Our story so far:

Following the 2,000 Dot Com crash, then Fed Chair Alan Greenspan brought Fed Funds rates down to ultra-low levels. Under 2% for 3 years, and 1% for more than a year.

Rates this low — and for that long — were simply unprecedented. They wreaked havoc with the traditional fixed income market. Bond managers scrambled for yield, and found it in investment grade, triple A rated residential mortgage-backed securities (RMBS). This better interest rate was created by securitizing mortgages with an unhealthy slug of higher yielding, riskier, sub-prime mortgages.

The demand for RMBS paper was nearly insatiable. Wall Street sucked up as much sub-prime paper as could be legitimately, then illegitimately produced. Lend-to-securitize-nonbank mortgage writers responded to the demand by abdicating traditional lending standards. 30 year mortgages were given to people who in no conceivable way could afford them. The hope was a non-default over the warranty period of the mortgage, typically 90 or 180 days.

The Greenspan Fed, in charge of supervising financial lending institutions, looked the other way.

The net result of this was a credit bubble and a housing boom. (A true housing bubble formed only in a handful of places). The credit bubble allowed 10s of millions of Americans to become, albeit temporarily, home owners.

In 1992, some 4 million homes per year were being purchased. A decade later, that number had risen 25% to 5 million. A mere 3 years later, annual sales were 7 million units — a 40% increase. From 2002 to 2007, the abdication of lending standards — who cares about credit scores, incomes, debt load, assets, even job! — created millions of new homeowners. And thanks to the ultra low rates, prices had exploded. The combination of brand new, unsophisticated buyers and rapidly rising prices was a dangerous combination.

Buyers of limited financial means who en masse overpaid for their houses at ultra low rates was a recipe for disaster. The Fed began its cyclical tightening, price appreciation slowed, then reversed. Sales plummeted, and prices fell. Five million of those buyers were foreclosed upon, with another 5 million likely to come.

Which more or less brings you up to date.

~~~

Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high. A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge.

This is known, or at least should be by those who have looked at the data. I cannot explain why some economists still have not figured this out.

In my analysis, price stands out as being the prime mover of the next leg down. High unemployment, and a decade of flat wages aren’t helping to create any new housing demand. And the millions in homes they cannot afford will eventually add more pressure to inventory and prices.

But the bottom line is Home prices remain too high: There can be no doubt that home prices have moved way down from the 2005-06 peaks. How did I reach the conclusion that, even after a 33% decrease in prices?

By using traditional metrics. Whether we are looking at US housing stock as a percentage of GDP or Median income vs home prices or even ownership vs renting costs, prices remain elevated. Indeed, we see prices remain above historic mean.

Consider price relative to income. From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP.

Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.

>

New Home Prices vs Median Income

Home vs Rent


Charts courtesy of Ned Davis Research.

>

We can look at numerous other factors. Employment, inventory, REOs, credit, another wave of foreclosures. etc. But the bottom line remains that prices must revert to a sustainable level, and we simply aren’t there — yet.

Yes, government policies temporarily stopped prices from finding their natural levels. Now that the tax credit has ended, and most mortgage mods are failing, the prior downtrend in price will now resume.

Neither the Bush nor the Obama White House seemed to truly understand this. The assumption has been that if we can modify mortgages or voluntarily refrain from foreclosures, the RRE market will stabilize. Through a combination of mortgage mods and buyers tax credits, the government has managed to — temporarily– create artificial demand and keep more supply off of the markets.

But as we have seen, that fix was at best temporary.

One of the things that Markets are best at is price discovery — the determination of a price for a specific item through basic supply and demand factors. Without the heavy hand of the government intervening, the residential real estate market is about to experience what price discovery is all about . . .

Category: Credit, Economy, Real Estate

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.

50 Responses to “A Closer Look at the Second Leg Down in Housing”

  1. Marcus Aurelius says:

    Best analysis in a while, BR.

