is no way people who are not real estate experts could cause a speculative mania without the banks.  People just don't have hundreds of thousands of dollars laying around to bid up the prices of housing.  Banks provided the easy irresponsible leveraged lending via ponzi lending.  Without that there would have been no bubble at all.  Now banks are paying for it, except that they are being bailed out by uncle sam, whereas ordinary people are not!  To make things worse banks are refusing to modify loans even in pretty dire situations.  For some reason they'd rather have people default on their homes, so that's what people are doing.  That's really their only option since banks aren't modifying payments.

[ERICOPOLY]

Predatory borrowing is perhaps more like it.

 

Ok.. let's back up a wee bit here... 

 

It was humor.  The rest of what you said is true, I agree with all of that.

 

I guess you didn't catch my sarcasm.  The funny thing (to me anyway) is the line about the big bad bank bully who wants to take advantage of me by offering me super low rates with no money down.

 

[bargainman]

Predatory borrowing is perhaps more like it.

 

Ok.. let's back up a wee bit here... 

 

It was humor.  The rest of what you said is true, I agree with all of that.

 

I guess you didn't catch my sarcasm.  The funny thing (to me anyway) is the line about the big bad bank bully who wants to take advantage of me by offering me super low rates with no money down.

 

 

Doh! :-)  Well hopefully the articles I linked were at least partially informative.  I didn't know before reading them what the history of the non-recourse laws was. 

 

Well 'Big bank bully' might have been a mischaracterization back then, but certainly not now that banks aren't letting people refinance or modify loans, in that respect they are being 'bullies' to some degree.  Back then though you could argue in the case of Wamu and Countrywide, who specifically trained their agents to push ARMs that were likely to cause defaults, and to conceal the changing rates etc, that in that case they were bullies?  Or maybe not..  They knew they were pushing ponzi lending and they were training agents to do just that (At least from the articles I read). Maybe they just got caught up in all the new Wallstreet products and securitization?

 

Regardless, sorry if I missed the sarcasm, certainly didn't mean to offend :-)

[SharperDingaan]

 

Most people do not see their homes as an investment. The reality is that you need a place to live, & so long as they can make the mortgage - & still use the space, there's little consequence to freezing in the head-lights. Eventually, next year will be better.

 

To generations of younger folks the only thing stopping walk-aways is the stigma of parental dissappointment, & its rapidly weakening. Does the 7 year credit blemish really mean anything if most of the monthly saving went to consumer debt retirement (improving credit) - and walking away was the rational, & common, practice amongst your age-group, in your area? It's a short step from parental dissapointment to admiration - & a bankers nightmare.

 

The 1930's depression emotionally scarred entire generations of people for life, as they watched their dreams/aspirations slip away from them. Why would you expect it to be different this time? & why would you expect them to ever pay top $ for a house ever again?

 

SD

 

[SharperDingaan]

 

Ericopoly.

 

A really good predatory borrower would be the banks main borrower, borrowing at >125% of equity, & shorting the bank. A simple publicized toss of the equity in a down market, & a handy short cover to make one very rich. Give up the house & buy it back out of foreclosure  ;D

 

C'est le vie!

 

SD

 

 

 

 

[ubuy2wron]

I think far too many people are paying attention to Mr Tilson and his cabal of housing doomsayers. Has anyone here even bothered to see how cheap money is these days and what it means on a 30 year mortgage at fixed rates. In Phoenix one can buy a house with a pool on a golf course less than 5 years old for under 100k See linkhttp://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?index=0&source=ARMLS&cKey=4kv0lf26&page=1&listing_num=4294881&numResults=208. The listing is for 73,000 with 25%down your mortgage payment with a 30 year fixed is 300 per month.  Investors are buying these houses and renting them to people who were foreclosed out of their homes across the street for 600 per month. It is this economic which is creating the floor under housing prices . People need a place to live and they are building dam few new ones in fact you have to go back to pre WW2 to see new home construction at lower levels. Mean while 1.5 million households are being formed every year. Every house that is being foreclosed is bought by either a owner occupier or an investor in fact they are in bidding wars with each other. The old owner who is turned out now is a renter and can move into the house down the block for a rent of less than half of his former mortgage payment the new owner is happy the new mortgage issuer is happy the new tennant is reasonably happy the bank that issued the first mortgage well not so happy but even they are a little happier because the mkt has finally found a clearing price so they know what their liability is. It is all made possible because the Helicopter Ben is buying up every piece of mortgage back paper outstanding. At some point the banks are going to wise up and start to seriously renogiate these mortgages which are likely to default instead of going through the expensive foreclosure process and then the supply will disappear over night. If you are under water to the tune of 50% of course you are going to walk however if the bank takes a middle road and says we will forgive you X percent of the loan people will not walk away it really is that simple.

[benhacker]

I mostly agree with Ron. There is some more pain in housing but we are mostly done through the price declines.

 

Also, whoever mentioned above (Onyx I believe) about the Option ARM resets starting in 2010-11 is just regurgitating the Credit Suisse report that has been debunked before, and it's very dated.  The report mixed / confused resets and recasts and paints a totally skewed picture.... and it also belies any knowledge of the actual loan terms of an option ARM loan.

 

To understand that the report is completely false, one only had to read Wells Fargo's financial statements over the years (and GoldenWest's back in the day).  O-ARMs (written by GoldenWest --> Wachovia --> Now Wells) were set to recast in 10 years after originally being written *or* when the loan balance reached 125% of original principal balance.  Given the low low rates, and the fact that the vast bulk of these loans were not written until 2004, it's clear that the majority of reCASTs (which are what you should fear for the housing market, not resets) won't start until 2013-14.  Credit Suisse was wrong, and just because everyone parrot their chart, doesn't make it any less wrong.  Let's not continue the propagation of the lie.

 

Careful not to take other peoples' data without a dose of reality because they don't usually have your best interests at heart.

 

Ben