Mr. Moulle-Berteaux, along with Barton Biggs, is a partner of Traxis Partners, a hedge fund firm based in New York.

They have had a series of disasterous calls recently: Shorting Oil three years ago at $50, and a mere 6 months ago, this horrific call in the WSJ, declaring the end of problems in residential real estate: The Housing Crisis Is Over.

Ouch!

There is an important lesson here for investors. Read this, and them join me at the other end:

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.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982. Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

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 . . .

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

I recall reading it at the time, and saying to myself: “Wow, that is simply awful analysis.” Hence, the diary for 6 months later and the current look back.

The logic errors within are myriad: Comparing different time periods and expecting identical parallel results, the failure to recognize how significant the credit crunch was, the extrapolation from past lows to present using insufficient variables, the failure to use traditional metrics of affordability, such as median home price to median income or price of rent versus own ratios, and lastly, the unsupported assumption that a 15% drop over 3 years, after a 100% increase was sufficient to make homes affordable.

If I was grading this, it would get a D minus.

The lesson you should take away when you read dumb things from smart guys running big piles of cash: They are talking their books, and having drank the Kool-aid, have little or no objectivity.

This is a classic example of that.

>

Source:
The Housing Crisis Is Over
CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23

http://online.wsj.com/article/SB121003604494869449.html

Category: Markets, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “The Housing Crisis Is Over (Ha!)”

  1. rob says:

    Speaking of drawing parallels. What strikes me as ironic, is all the dire numbers being thrown around. Worst housing since the depression, prices back to 1984, spending multi-decades, blah blah blah… yet the stock market isn’t even below 2003 levels! Where’s the disconnect? Or to put it in last year’s buzzword, have the equities decoupled from everything else? Sorry, but I just have to chuckle on that one.

  2. Don the libertarian Democrat says:

    I want to propose a thesis. The cause of this crisis was the foreclosure system itself. The crisis could have been avoided had a system been set in place that renegotiated mortgages immediately upon delinquent payments.

    The cause of the crisis in the housing sector was a misallocation of resources by individual homeowners. The borrowers took mortgages that were eventually too high for them to afford. The loans/mortgages were based upon terms that were much more likely to lead to default/foreclosure.

    But what if foreclosure had not been the option? What if the first option had been to renegotiate the mortgage/loan to a payment affordable to the borrower? The level of payment that the borrower could afford would then trigger a set of possible options:

    1) Increase the price of the house
    2) Increase the length of the mortgage
    3) Base payments on percentage of income, so that they will rise as borrower’s income rises.

    Now, however it would be done, wouldn’t this have been a better situation than the one we currently face? The reason to try a mortgage renegotiation plan now is to try and see if we can move away from the foreclosure system and devise one that keeps borrowers in their houses. Isn’t that a sensible proposal?

  3. Eric S says:

    I can only hope that people start buying homes to live in. What happens next if people can not afford to own the “American Dream” . The whole concept of capitilism is being put on the ice with a team of enforcers ready to drop the gloves. It is a little scary anyone remeber the Who song “well be fighting in the streets with our children at our feets and the shotgun sings out a song or something like that how about some insight

  4. jagmohan swain says:

    How can there be a bottom in housing until the inventory is worked off.Sales are going up as prices are coming down.That’s a natural response from prospective buyers.But supply still exceeds demand and therefore there is unlikely to be a bottom in housing market until that dynamics reverses.I am also with Barry that prices are more likely to overshoot on the downside much the way it did for upside.However it’s increasingly makes sense to buy a house than rent and that bodes well for sales going forward.Once the credit markets and banking system resumes the normal operation we could see some of the risk premium built into mortgage rates going down.2010 might be a good point in time to look for a bottom in housing market price wise.

  5. Upandaway says:

    Hey Barry, the NBER commitee has declared a recession. So it’s almost over now or what?

