Assume for a moment that house prices have bottomed. This still isn’t certain, but it’s looking more and more each day like the bottom is in. The final piece to the puzzle that convinced me house prices weren’t going to reverse course came when Ben Bernanke announced the federal reserve was going to purchase $40B per month in mortgage-backed securities for as long as it takes to make housing and employment to come back. Further, to reiterate his commitment to the policy he stated, “We’re not going to rush to begin to tighten policy. We’re going to give it some time to make sure the recovery is well established.”
You can’t fight the Fed.
Basically, the federal reserve is going to print money until house prices go up. Period. Apparently, it doesn’t matter how long that takes or what other consequences this policy has, the federal reserve is going to do this. Given this new development, in concert with mark-to-fantasy accounting, a zero percent federal funds rate, a cohesive banking cartel restricting inventory, record home payment affordability relative to rents, and a slowly improving economy, it’s difficult to see how house prices can go lower from here; therefore, we are looking at a housing recovery.
I wrote this about the eventual recovery back in 2008 in Future House Prices.
As with any illness, the recovery is often plagued by symptoms of the disease and unwanted side effects. The recovery from the Great Housing Bubble will be no exception. The main problems will be experienced by those who bought at peak prices and did not go through the cleansing foreclosure process. As painful as foreclosure is to those who must endure it, foreclosure is the cure to the disease of the market. After foreclosure, a borrower is no longer burdened by high housing payments, and is free to move to find new work and spend income on consumer goods.
Houses will become America’s new debtor’s prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Since there are a great many people in these circumstances and since each of these people are in at a different price point, each one will have a different term in debtor’s prison, but when their sentence is up, many will opt to sell to get out from under the crushing payments. Each of these people selling their homes keep prices from rising. This is the impact of overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. People trapped in their homes cannot move to accept promotions or advancements in their careers, and people who are making large debt service payments have less discretionary income to spend. In an economy heavily dependent upon consumer spending, the impact of this loss of spending power will serve as a drag on economic growth. Aside from the broader economic ramifications, the heavily indebted will need to adjust to a lifestyle within their available after-tax and after-debt income. This will be a disheartening adjustment to many, particularly those who had become dependent upon mortgage equity withdrawal to sustain their lifestyles.
Loan modifications have relieved some of these problems, but they merely extend it for others. Each of these distressed properties represents another unit of overhead supply which will weigh on future appreciation.
By Les Christie @CNNMoney September 26, 2012: 6:15 AM ET
NEW YORK (CNNMoney) — Home prices are showing signs of life, but have a long way to go to make up for losses from the housing bust.
U.S. home prices dropped by a third from the start of 2007 to the start of 2012, according to Fiserv, an analytics firm.
Fiserv forecasts prices will bounce back an average of 3.7% a year for the next five years — a rate that would still leave prices 20% below the peak. At that forecasted growth rate, the national average high of $238,000 would not be hit again until 2023.
Depending on what metric you use, the return to peak could be a few years away or a decade or more away. I originally predicted prices nationally would get back to peak levels in 2018 or 2019.
However with all the manipulation of the market, there is no telling when it will really get there.
It could take even longer in some areas. “In some hard-hit markets, prices could take decades to recover,” said Fiserv economist David Stiff.
Among those facing a long haul: Arizona, California, Florida and Nevada, the states most caught up in the speculative feeding frenzy of the mid-2000s.
Of those four states, Nevada and Florida will take the longest. They had some of the deepest declines, and they have more shadow inventory to absorb, particularly Florida where the backlog of foreclosures is enormous.
In California, for example, home prices should grow a little faster than the national average. Fiserv projects 4.4% gains during the next five years. But the hole is also deeper, with prices having fallen nearly 46% from early 2007 to early 2012. Break even won’t come until after 2026.
This is very similar to my own forecasts from 2008 I made in the Great Housing Bubble:
The bottom was not as low as I predicted, mostly due to a decline in interest rates from 6.5% in 2006 to 3.5% today. Continuation of these low rates may drive prices back up to the peak much faster as well. However, at some point, these rates will go back up, and unless wage increases make up the difference, prices will languish. Lenders won’t mind flat prices, as long as the flat spot is near the peak so they can get out from under their bad loans.
Homeowners in Nevada may have to wait the longest to make up lost ground. Home prices in the state plunged nearly 60%, and Fiserv projects annual gains of just 2.3%. It would take some 40 years at that pace to get back to 2007 levels.
It won’t take that long. House prices there certainly do have a long way to go, but the market is so affordable by historic standards that I believe prices will get bid up much more quickly once the local residents recover their credit and the shadow inventory is finally purged. Nevada will serve as a textbook market for rebound appreciation just as Phoenix is now.
Real estate, of course, is local, and there are many housing markets that never bubbled during the boom. In those places, buyers who bought in 2007 are much more likely to be in the money today. In South Dakota, Texas and West Virginia, prices are already slightly higher than they were five years ago.
In North Dakota, a housing shortage driven by the oil boom has sent prices soaring 17.7% over the past five years.
Iowa, Oklahoma and Nebraska, are nearly back to peak, as are Kentucky, Vermont and Alaska. These were all housing markets that recorded only mild price increases during the boom.
Most housing market analysts are not factoring in the impact of rebound appreciation. Given that we have never witnessed such a crushing home price decline before, this is understandable. However, most forecasters will be proven wrong when the local market residents regain their credit scores and the shadow inventory is cleared out.
Most housing markets hover at an equilibrium somewhere near rental parity. Supply restricted markets like Coastal California always trade at a slight premium, but most markets do not. Rental parity is a strong support level because when prices are below this level, renters have a strong incentive to buy. Currently, most markets around the country are trading at a discount to rental parity — or in the case of Orange County, a discount to their normal relationship to rental parity. In these circumstances, a rebound to historic norms is likely. The deeper the current discount, the larger future appreciation will be until the market normalizes at its historic relationship to rental parity.
Realistically, do you think Las Vegas houses will permanently trade at a 40% discount to rental parity like it does today? I don’t think so.
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Proprietary Irvine Housing News home purchase analysis
$575,000 …….. Asking Price
$610,000 ………. Purchase Price
5/12/2009 ………. Purchase Date
($35,000) ………. Gross Gain (Loss)
($48,800) ………… Commissions and Costs at 8%
($83,800) ………. Net Gain (Loss)
-5.7% ………. Gross Percent Change
-13.7% ………. Net Percent Change
-1.7% ………… Annual Appreciation
Cost of Home Ownership
$575,000 …….. Asking Price
$115,000 ………… 20% Down Conventional
3.43% …………. Mortgage Interest Rate
30 ……………… Number of Years
$460,000 …….. Mortgage
$133,242 ………. Income Requirement
$2,048 ………… Monthly Mortgage Payment
$498 ………… Property Tax at 1.04%
$358 ………… Mello Roos & Special Taxes
$144 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$394 ………… Homeowners Association Fees
$3,442 ………. Monthly Cash Outlays
($317) ………. Tax Savings
($733) ………. Equity Hidden in Payment
$123 ………….. Lost Income to Down Payment
$92 ………….. Maintenance and Replacement Reserves
$2,607 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,250 ………… Furnishing and Move In at 1% + $1,500
$7,250 ………… Closing Costs at 1% + $1,500
$4,600 ………… Interest Points
$115,000 ………… Down Payment
$134,100 ………. Total Cash Costs
$39,900 ………. Emergency Cash Reserves
$174,000 ………. Total Savings Needed