Another “Realistic” View of the Housing Market
Below is another, what I consider, realistic view of the housing market. Being an optimist or a pessimist about the housing market is not the issue. The issue about the housing market is to be a realist. Thank goodness the financial press is beginning to state where we are at. My dad used to tell me, "you can't get to some place unless you know where you are at". Text in bold is my emphasis. From Market Watch:
The housing market is just getting worse. Home resales tumbled 8% in September to the lowest levels in this decade, prompting the obvious question: When will it all end?
The honest answer is no one knows. Optimists have been saying for more than a year that the worst is behind us, while the pessimists have been saying recovery is still a year, or years, away.
So far, the pessimists have been right about the weakness in the housing market, but their forecast that the collapse in housing would lead to a general economic malaise has, at least so far, failed to pan out. The economy has slowed, but has not fallen into recession, as consumers and investors adjust to a world in which home prices don't automatically rise 5% or 10% a year.
The only thing that's clear now is that the housing market has gotten worse since the spring. The market was in a free fall in September. Sales of existing home fell 8%, while inventories of unsold homes rose to a 10.5-month supply. It could take 320 days for a home to sell.
Sales of existing single-family homes are down 20% in the past year, the fastest decline in 16 years.
Median prices have dropped 4% in the past year, in part because fewer expensive homes are being sold, but also because the typical home is worth less than it was a year ago.
Homes are only worth what someone is willing to pay for them, and right now, most homes on the market have no buyer in sight. Prices may have to fall much more to bring supply and demand back into balance, economists say.
Builders have almost no confidence. The home builders' index fell to a record low in October (the index dates back to 1985). New construction on single-family homes has plunged 31% in the past year, but still the inventory of new homes on the market, after adjusting for cancellations, is at the highest level since the early 1990s.
As if the fundamental sickness in the housing market weren't enough, a secondary infection has developed. The credit crisis in the mortgage market that erupted in the summer has left huge numbers of potential buyers without any access to mortgages.
The subprime sector has essentially died, with the newly reinvigorated Federal Housing Administration able to replace only a tiny segment of what was once a huge market of home buyers.
The top end of the market was also frozen out, as jumbo loans (those with mortgages above the conforming level of $417,000) became more expensive or completely unavailable.
The jumbo freeze-out devastated sales in pricey areas such as the San Francisco Bay area, where jumbo loans had accounted for about 52% of purchases in August, but just 39% in September. There's some evidence that the jumbo market is slowly returning, but it's not functioning normally yet.
"We are seeing the first buds of spring" in the recovery of the jumbo market, said Stephen Stanley, chief economist for RBS Greenwich Capital. "It's a slow, glacial recovery."
Historically, housing corrections take a long time. After the market softened in the late 1980s, sales fell for five years, then took three more years to return to the peak level. Prices took just as long to recover.
Some analysts say the fundamentals will worsen in coming months. The main problem is that so many adjustable-rate mortgages will reset to a higher interest rate. The typical family with an ARM will see mortgage payments rise by $10,000 a year, according to Andrew Jakabovics of the Center for American Progress, a progressive Washington think tank.
Millions of these home owners will be unable to refinance their current loan and will either have to scrounge to make the payments, or lose their home through a fire sale or foreclosure. That would throw even more supply onto a saturated market.
"The mortgage crisis is neither wholly contained nor likely to abate in the near future," said Jakabovics. "Default and foreclosure loom ever more menacingly as borrowers are unable to find a reasonable payment option and unable to sell their homes."