How does it end? When housing prices hit bottom

A chaotic and historic day on Wall Street will probably end with two of the pillars of the Street -- Lehman Brothers and Merrill Lynch -- gone as independent companies. Within days it is likely that Lehman, whether in an orderly liquidation or a bankruptcy, will be selling assets, as will suddenly teetering AIG.

New Century, Bear Stearns, Countrywide Financial, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch. Is Washington Mutual next? AIG? How does it end?

“We are in the grip of a vicious circle,” market strategist Douglas Peta told The New York Times, “and the only thing that to me will break that is for home prices to stop going down.”

And what will make housing prices stop declining? Again, The New York Times:

Many analysts believe that for the downward spiral to be broken, home prices must fall to a level that can be supported by factors like household income that have traditionally had a strong relationship to prices. Also, the government has to determine how it will restructure Fannie Mae and Freddie Mac, which own or guarantee half of the nation’s home loans, said Thomas F. Cooley dean of the Stern School of Business at New York University.

“We have to hit the bottom in housing prices,” he said, “and we have to just sort out how housing will be financed in future.”

There have been numerous recent signs that the housing decline may be slowing. In Southern California, sales of existing homes are running ahead of year-ago levels. And various statistics indicate the rate of price decline is decelerating. Still, as the L.A. Times' Peter Hong pointed out over the weekend, there is a strong argument that says home prices in the region will continue to decline. Credit Suisse recently argued in a research report that housing prices are still high relative to income levels, and will probably decline for another 12 to 18 months. Hong:

...the overall pressures on the economy and the housing market are serious -- and remain very much in place.

A key problem is that despite the crash, prices remain historically high when compared with people's incomes. So even though home prices have come down, people can't afford to buy them. And the exotic mortgage products that made it possible to buy expensive houses in the past are no longer available.

Low interest rates can make pricey properties more affordable, but that's meaningless if you can't get a loan, and most lenders have tightened their requirements so much that even people with good credit often don't qualify.

Supply is another key factor affecting home values. When there are too many homes on the market, there is downward pressure on prices.

--Peter Viles

-- Your thoughts? Comments? E-mail story tips to Peter Viles

Comments

[adoptivefather]

Has it dawned on anybody that osama bin laden must be sitting in his cave with a huge smile on his face, knowing he played a big part in destroying the American economic system.

[ToadB]

"A key problem is that despite the crash, prices remain historically high when compared with people's incomes. So even though home prices have come down, people can't afford to buy them."

This is exactly it! Prices here have always been high, but the last few years they went out of control. Now with the tighter lending there might be few who can afford to overpay, but the majority can't. Unless the prices take another serious dip, there will be a lot of unsold properties on the market.

[cane]

As posted on prior post, you've transcended Ellsworth Toohey of The Fountainhead. In the end to the presses stopped before he reached his goal.

[Mike P.]

It is, and has always been, about making that monthly mortgage payment. Just as we've seen wage-price inflation spirals in the past, easy housing credit and toxic option ARM products stretched the amount of mortgage you could take on (and thereby forcing prices higher, a la inflation) while maintaining a (short-term) manageable monthly payment. Throw in the mantra that 'real estate only goes up (in value)', and people were willing to be imprudent, 'knowing' the market would save them.

If your monthly payment is $1500 for either a conventional 30-yr fixed mortgage of $340,000, or an 'innovative' Pick-A-Payment Option ARM where $1500 per month will get you (temporarily at least) a $750,000 mortgage, you really can't be surprised when $340,000 homes suddenly cost $750,000.

With a return to normal credit terms, plus income verification of ability to make that monthly payment, prices have been deflating. And prices will continue to go down until that monthly mortgage payment becomes affordable for home buyers in the area. We are nowhere near the bottom.

[sailor7x]

Finally, it begins.....

[Joseph Lopez]

The housing crisis, as it appears, have just begun. Many programs are being structured to help homeowners keep their homes, but the foreclosure rate still continues to spike.

Help can be found in http://myloannegotiator.net

[Osama bin Laden]

Wow, why are you blaming me for handing out free money to trailer trash? Anyone with 1/2 brain knows to check income before loaning $800K for a place in Compton. No, American stupidity is to blame for this mess.

[smrr]

This is not a question that thepedestrian LA Land crowd has the onions to answer was my first reaction (and I proudly count myself amongst those il[aland]literates), I hopped over to the NY Times and saw my favorite Princeton economist agrees completely. But you can bet I'll be watching that DOW monday. Could this be the day we get a 1000 point selloff? Exciting times we live in!
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Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

[Tom Lindmark]

I have been in the camp that thought there were hopeful signs of a bottoming out at least in Phoenix. Then yesterday I attended with a group a home auction in Phoenix. We went with the intent of buying and buy we did. At prices between $32 and $50 a square foot. We were buying homes in areas in which the published median price is say around $180,000 for less than half of that.

It was a great deal, we bought 12 houses and spent about $1.2 million. We are able to put tenants in these properties and get cash on cash returns of from 8.5% to 15%. Like I said, a great deal from our perspective but it sure put a new perspective on the market. It's terrible.

Just one other observation. The auction was poorly attended and the bidding was sluggish at best.