    The same forces holding up the housing market are also holding up the banks, derivative values, the auto industry, CRE, the unemployed, the uber wealthy, and two wars.

  2. VennData says:

    The voters voted for the some-for-nothing Bush years of credit expansion, then voted him back in.

    They voted for Reagan the politician that delivered Greenspan (and ended alt-energy – imagine where we’d be a generation hence if we’d not had Reagan foisted upon us…)

    http://climateprogress.org/2008/07/08/who-got-us-in-this-energy-mess-start-with-ronald-reagan/

    …you got what you deserved. Pay your over-priced mortgage off to that big bank that Bush bailed out and stop complaining about anyone but yourself.

    P.S. If you don’t think they’ll do it to you again, take a gander at how Joe Barton and Bobby Jindal handle an industrial accident, “Drill, Baby, Drill.”

  3. dead hobo says:

    I would like prices to fall quickly, but if price declines take a couple of years then OK by me. I don’t plan to sell for at least 10 years so a depressed market value until that time is fine. Later this year I plan to get my house appraised for the purpose of challenging my home’s assessed valuation. A one time cost of maybe $300 will turn into a tax free annuity of perhaps $1000 a year. If prices continue to fall, then I may get to double these amounts over time. If everybody did this then it wouldn’t work because tax rates would rise. But most won’t so I’ll just pass my savings onto them to make up.

  4. On that note, see Clear on Money:

    US home forfeitures

  5. Rescission says:

    I’m in the business. We will leave it at that.
    Here are the facts.
    The tax credit wasn’t a real tax credit, it was a rebate. You send in a form and they send you $8,000.
    A lot of fraud going on with the program that will come out later.
    Also, people have been getting 100% financing. It goes like this:
    Buy a $200,000 house and get an FHA loan for 96% LTV. Builder figures out a way loan you the down payment or you temporarily borrow it somewhere till your $8,000 check comes in the mail. NOTHING DOWN! What a concept.
    Once the government stopped giving away free down payments/ free money, people stop buying houses.
    FHA writes subprime loans. Fannie and Freddie have loosened their underwriting guidelines.
    Now that its all government controlled and the taxpayers (the evil rich capitalists) are footing the bill, the grand redistribution structure is in place, so why worry about whether we are writing good loans or not?

  6. dead hobo says:

    Barry Ritholtz Says:
    June 24th, 2010 at 7:52 am

    On that note, see Clear on Money:

    reply:
    ————–
    Woo woo! This may turn out to be the gift that keeps on giving.

    I forgot to mention that homes are reassessed annually and my home’s assessed value has been falling. The appraisal will just help it along.

    However, and I am only guessing about this, I suspect doing nothing after one or two or three challenged assessments will still result in annuity growth. The automatic revaluations are computerized and based on average sale prices. I wonder if my house will fall in the cracks and be automatically lowered while others in the community are lowered by routine. If everything works out to perfection, I suspect (hope) my ultimate savings in a few years will annually equal about 35% of my highest real estate tax bill, for a total out of pocket cost to me of $300 to $600. This is how to buy the dips.

  7. BR,

    from the Post, is it “Home-Owner”, or, potentially more accurately, would it be, “Home-Ower” ?

  8. constantnormal says:

    I’m with Rescission on this.

    And the tax rebate has only helped to accelerate the decline in prices, getting things back to where they should be quicker.

    How can this be, you say? It’s simple. Offer an incentive to pull sales forward from the future for an extended time, and then turn it off.

    Where are you? The future, without the home sales that you pulled forward. A demand vacuum exists, and prices will plummet even faster, effecting the price correction in record time.

    Thank You, Uncle Sam.

  9. Hugh says:

    Barry, you make some very valid points.

    But surely Rescission is also on to something too: if LTV were to fall back to (say) 80% then the number of people able to pony up the down-payment (now 20% instead of 0%) would fall drastically at all price points and houses prices would slump once more.