    ~~~

    BR: Actually, one member of the NBER committee has said its a recession — we have yet to get the official pronouncement

    See this:
    Hall of NBER Sees `Conclusive’ Evidence of U.S. Recession
    http://www.bloomberg.com/apps/news?pid=20601068&sid=aiSVeIbiC0BU&

  6. redfishmark says:

    We too were amazed with Cyrus Moulle-Berteaux’s call in May that the national housing crisis was over, though he has offered some appropriate commentary about the necessity of restoring affordability in housing.

    JS above is right about the need to reduce inventory. Many if not most of the worst single family markets still have very impressive inventory overhangs AND poor affordability metrics – these two factors alone will continue to exert significant downward pressure on prices, obviously compounded by constipated credit markets.

    My company tracks residential real estate (single and multifamily) for investors in over 200 markets around the country, and a few individual markets are very near the bottom or are climbing back up now. Looking at the national housing market, the mythical bottom is years away. Looking at individual markets, some are turning now – these are markets with strong housing demand, population and job growth (yes – there are communities with solid job growth and impressively low unemployment), affordable housing and relatively balanced for sale inventories. The devil is in the details.

  7. Winston Munn says:

    Don the libertarian Democrat Says:
    “The reason to try a mortgage renegotiation plan now is to try and see if we can move away from the foreclosure system and devise one that keeps borrowers in their houses. Isn’t that a sensible proposal?”

    First off, there already is a system in place to avoid foreclosures; it’s called “rent until you can afford to buy.”

    Second, if I hear the mantra that we must help “keep people in their homes” I will vomit. Keeping people in homes they cannot afford is no more beneficial to them than asking them to make minimum interest payments on a maxed out credit card. Besides, where do we get off telling someone where he must live and what he must do? If the lender was dumb enough to put this person in a house for no money down and no recourse if the borrower mailed in the keys and walked away, what advantage is there to save such a poor lender?

    All these “plans” to keep people in their homes are designed for one purpose only: to retard the fall of home prices, not to save homeowners but to try to salvage poor investment decisions.

    People don’t need new financial products that allow them to stay in overpriced homes – people need homes that are affordably priced.

  8. babycondor says:

    From Wikipedia:

    “Biggs is author of the 2008 book Wealth, War and Wisdom (358 pages; Wiley; January 2008; ISBN: 978-0-470-22307-9). In this book, Biggs has a gloomy outlook for the economic future, and suggests that investors take survivalist measures such as looking into “polar cities” as safe refuges for future survivors of global warming. In the book, Biggs recommends that his readers should “assume the possibility of a breakdown of the civilized infrastructure.” He goes so far as to recommend planning adaptation strategies now and setting up survival retreats: “Your safe haven must be self-sufficient and capable of growing some kind of food,” Mr. Biggs writes. “It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson. Even in America and Europe there could be moments of riot and rebellion when law and order temporarily completely breaks down.””

  9. Jay says:

    @redfish – How do you define bottom? If it’s near the bottom, then the bottom hasn’t occurred, thus how do you know if you’re near or not? ‘ Some are turning’. Can’t things get worse, and prices fall even more?

    [....My company tracks residential real estate (single and multifamily) for investors in over 200 markets around the country, and a few individual markets are very near the bottom or are climbing back up now....]

    I’ve always liked the Rothschild quote about buying late and selling early.

  10. Winston Munn says:

    Herein lies the heart of the affordability problem.

    AP
    Rich Poor Gap Widens

    http://www.philly.com/dailynews/national/20081022_Rich_poor_gap_widens_in_U_S_.html

    Is it a coincidence that this study is of the last 20 years, about the same timeframe the U.S. evolved from a manufacturing-based economy into a service-based FIRE economy?

  11. harold hecuba says:

    BR. mr. mauldin this week makes similar analogies of the repulsive housing call with the geniuses and their call of comparing this recession to the rest of the post ww11 recessions. it is simply unfathomable to me how these idiots are paid so much money for such worthless advice. wall street will be gutted to the bone before this is all over.

  12. DL says:

    In November of 2007, very close to the peak of the stock market, Barton Biggs went on CNBC and confidently proclaimed that we were going to see a “melt up” in the stock market, i.e., a HUGE rally.

    How wrong he was.

