The Housing Crisis is Not Over

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?

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