    The question thus becomes what LTV is going to be acceptable to lenders going forward? If we know that we’ll know where prices are heading.

  10. The Curmudgeon says:

    “One of the things that Markets are best at is price discovery — the determination of a price for a specific item through basic supply and demand factors. Without the heavy hand of the government intervening, the residential real estate market is about to experience what price discovery is all about . . .”

    ‘Tis true that the whole point of a market is to find a price. Color me skeptical that the government will allow it this time around, if it means another leg down. They simply can’t allow the artificial edifice of higher than indicated prices for residential real estate to collapse. It will put us back where we were before, but this time with less ability to use free money to paper over the foundational flaws.

    Great post BR.

  11. WFTA says:

    For my edification, does anyone know how many or what percentage of the homes/mortgages currently in foreclosure/default came about because people who owned homes and mortgages that they could afford refinanced or took out a second in order to spend their phantom home equity?

  12. Professor Tim 1754 says:

    In general, I agree with your overall conclusion but I would like to see you tweak the analysis to address two points that the housing bulls may raise. First, the Fed just announced that rates are going to stay low for a looong time, which means mortgages will likely stay low for a long while too. Provided you can qualify for a mortgage, the lower the rate, the more mortgage you can afford. Ergo, this is clearly a positive for the prices of houses. Second, the tax rebate, credit or refund check. However you want to call it. Absent from your analysis was the actual impact of this tax credit on house prices. I do not pretend to know the answer because I do not, but what I do know is that the impact of “tax credit” should have most impacted the low end of the housing market because it was limited to first-time homebuyers and the max credit was $8000 – as well as to those inmates who took advantage of the dolts overseeing the program. In short, $8,000 ain’t gonna be a difference maker on anything other than starter homes.

  13. Rescission says:

    @Professor: There is no demand. You are theoretically correct in your assumptions, IF people wanted to buy houses. They don’t. We must realize that we are coming off of probably the biggest housing (credit) bubble in our lifetime. A “double peak” bubble created by Greenspan’s policies.

    It’s a secular them, not cyclical. Big is out. Small is in. Less is more.
    Can’t you see it? We have stupidly low interest rates and, under the government plan, a $200,000 house can be purchased for FREE!! and they still can’t get the market primed. What does that tell you? It tells you there is nothing left in the pump…

  14. Rescission says:

    The best article I have seen on the entire situation and its history was published in the Journal on August 7, 2007.
    It’s worth the read. Here is the link.

    http://homes.wsj.com/buysell/mortgages/20070808-ip.html

  15. riley says:

    “I cannot explain why some economists still have not figured this out.”

    Why let the facts get in the way of a desired conclusion.

  16. Chief Tomahawk says:

    Nice ending “…”!!!

    I think a further 20% drop in prices from here by January 2011, less of course any government intereference in the marketplace.

  17. FrancoisT says:

    When house prices resume their downtrend, where will that leave all these institutions holding CDOs, RMBSes and all that stuff?

    Won’t it mean a prolongation period for the pretend-and-extend “strategy”? And how long can this hocus-pocus accounting sleight of hand continue?

  18. Mannwich says:

    @FrancoisT: It will mean yet ANOTHER bailout for the banks. It’s ultimately a road to ruin. Obama and his peeps had the chance to make real “change”. They did not choose wisely.