  13. redfishmark says:

    @Jay – very appropriate questions. Please let me respond with an example. We have a data client who is a single family investor who typically purchases SFH at median market value -30% to -40%.

    (BTW – In a given market we track single family home issues by a variety of metrics, and agree with those who have opined in this blog and other places that use of median market home prices can be very, very misleading.)

    That said, we track single family home prices by price bands, and can identify markets for our investor above where homes in the bands from median to median -30% are now increasing in price – when that happens we’d consider those valuations to have “bottomed”. In that same west coast market, however, homes above median price are still dropping in value, and homes at 2-3x median are dropping at even more significant rates.

    Has the overall housing market in that community “bottomed”? – No. Can prices still fall in that market and things get worse? – Yes, for homes priced at 2x or more above the median there are likely some very ugly days ahead. Can the increasing prices / valuations in the median to median -30% price bands be derailed by credit issues / other future factors? – Sure they can, but that’s part of what makes the game interesting, isn’t it?

    From our somewhat concrete perspective – you really can’t call “the bottom” until you see consistent upticks in housing unit valuation in a particular target price band. When I used the term “turning” in my post above, I was referencing the beginning of price stabilization / increases in some price bands (and did not explain that at all in my post).

    What we’re seeing in many communities with more healthy housing markets is that the stabilization in price / valuation typically (not always) starts in price bands near the median and below, and then moves upward into more expensive price bands. That premise hasn’t held as well in some Texas markets (Houston and Fort Worth in particular), though they didn’t “bubble” near as impressively as many other markets around the country.

    Finally – housing market recovery will be dependent upon much, much more than price alone. We’re trying to address that by measuring a host of factors for individual markets – including key demographics, job growth and unemployment, economic development measures, as well as rental market and single family metrics. We have a free index (the Homeowners’ Market Fundamentals Index) ranking markets for homeowners available at http://redfishemergingmarkets.com/pages/hmfi.html.

  14. Pat G. says:

    “All these “plans” to keep people in their homes are designed for one purpose only: to retard the fall of home prices, not to save homeowners but to try to salvage poor investment decisions.”

    Spot on! With future ARMs resetting and all the forthcoming layoffs producing more foreclosures how can anyone with half a brain declare the “housing crisis over”. Oh, we’re talking about Biggs. Isn’t he in his 80s? Must be the onset of Alzheimer’s.

  15. AGG says:

    What caused all this mess?
    Take your pick of the HENIOUS HOODLUMS:
    1) Dower 30
    2) Nausea 100
    3) Snide & Pushy 500
    4) Playing Folotsy 100
    5) Russler 2000
    6) Knock Up Nikky 100
    7) Fifty Two fuck up deck.
    THESE ARE PEOPLE, NOT STOCKS. They’re still out there. They still have all the capital they stole from us. We can get the money (a lot of it) back.
    Hey Barry, why don’t you rotate mug shots with links to damning bios of the culprits through your web page screens? It might increase you exposure and ad revenue.

  16. AGG says:

    Sorry about the typos. I hurry too much sometimes.

  17. Mike in Nola says:

    So how can they still be in business? Maybe these were just head fakes to get the competition to destroy themselves.

  18. this: babycondor Says:

    November 8th, 2008 at 11:44 am
    From Wikipedia:

    “Biggs is author of the 2008 book Wealth, War and Wisdom (358 pages; Wiley; January 2008; ISBN: 978-0-470-22307-9). In this book, Biggs has a gloomy outlook for the economic future, and suggests that investors take survivalist measures such as looking into “polar cities” as safe refuges for future survivors of global warming. In the book, Biggs recommends that his readers should “assume the possibility of a breakdown of the civilized infrastructure.” He goes so far as to recommend planning adaptation strategies now and setting up survival retreats: “Your safe haven must be self-sufficient and capable of growing some kind of food,” Mr. Biggs writes. “It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson. Even in America and Europe there could be moments of riot and rebellion when law and order temporarily completely breaks down.””

    needs to be understood. That, by Biggs, and, even, Barron’s’ coverage of ‘Home Compounds’, received little, to no attention. Both pieces were, well, previous to the recent the waterfall toward ’003 lows..