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The Housing Crisis is Not Over

June 2, 2008 | Filed in: Personal Finance | No comment

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I came across an interesting article the other day on the Wall Street Journal Online. Cyril Moulle-Berteaux of Traxis Partners LP (a hedge fund based in New York) wrote an article entitled “The Housing Crisis is Over.” He brought up some very interesting points, which I’d like to highlight for you and also provide some commentary as well as my own personal opinion on the points that he’s made.

Mr. Moulle-Berteaux begins his article by mentioning that headlines in the financial as well as the popular press are intensifying. Yet even with all of these cries of doom and gloom he predicts that “April 2008 will mark the bottom of the U.S. housing market.” This article, although posted almost a month ago, caught my eye because of the significance of this statement. What would Mr. Moulle-Berteaux use to back up this statement? How could he possibly claim that we’re at the bottom and won’t go down any more when it seems so obvious that this is quite untrue? Isn’t it?

What the “Bottom” Means

The author reminds us that “a bottom does not mean that prices are about to return to the heady days of 2005. It just means that the trend is no longer getting worse, which is the critical factor.” All things considered this makes his profound statement seem less impossible and even somewhat likely. After all we have been in this housing bust for several years now, shouldn’t it be about time for us to be at the bottom of the bust? It is definitely a possibility, but is it an actuality?

Mr. Moulle-Berteaux’s Argument

The author argued that the same thing that caused this bust is likely to pull us out of it: affordability. According to him during the 90’s and early 2000’s it took 19% of average monthly income to “service a conforming mortgage on the average home purchased.”  For first time buyers he claims that it took 29% of monthly income to purchase a home.  These numbers jumped for non-first-time home buyers and first-time buyers, respectively, to 25% and 37% of monthly income by the year 2006.  Over the past two years (since the previous mentioned point in 2006) Moulle-Berteaux argues that home prices have fallen 10-15% and mortgage rates have come down 70 basis points from their high (a basis point is equal to 1/100th of a percent).  This reduction in home prices has brought the monthly income/mortgage payment ratio back in line at 19% of monthly income for the average home buyer and 31% for the first-time home buyer.  In other words, he claims, “homes on average are back to being as affordable as during the best of times in the 1990s.”  

Essentially Moulle-Bertreaux is arguing that although inventories are at their highest levels ever and that home values are dropping like flies, we have reached a bottom.  He claims that inventories are increasing, but at decreasingly smaller levels and that prices - although they will continue to drop until sometime in 2009 - will not drop at the level that they have heretofore been dropping at.  It’s an interesting argument, and it does make sense but does not seem to be the reality of the situation - at least not yet.

The Market in My Neighborhood

I did a little bit of research for the median home price in Phoenix, AZ as well as the median and average household incomes.  I then used these figures to calculate a percentage of an average mortgage payment (based on a rate of 6.31% APY and the median home price of $210,000 with no down payment) and the 2006 greater-Phoenix median household income of $51,862 dollars.  With these figures I calculated that the average home buyer (based on their income equaling the median income) in the Phoenix area buying a home that’s valued at the median price would have a mortgage payment to monthly income ratio of 38% which is well above the authors claimed percentages of 19% and 31% for the average home buyer and the first-time buyer.

The market in my neighborhood is - based on the authors facts and figures - far above the affordability index that he has created.  So for the Phoenix area at least it seems that the housing crisis is not over… not yet.

How is the market in your neck of the woods?  Does it fall in line with these “averages” that Mr. Moulle-Berteaux has stated?

Tags: affordability, boom and bust, housing, housing bust, housing market, Personal Finance, Real Estate

The State of the Housing Market

December 11, 2007 | Filed in: Miscellaneous | No comment

Unless you’ve been asleep for the past year, you are more than aware of the slump in the housing market. You might be someone who is adversely affected by the downturn in housing, or maybe you are waiting for the downturn to continue because you are looking to buy your own property. My wife and I are in the second situation. We don’t own a house. We are renting and waiting until the best time to buy. Many people are saying that now is the time to buy; housing prices are at their lowest for the past few years, and interest rates are dropping. I disagree. I don’t believe we’ve reached bottom yet. In fact I am unsure that we will even reach bottom in 2008. We may, but it is no sure thing. I’d like to talk about two of the reasons that we are having this downturn in the first place, which will (hopefully) teach us a few lessons about what NOT to do when looking to purchase a house.

A Little Bit of Recent History

The median home price during the year 2000 (this is a national median price) was $119,600. By the fourth quarter 2005 the national median price was $213,900. This is an increase in the national median home price of roughly 178%. The Arizona median home price in 2000 was $121,300. By the end of year 2005 in Arizona the median home price had accelerated to $286,825. This is a 236% price increase. Why are these increases so large? What was going on with the rest of the economy at this time? Most of you will recall the market downturn and the “recession” at the turn of the century. The so-called dot-com bubble burst losing investors billions of dollars and pushing our economy into a soft recession. The federal reserve (public enemy number one, IMO) “fought” the recession (which by the definition of recession wasn’t even a true recession) by lowering their federal funds rate (the rate at which financial institutions lend one another money) 11 times from 6.5% to 1.75% over the course of a few years. These extremely low interest rates are what enabled banks and other financial institutions to lend businesses and individuals money at subsequently low rates.

The Next Pie in the Sky.

Where do investors put their money when their “sure” investment loses them money, and they are forced to pull out? In the next “sure thing,” of course. After the fall of the dot-com bubble and as the fed (aka the federal reserve) lowered their federal funds rate to a ludicrously low amount, investors decided that real-estate was a “sure thing,” and they pumped their money into the real estate market. Of course with this hefty increase in demand homeowners and homebuilders started rapidly increasing their selling prices. Simple economics right? Truly it is. What these investors (and even regular old Joe homeowners) did not think about is that the demand they were creating for homes was unsustainable. What goes up must come down. It’s a law… one which people tend to forget about every single time the next big investment comes around. “It won’t happen to this one,” they say. It always does.

Buying on Expectations

Foreclosures on homes happen. People lose their jobs and can’t afford their home payment anymore and so they end up foreclosing on their home. It is inevitable to a small degree. The level of foreclosures nowadays though is much larger than that small inevitable percentage. Another problem with today’s housing market is that consumers bought their houses on expectations. Expectations that the loan rates would stay low, expectations that they would get that raise next year, even expectations that housing prices would continue to accelerate at the level of growth that they experienced in the early part of this decade. These expectations are foolish to depend on. Purchasing a home will most likely be the largest, most expensive and most important purchase that one will ever make. Making such a large decision while making so many assumptions about the future is foolish, and it is primarily the cause of the increase in foreclosures we’ve been experiencing lately.

I mean no harm and no offense. There are many people out there who are suffering due to the events in the housing market over the past six or seven years. I do not mean to promote that suffering. I only wish to educate those who have not yet made these mistakes, so that they will be able to avoid them. Everyone makes mistakes. We grow by learning from (and not repeating) these mistakes.

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Tags: Economy, Real Estate

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