The Housing Crisis Is Over

By CYRIL MOULLE-BERTEAUXMay 6, 2008; Page A23
Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Florida's Existing Housing Market Mirrors

Florida's Existing Housing Market MirrorsNational Trend at Year End 2007

ORLANDO, Fla., Jan. 24, 2008 – Florida’s housing market followed the national trend in 2007, as mortgage industry issues and a sluggish economy impacted sales and prices. By year’s end, a total of 130,241 homes sold statewide for a 29 percent decrease compared to the 183,988 homes sold in 2006, according to the Florida Association of Realtors® (FAR). However, 2007 is expected to be the fifth highest sales year on record for existing-home sales, according to the National Association of Realtors® (NAR).

“What we experienced during the five-year boom cycle (2001-2005) was not a normal housing market,” notes 2008 FAR President Chuck Bonfiglio. “It was a market like we have never seen before. Existing-home median prices went up statewide over the past five years by some 60 percent; prices only declined in 2007 from 2006 by 5 percent. People are still experiencing a sizable return on their investment if they have owned their home over the past six years. The outlook for 2008 is that the housing market should start to normalize, that we should see some gains by the end of the year. Continued efforts to resolve Florida’s property insurance and property tax issues will also help revitalize our state’s housing market.”

The latest market outlook from NAR predicts that, as conditions for the mortgage industry continue to improve, existing-home sales should hold fairly steady over the next few months, rise later in the year and continue to improve in 2009. “A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008,” says NAR Senior Economist Lawrence Yun. “Our consumer survey shows buyers today are in it for the long haul, planning to stay in their home for a median of 10 years. This is a wise approach to housing because the data shows the longer you own, the better your investment.”

Florida’s median sales price for existing single-family homes for year-end 2007 was $233,600; a year ago, it was $247,100 for a 5 percent decrease. The median is the midpoint; half the homes sold for more, half for less. At the end of 2002, the statewide median sales price for single-family homes was $137,800, for an increase of 69.5 percent over the five-year-period, according to FAR records.

Sales of existing condominiums in Florida also decreased last year, with a total of 41,478 condos sold statewide compared to 56,877 in 2006 for a 27 percent decline, according to FAR. The statewide median sales price for condos at year-end was $205,100, down 3 percent from the 2006 year-end condo median price of $211,500. NAR reported the national median existing condo price was $223,500 in October 2007.

Interest rates for a 30-year fixed-rate mortgage at the end of 2007 averaged 6.34 percent, according to Freddie Mac, down from the average rate of 6.41 percent at the end of 2006. FAR’s sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

Timing the housing market

You want to buy a home but are scared to take the plunge in a crumbling market. Here's how to think it through.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: At some point I plan to buy a house in the $250,000 to $400,000 range. I have generally good credit and plan to make a down payment of 20 percent or more.

But given the instability in the housing sector and generally tightening credit landscape, I'm wondering whether I should buy now or wait several months, maybe even a year, to see where the market settles. What do you think? - Daniel Akers

Answer: I don't recommend trying to time the housing market any more than I would timing the stock market. So if your aim by holding off is to try to get the best deal by buying just as prices have hit their low, I think that's unrealistic.

After all, even assuming you can figure out the ideal time to buy - that is, when prices have hit not only hit a trough but are on the verge of rebounding - by the time you find the house you want, line up the financing and close the deal, the "best" time may have already passed.
That said, given current state of the housing market, you certainly don't need to be in a rush. As my Money Magazine colleague Amanda Gengler pointed out in our December cover story on the outlook for 2008, house prices are already down more than 4 percent from a year ago.

And given the huge inventory of homes already for sale plus the ones likely to come into the market as more homeowners default on their mortgages and go into foreclosure, prices are forecast to tumble another 6 percent or so in 2008.

Perhaps the Bush administration's subprime plan or some other proposal to help borrowers facing foreclosure may be able to limit the damage somewhat. But I don't think anyone believes prices will rebound in a significant way until 2009 at the earliest.

So how do you factor all this information into your plans for buying a house? I recommend that you start looking around in different areas where you may be interested in living to get a sense of what the market is like and where it may be headed.

The forecast I referred to above is the broad-brush picture. But the national housing market is really a collection of many local markets, and the prospects can vary considerably from one locale to the next, depending on such factors as how hot the market got, the local employment picture and the volume of inventory and potential foreclosures.

You can check out prices online and take the pulse of the market in different cities and neighborhoods by going to trulia.com, zillow.com,homegain.com as well as other sites that are featured in the "Know Your Home's Future" section of Money's January cover story, "The Best Money Web Sites."

But you'll also want to take time to do plenty of real-world legwork. Drive around different neighborhoods to see how many "for sale" signs you see and then talk to agents at several real estate offices to get an idea of how long homes are sitting on the market before they sell, how much below asking price they're going for and what kinds of concessions sellers are offering.

While you're at it, you should also contact a few mortgage lenders to see what size of loan you can likely qualify for given your income, expenses, assets and liabilities, credit rating and the size of the down payment you plan on making.

Part of the fallout of the subprime debacle is that lenders are now more stringent about the documentation they require before making a loan. You'll want to be sure you'll have access to documents like recent pay stubs, tax returns and savings and investment account statements so you'll be all set to apply for a loan when you're ready to buy.

As I said before, you shouldn't feel under any pressure to make an immediate move. But when you eventually do see some houses you really like and feel you're ready to join the ranks of owners, you want to make the most of what is now most certainly a buyer's market.

Find out what comparable houses have sold for recently and then consider starting your bidding at 10 percent to 15 percent below that price. Don't be surprised if the owner doesn't fall at your feet and thankfully accept your offer.

Even in a down market, many owners have inflated notions of the value of their home and will stubbornly stick to an unrealistic price. So if you want to pick up a real bargain, you've got to be ready to walk away and go on to another listing.

Generally, you'll have the most leverage when the owner is under some pressure to sell - a looming foreclosure, a job relocation, a commitment to purchase another house, an investor looking to escape burdensome carrying costs, etc.

On the other hand, you don't want to overplay the haggling game and end up losing out on a great house for the sake of a few thousand bucks. For more advice on how to get the best deal, I suggest you check out the "Your Home" section of Money's 2008 outlook story. (This story also has tips on how sellers and owners can best cope in today's market.)

And if you're considering buying a new home, you should also check out my colleague George Mannes's story in Money's January issue, "Boy, Have They Got Freebies for You," which explains how to evaluate the discounts, upgrades and other incentives homebuilders are tossing around to entice you to buy a newly built home.

This kind of opportunity doesn't come around very often in the housing market.

So take your time, do your research and make the most of it.

Tax Break for Mortgage Debt

Good News! Tax Break for Mortgage Debt Foregiveness! A Change that will help!


GOOD NEWS!

Today is a day of some really good news that will help the people that find themselves faced with foreclosure and cannot find a solution to save their home by using one the plans that have been created for those that meet a certain criteria and they were not able to do a workout with the lender(s).

If the homeowners find that there are no workout plans that fit them and they have to seek a short sale approval and if they are lucky enough to get an approval for the short sale, they now do not have to worry about the difference between what the actually owe the lender and what they were able to sell the home for. This is called debt forgiveness. With this law, they are truly forgiven.

This law will ease the after shock of losing your home and then finding yourself owing the IRS that difference ~~~ the debt will be fully forgiven ~~ if that homeowner is in hardship.

TAX BREAK FOR MORTGAGE DEBT FORGIVENESS
President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).

For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer's principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.