Wednesday, December 24, 2008

Median Prices of Housing Falls Most Since Great Depression

A popular theme of the punditry through 2007 was "housing prices could never fall nationally because they never have in the past". I really hate that sort of analysis - talk about lack of rigor. We were refuting that weekly in the blog and saying "yes it is different this time". Our prediction did not take long to come true as in January 2008 prices fell "for the first time nationally" [Jan 24: They Said it Could Never Happen. Ever.] Keep in mind these records started in 1968, so it's really not "never" - the truth is home prices have never fallen nationally since 1968. Hence they never could. That looks silly now but it was the thesis for late 2006 through late 2007.

I wrote in January

Folks, they told us it could never happen. It never happened in history (well since 1968 at least), so therefore it could never happen. This is why you have to ignore these pundits.

They also conveniently forget to mention what else has never happened; the median home price rising at levels they did from 2000-2006. I don't know the figure % rise off the top of my head, but I know the median price rise was historic and also "never happened". So when you have a bubble, and something goes up at a rate it has "never done so", a lot of "historical" things can happen on the back end. And I'll place a wager that 2008 will be a repeat - median prices will fall again.

Housing prices are still TOO HIGH for people to afford. Even if we get these long rates down to 5% - it is not about mortgage rates - it's about affordability. If you force people (gasp) to come up with 5% down, and have a (gasp) FICO score of 680+, and (gasp) have documented income ... well you've just reduced the pool of potential buyers by a huge amount from "anyone with a heartbeat" in 2003-2005. So the supply/demand dynamic has shifted.

This has all come to pass... and more, despite all the government's efforts to stop it.

In December 2007 I wrote [Dec 6: Analysis - What Should Median Home Price Be Today?]

In July 2006 at the height of insanity the median price of a home was $230,200. It has already fallen in less than a year (October 2007) to $207,800.

I am fully confidant that by the time this is all said and done NEW financial innovations will be introduced (along with bailouts) which will keep prices elevated above where they 'should be' without the 'not so invisible hand' propping things up.

I went on to do a simple ratio of historical home prices to incomes, and reverse engineer (with very generous assumptions) and I came to the conclusion for the median price to come anywhere near historical range it would have to fall to $167K. That was an outrageous NATIONAL fall of 20% from even October 2007's level, which in and of itself was already down 10% nationally from the July 2006 peak of $230K.

A $167K target versus $230K (July 2006) peak is a national fall of nearly 28%. When the pundits who are highlighted and cheered daily on CNBC said it could not even fall 1% nationally (real estate is local!). Look whose talking now...
  • Sales of existing homes plunged far more than expected last month as buyers recoiled from October's financial wreckage on Wall Street. The median sales price fell by the largest amount on record.
  • The median sales price plunged 13.2 percent in November to $181,300, from $208,000 a year ago. That was the lowest price since February 2004, the biggest year-over-year drop on records going back to 1968 and most likely the biggest drop since the Great Depression.
  • Nationally, the Realtors group estimates that sales of distressed properties made up 45 percent of all property sales in November.
  • There were 4.2 million unsold homes on the market in last month. At the current sales pace, it would take 11.2 months to sell all the properties, matching a record set last spring.

So just be aware the same people financial media trots out to predict when housing will bottom, are the same ones a year and a half ago said housing would never fall nationally. This is why they need to scroll previous predictions at the bottom of the screen so you can see who actually made the correct calls in the past, versus who has been a Kool Aid drinking "the playbook says this so I'm going by the playbook" pundit - which is almost all of them. Group think is so prevalent on Wall Street.

So despite all these bailouts and everything the government has done along with banks in re-doing loans, almost 1 in 2 sales in America is now a foreclosure; the worst year over year price decline in history happened; and we have the largest inventory in terms of time it will take (in months). But not to worry that was YESTERDAY's NEWS and today the seals are clapping about a huge increase in mortgage applications due to the lower mortgage rates. The same news thay were cheering 3 weeks ago (remember the 100%+ increase in mortgage applications?) That's Wall Street for you.

Now with that said, 4.5% mortgage rates will help all things being equal and the government has clearly targeted that level as a MINIMUM - thats how full on socialism works - the government sets the rates and is trying to set the prices within their power. I would not be surprised they try to set the rate even lower. Because the solution for a country that took on far too much debt do to easy money, is to repeat the problem. Something about those who don't learn from history....

... but remember, it's America - we only worry about the couch on fire that we're sitting on. When the next bubbles are formed we'll deal with those at the appropriate time. Basically we've sadly become a country that lurches from one self made catastrophe to another, creating short term solutions to put out the nearest self made fire, while knowingly creating new ones. A bit pathetic.

Anyhow, as I swig Kool Aid, here is the good news of the day - mortgage applications are up! And Obama will save us. Just like the government saved us the past 12 months. Hope never ends.

  • Mortgage applications spiked last week to their highest level in more than five years, as borrowers took advantage of rates that fell to near-record lows after the government pledged to funnel money into the mortgage market.
  • The Mortgage Bankers Association said Wednesday its application index surged 48 percent in the week ended Dec. 19 to 1245.5, the highest level since July 2003, when refinancing activity boomed at the peak of the housing market. (I said in my 2009 Outlier Predictions that mortgage refinancings will, due to government interference, reach peaks seen during the housing boom) The index is still below its peak of 1,856.7 hit in May 2003 at the height of the housing boom.
  • More than 80 percent of applications came from borrowers looking to refinance into loans with more affordable rates, the trade group said.
  • The average rate for traditional, 30-year fixed-rate mortgages decreased to 5.04 percent from 5.18 percent a week earlier, according to the MBA report. That was the lowest point in the weekly survey since rates fell to 4.99 percent in June 2003.

So once more, I will pose the exact same question to the cheering hordes of pundits - please show me what % of applications have been approved, as now 1 in 5 households are underwater and the remaining 4 in 5 actually need to show income and a good credit score (unlike the "good times" during the past half decade of mortgage nonsense). And please recognize these are people refinancing dominating these numbers; not new purchases. Foreclosed houses are so dominant in the landscape that the natural sellers are having a hard time competing. And the vast majority of home buyers have a home to sell first.

So net net, the "easy money" is a "help" as it improves cash flow for those who can refinance. It makes homes cheaper versus income. But a lot of people will see homes falling in price and say "I'll wait for home prices to fall even more" and others won't be able to buy (or not willing to take the risk due to potential job losses) at 0% interest rates.

Eventually time and natural market prices will prevail, no matter what the government tries to do. Housing prices must fall into line with incomes - or affordability at any interest rate will not happen. But - let's not ruin a Wall Street thesis with facts... let's put our flippers together and cheer. I mean it can't get worse than this (cough) - the investing thesis of 2009.

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