Now That Takes Some Guts…
The Wall Street Journal ran an article yesterday procaliming that The Housing Crisis is Over.
Now that takes some guts.
Back in October of 2005 I had a client (a referral from a good friend of mine) who wanted to list and sell his house up in Dublin Ranch because his soon-to-be Fater-in-Law, a financial planner from the Rocky Mountain region, was convinced that the California real estate market had topped out and it was time to diversify. Smart guy. Really, the only one I know who was calling the top right as it was approaching (and no, I’m not counting the ogres at UCLA or anyone else who predicted the bubble would burst for three years before it actually did).
The basis of the latest WSJ prediction on the real estate market has some merit in my opinion.
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.
Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.
It is all about affordability, or a household’s ability to make the monthly payment required to own a home. And as prices come down, and as lenders come back to the market with reasonable loans, houses are selling again, even out here in Brentwood.
The article’s only misunderstanding, as I see it, has to do with the cause of the crash. It wasn’t that prices got too high, it was that the irresponsible mortgage loans, the crazy financing that turned affordable monthly payments into outrageous purchase prices, went away.
The new financing (and we’re still working it out) converts those same monthly payments into very different purchase prices, and that’s the painful adjustment that we’re going through.
So while I think it’s brave to call a bottom right here, I don’t think it’s unwarranted. I see a strong floor forming in a lot of markets, and there has been a pretty consistent trickle of good news from the mortgage loan originators that I know. I think this may be a good time to buy. How about you?
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