  19. kanigetts says:

    I am still not convinced that the next leg down is imminent. I am utterly certain that it still has a long way to go down. Markets are good at setting prices, but we do not have a real market here. What we have is a bunch of sellers and one buyer who prints his own money. As long as the federal gov’t is willing to buy 96.5% of all mortgage debt, we will have no market. The only market will be in those mortgages who don’t qualify for federal backing. That market is poised to drop rapidly once the banks start to evict squatters and put the houses on the market. The cartel of large banks have worked well together to keep prices of these high end homes steady for the sake of their balance sheets, but all cartels eventually fail when one or more of their members cheat. They also know that the fed gov’t has their back. It would seem to me that the first bank to break the cartel and start foreclosing in earnest will be in an advantageous position. They will get the highest prices for their collateral by being first to sell in a falling market, and the first to be re-bailed out before our gov’t rethinks it’s doomed manipulation of the housing market. I would never have thought, before this credit bubble burst, that the gov’t could control the markets to the extent that they have so far. The end result of lower house prices and higher credit prices is obvious, but the timing is something I will never again try to bet on. As long as treasuries continue to sell at low interest, being best of a bad lot, the gov’t can maintain control one way or another. I will fight the Fed no more, forever.

  20. Expat says:

    Yes, yes, yes. I have been saying this for the past four years (pause while I pat myself on the back). Sustainable house prices are based on what people can afford. Over one hundred years of data have taught us that people can afford about three times household income. Anything else is not possible in the long term.

    Where are we today? Median household income around $48k. That means a median house price around $145k. But, wait, don’t buy yet! There’s more.

    Record inventories, high defaults, massive amounts of REO, and banks running scared. Oh, and real unemployment up around 20%

    My call is for stabilization of house prices at about 2.5 times median household income.

    So, whatever your call for percentage drops, just tell me how far we are from about $125k.

    Assuming anything much higher is simply leftover bubble kool-aid and backwash from David Lereah.

  21. S Brennan says:

    Distressed sales depress market:

    a] Post-partisan DC-NY Solution, rebates, bank bailouts & other gimmicks…comfort the comfortable.

    b] For a lot less money, we could have started two major programs to provide steady employment in slack decade ahead.

    1] Government Energy Programs, domestic engineering, design, manufacture and installation. Thorium, fusion, solar, wind, tidal, wave. Reactors built in a factory, must be transportable by truck or barge.

    2] Transportation, FAST mass transit, domestic engineering, design, manufacture and installation tunnels & elevated grids. Why is a train built in 2010 easily recognizable to somebody born in 1824? Is there only one way to do it? Bullshit.

    Distressed sales depress market. Would good paying jobs clear all the distressed sales?

    No, but they would do far more than rebates for far less money….oh yeah, almost forgot, it will improve our lives and those of our children.

    Good paying jobs, create them and these grey skies will clear to blue. Good paying jobs lift all boats.

  22. NormanB says:

    BR: How about a graph that shows house mortgage payments which would take into account the extemely low rates we have now. Turns out homes are cheaper now than they were 30 years ago. Put that in your statistical pipe!!!!!!!

  23. jonathanb says:

    The pain of a leg down would of course be mitigated by seeing Paulson get his clocked cleaned in Vegas. I think JP may discover that karma’s a bitch. In fact, if housing prices fall 20% from here, I’ll send JP the jerseys of those other lovers of karma, the French soccer team. (Which made it to the World Cup due to a hand ball, only to have the worst tournament imaginable.) I would love it if Paulson’s next few years resembled Les Bleus pitiful display at the World Cup.

  24. james hogan says:

    Good post for the most part, BR.

    About that chart showing new home price to median income: The mean of 4.1, while probably correct using these data, isn’t representative of the real world because the period 2002-2010 is substantially above all the previous highs. In other words, this period represents the bubble and not reality. It would be interesting to use the period 1971 (the end of the Bretton Woods era) to 2000 (the dot.com bubble) for a more relevant view of the public’s ability to carry the housing cost load. My guess is that the real mean is probably around 3.5-3.8.

