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

[Wilson]

Interest rates are fairly low right now...
Home sales are horribly low...

Imagine what happens if interest rates rise...
EVEN LOWER SALES....

Even lower sales = lower and lower and lower prices

I CANNOT WAIT FOR THE FED TO RAISE RATES...

(And you think they have a choice? Once China and the rest of the world threatens to dump treasuries--they will raise rates--oh, how they will raise rates...)

It's only a matter of time before your five million-dollar mansion in Beverly Hills can be had for 25 cents on the dollar...

[Joe]

The fact that sales have increased from last year is misleading. What your article doesn't say is 50% of everything bought was a foreclosure, plus the summer is always the busiest time for buyers. This price correction is far from over, like Peter said in one of his other articles people who make 250k a year can't afford a house. Seriously, if your in the top 3% of incomes in the nation and can't buy a nice house something is really wrong. Looking at some sales records in certain areas home prices were half of what they are today. The state of California's real estate market should NEVER be referred to as a decline, were these prices suppose to be this high NO. Therefore it is a market correction, the market is correcting itself and going down to where it should be. As for the Bottom we have at least until 2011, plus we haven't seen the resets of the alt-a/arm adjustable. This will bring about a huge wave of foreclosures far worse than the subprime, 60% of these loans are in California. Another factor, is the fact you can rent for a lot less. You don't risk loosing your mortage, you don't have to pay high taxes and if you need to leave you don't have to sit around for years waiting for a buyer. So if you think the bottom is near for California, you must have the mentality that life in California is being a debt slave to a home that the bank owns for the next 30 years.

[adoptivefather]

bin laden (no caps intentional) played a role in that 9/11 has added a huge layer of cost structure to our economy. Nobody has a clue how to contain that cost structure because it is trying to protect our open society against guerilla tactics

The US government paniced after 9/11 and drove interest rates through the floor opening a window (nice writing huh!) for the idiotic credit mess we see today.

And to top it all off, bin laden necessitated the US into a very expensive two front war on his turf. His was b bet made believing Americans couldn't stomach any protracted conflict costing American lives. bin laden achieved his goal of leveraging the experience of the Vietnam conflict to divide Americans further.

[John]

Real estate prices will stabilize when the sellers stop being delusional.

Who do they think is going to pay for the overpriced properties? The Tooth Fairy?

The days of the Liar Loan are over, and Wall Street is, at this minute, wiping out people's retirement accounts.

Translation: How much mortgage money can the typical wage earner qualify for, on a conventional loan? That's where house prices are headed.

[Sujo]

I'm soooooooo glad I rent at a great price.

[Joe]

I forgot to add, if these prices don't correct to a reasonible level who will buy them in the future? The current generation of California homeowners won't live forever, who'll buy their homes when they're all gone? or say you have children, where will they move when they grow up, probably out of state. Peter, if theres any proof this state is near a bottom why haven't you posted it for us to see? All the proof I have, is that this nightmare is far from over. It doesn't take a rocket scientist to figure that out.

[Dr. Richard Morgan]

This is very simple:

When the Real Estate prices go back to the 1940's level, then the bottom will be in....

SEMPER FI.

PS; WHY...because, of the OTC Derivatives...and, this does not take a MENSA member to figure it out....

[mlimberg]

How does it end? When housing prices hit bottom, Wrong...

It ends when American troops invade California and retake the State from Mexico.....

Until then, California becomes a third world State of Mexico.....

It's your land California, how do you want to live, like Americans or Mexicans?

[Mary C.]

You can blame Osama Bin Laden for starting the Fed on a path of slashing interest rates to unsustainable lows. Greenspan overreacted in the wake of 9/11, thinking that it would harm the American economy and scare people off from spending and buying. He never should have let interest rates get that low, the terrorist attack shock effect would have been shrugged off fairly quickly even without low interest rates. It encouraged institutions to rush to borrow from the Fed and to start making loans at extreme low rates and without proper underwriting standards, bundling off the risk in packages to the securities markets. Without 9/11 and Osama, none of this would have happened. You have to blame Alan Greenspan, along with the people in both political parties who drank his Koolaid like he was a financial Jim Jones who could do no wrong, but Osama was the trigger.

[DAve]

I have a sneakin' hunch...

Here in CA illegal immigrants were allowed to have mortgages...
Thus artificially increasing demand for housing and thus the prices... which benefitted realtors, finance companies and banks
When the bubble finally bursts they go back to their country of origin, not having credit ratings to lose... and the gov't gets to bailout the banks that provided all these now-unrecoverable loans. Law-abiding and credit-abiding citizens get hammered... and a massive and probably irreversible wealth transfer has occurred.
If this isn't an illegal transfer in the letter of the law it certainly is in the spirit.