Quelle Surprise! Experts Now Say Home Prices Far From Bottom

We have said for some time that the repricing of residential real estate has some way to go. While conditions will vary greatly by market, a number of measures all suggested that nationally, the decline peak to trough would be on the order of 35-40%. That would in turn suggest that we are only a bit more than halfway through a painful process.

And lest you think a bailout or government rescue program can solve the problem, consider: prices need to revert to levels that consumers can afford given non-predatory mortgages (30 year fixed, 20-25% downpayment). Housing prices need to fall roughly 35% from the peak to return to long-established pre-bubble multiples of incomes.

But this New York Times article treats the idea that housing to fall as a new realization:

The American housing market, where the global economic crisis began, is far from hitting bottom…..

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers.

“The No. 1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.”…

Yves here. This is a tad misleading. As we indicated above, housing had further to fall based on existing incomes and a return to more traditional (conservative) mortgages. A recession will make the slide worse, but a further decline was in the cards.

On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.

As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data….

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif….

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)

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  1. Anonymous

    According to the zillow mortgage page, average 30 mortgage rates have gone up .75% in one week…

    Housing has been plunging even with great interest rates.

    If the rates start to head higher due to “unlimited funds” of the western worlds CBs to bail out their banks and a resistance of the eastern would to buy sovereign debt used for those purposes, housing will add momentum to it’s rate of descent.

    Here in San Diego the poster child for the housing boom home prices are already off an average of 35% and dropping at a steady rate of 2%/month.

    The only precedent I’m aware of for a housing bubble popping based on excessive credit is Honolulu, HI after japan tanked in 1990. Prices there dropped just over fifty percent and did it in a staggeringly short period of time.

  2. doc holiday

    Meanwhile, in another housing market…

    Wind Knocked out of China’s Housing Prices

    A wave of housing price cuts appeared to have swept across major cities in China after the Olympics, which earlier this year was still a property hotspot.

    Property developers in Shenzhen, southern Guangdong province, were among the first to slash prices to boost the sluggish local real estate market.

    Between September 29 and Oct 4, trading volume for housing units dropped 72% compared with the same period last year, according to data posted on the the Beijing municipal real estate management website. During that week, 412 units were sold, or an average of 69 units per day.

  3. gdd9000

    Exactly. The marginal change in home prices, from what was already expected, is that the job losses are about. But what is really funny, is that their adjusted cumulative price decline, after recessionary impacts, is still smaller than what many of us here already expected before the massive credit crunch.

  4. Anonymous

    I keep remembering what Sir John Templeton said a few years ago in an interview. (I might add, an interview in which he acknowledged the housing bubble way in advance of most.) He said you will know when it’s time to buy back in when the most outrageously over-priced realestate (price at height of the bubble) sells for 10% of its original price. That sounded pretty drastic at the time – still does – but it would not surprise me greatly if it turned out Sir John was right. Of course, he could have simply been repeating historical data from the Japanese housing crash in the latter part of last decade.

  5. Anonymous

    "…..This most recent S&P action hit $280 billion and comes just two months following another massive sweep of both Alt-A and Jumbo Prime (see Mr Mortgage report links). $280 billion is approximately 15% of the total Alt-A universe. I am aware that $280 billion hardly seems like news any longer, but many banks still hold Alt-A and Jumbo Prime MBS/whole loans on balance sheet due to their previous high ratings.

    The raters are finally understanding the ominous impact that negative equity has across all loan types and borrower grades. Negative equity knows no bounds. While factoring in the unprecedented home price deprecation seen in the past 12-months and projecting that out, they are discovering that those who purchased or refinanced with cash-out as early as 2003 are now under water and at an exponentially greater risk of default. In your harder hit areas, prices are at decade lows and those in a negative equity position are the majority….."


  6. rahuldeodhar

    A “Quelle Surprise” post after a long time!

    Totally agree – the real estate prices globally had some more way down left to go. This was before the recession was “priced in”.

    Despite the current stirring of hornet’s nest – my bet is “recession” is not adequately “priced in”. Bottoms are going to be way lower. This is just starting.


  7. Anonymous

    Could Alt-A mortgages cause another wave of write-downs in the banks? They must be securitized as well. As reported by Bloomberg, S&P has raised the estimated default rate for Alt-A to 40%.

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