[Chris Pepper]

i'm sure the execs made multi millions driving these institutions into the ground. how can this be? how can our society accept such nonsense. and all the working folks will lose their jobs. everyone wants these banks to fail, but doesn't seem it helps the situation. god help us.

[not confused]

It is now a case of the dog chasing its tail. These bank failures and resulting job losses-- along with the psychological fear factors people will experience (AIG holds many securities related to retirement income, for instance)-- pretty much assure we are no where near the bottom of the housing or recession spirals.

There is too much overall weakness in the economy in this present financial crisis for there to be a soft landing that would cushion housing prices. I think many of us will be amazed how much farther the housing market can fall.
But we are unlikely to benefit personally if the job markets follow housing into a deeper recession/depression.

[Mike P.]

Apologies... my $1500 per monthly payment example in my previous post was a bit of a shorthand. I should've said, $1500 effective monthly payment, adjusted for the increase in your take-home pay due to the add't payroll exemptions you would take (because of the interest write off on your federal income tax return).

For example, if you figure $2000 actual monthly payment (P&I), plus property taxes, minus deductible interest, you get in the neighborhood of $1500/month.

Hope that makes sense...ish

[Todd in WeHo]

Bin Laden can't take credit for the U.S. and global economic crises. The culprit is plane ol' greed. Too many people made money too easily and the light of day is finally exposing the Ponzi scheme. Merrill and Lehman going down the toilet (followed soon by AIG, WaMu and others) is just the tip of the iceberg. Consider this from Bloomberg:

Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower's income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods, according to RealtyTrac Inc., an Irvine, California-based foreclosure data provider.

[Brian]

Peter Hong is right.

[Uncle Billy Has Bad Teeth]

Could be that market analyst is a little housing-centric. This brave new economic world is huge and multi-dimensional.

[Keith]

Didn't know Osama was a realtor, but I'm not surprised. Or was he a mortgage broker or a flipper?

[The Coffee]

Lower prices = more sales = benefit to global economy.

Get it?

Got it?

Time to lower those prices sellers!

Significantly. None of this 5-10% BS off of an already overinflated price.

Yes...you too...the one's hiding out in the goooooood neighborhoods. Your 500k purchase in 1997 isn't worth 2MM now.

Sorry.

Time to wake up and smell me.

Sincerely,

The Coffee.

[jake d]

Adoptivefather, I don't usually comment on other people's postings too much, but would you explain to me how Osama bin Laden forced the finance indstry to become so blind with greed as to cause their own colapse?

[Carolina]

The pain that Osama inflicted on the US economy is small compared to what we have done to ourselves.

Unrealistically optimistic home buyers, dishonest mortgage brokers, and lunatic appraisers in California , Arizona, Nevada, and Florida have brought the entire financial system of the US to the brink. This will continue until housing prices drop to reasonable levels relative to income. Long way to go until bottom.

[Millionaire says greed is good]

If the stockmarket crashes on Monday, at least it will stop/ slow the Govt & Feds from raiding taxpayers money to support their rich Executive friends.

If there is an earthquake down the westcoast, everyone will post their house keys back to the banks in non-recourse states and we will all be closer to the bottom of house prices.

[Steve]

The bottom is now for most of the country, the fed and Bush has screwed this economy up so much and this beiing an election year rates will soon be in the low 5s. It is time to buy

[latesummer2009]

Westside immunity WAS a nice thought. Big drops are headed this way.

http://www.westsideremeltdown.blogspot.com

[jake d]

Steve, let me explain something, if you don't mind. The people that want to buy a house today are in two groups: ones that financially cannot buy at the present price levels and otheres that can but are are not willing to buy at present price levels. Newsflash: both groups are literate and the news and buzz about housing market has been everywhere. So, in conclusion: we don't think it's time to buy.
As for the interest rates: don't worry. The Fed knows that low inteest rates on mortgages will be (is) the last lifeline to this economy in eventually finding housing prices bottom - they'll keep them low.

[Sing Expat]

The key, major, prime, ultimate (etc.) problem in housing is the price of houses. It's nice to see an article which states this and doesn't make up random percentages that the market should move down. People can't afford houses and won't be able to afford them until they drop ANOTHER THIRTY TO FORTY PERCENT.

What, you say! You're insane! They CAN'T drop that much.

House prices will return to the long term ratio of about 2.8 times income. In order to do so, the prices need to go BELOW the long term ratio in order to balance out the insanity we still see from the bubble. So, unless you worship Lereah and still believe "it's different this time", house prices are going down to 2.5 times income and staying there for a while.

Median income is about $48k and falling. 2.5 times 48k is $120k. The national median price is presently close to $200k so we need to drop another $80k.

And size does not matter, nor do marble counter tops. Affordability matters. If size and features were what mattered, we would all be driving Bentleys or Rolls.

This is called economic reality. I am sorry if it sucks for you, but....well, actually I am not at all sorry if it sucks for you. If you are suffering because of the housing bubble bursting, then you were part of the cause and therefore are to blame.

ha ha ha.

[Syscom3]

As long as the genious's in Sacramento encourage the importation of low wage workers, and do everything in their collective power to chase away good paying industries, the housing decline will continue.