    *****
    Another thing: An alternate solution to the problem is to raise incomes (vs lowering housing prices). This would be difficult to do, but it is most certainly one of the keys to getting out of this awful economic slowdown. We live in an economy that is driven largely by consumers. About 70% of all economic activity is due to consumer spending. In such an economy about the worst thing that could happen is for the consumer NOT to have the wherewithal to spend, either as a result of declining incomes and/or the knock-on effect of tightening credit availability. (I’m befuddled by this claim , since many, many retailers are willing to sell on credit at 0% interest or something less than 4%. As an aside I saw a sign over the last weekend offering to sell new cars and trucks at 0% interest for 72 months! Now that’s a helluva deal…)

    The best way to get money into consumer’s pockets is by putting new money into the economy from the bottom up, instead of the failed “trickle down” approach we are currently using. One of the quickest methods is to send money directly to the states and local governments, both for infrastructure purposes and to retain necessary employees, like policemen, firemen, teachers, etc. The CBO says this is the quickest, most effective way to do this. Nationally we could develop a true high-speed “internet” that could deliver at least 80 /second. When it is in place we would have a valuable asset to show for our money. Same thing with the electric grid–something to show for our money. There are other things that need developing, too but this post is already too long.

  25. [...] look at the second leg down in housing.  (Big Picture also Maoxian, The Macro [...]

  26. [...] | Posted by Chill on 24 Jun 2010 at 03:18 pm | Housing is about to experience its second leg down. [...]

  27. Shadowfax says:

    Great charts BR! The problem, as BR puts it, is the credit bubble. Our consumers are insolvent and are not spending, to the tune of about $1 trillion. A great chart to add would be the one that shows household debt to income rising from around 70% to a peak of 134%, now dropping back to about 122%.

    Since consumers aren’t spending, businesses aren’t either. Residential investment is down a whopping 4.5% of GDP from its peak, while equipment and structures are each down 1.5% of GDP from their peaks. Without Uncle Sam borrowing an extra $1 trillion last year vs. Bush levels, GDP would have dropped from about $14 trillion to about $13 trillion, near the 10% Depression threshold.

    So let’s tackle the real problem…debt. It’s time to write down the mortgages to current market value, so folks stay in their homes and stop walking away and foreclosing. Let’s throw in a 30% cut in credit card debt also. We can then require 20% minimum car and home down payments and a $10,000 credit card limit. This will involve bank bondholder haircuts. Tough luck…the banks should have gone bankrupt anyway. Perhaps a 20-35% haircut will do the trick.

    Solvent homeowners, solvent banking system = confidence. We don’t want to end up like Japan, which has debt equal to 200% of GDP after ten years of massive deficit spending. We have a clear example of what not to do…let’s avoid Santayana’s curse and remember the past this time.

    Get rid of the debt! Stiglitz, Sachs, Roubini, Taleb…who else needs to argue for this before they do it?

  28. Ole Drippy says:

    Recission:

    Wow, I didn’t think they were doing 100% ltv loans anymore. Very interesting.

  29. Shadowfax says:

    Here is a link to the Peabody-award winning article on the crisis from NPR:

    http://www.pri.org/business/giant-pool-of-money.html

    And another superb and more technical article from Robin Blackburn, written in early 2008 before the worst hit:

    http://www.newleftreview.org/?view=2715

  30. ejamin says:

    Not certain the 3x or 4x of salary calculation is a relevant number given the influence of interest rates and down payments, property tax, insurance costs, etc. on what people can afford.

    That is, I bought my first home in 81 at 14% interest paid 600 per month, today I bought a home 15X greater in price but pay only 4X more in monthly payment and my income is 10X greater.

    What people can afford and are willing to pay for a home is driven by too many factors to simple define a market price as income X a multiple.

    Taxes in fact play a big part of how a market is valued. For example raise income taxes and reduce the net monthly cash available for a mortgage. Raise capital gains taxes and reduce the net proceeds from an investment sale and thus available capital for a down payment. Raise property taxes and consume more of the net monthly cash available for a mortgage payment. All these taxes dramatically impact NET available cash to pay a mortgage and thus demand in the market. Plus add the impact of uncertain on where taxes and interest will be 1, 3, 5 years out (most think both are headed up) and you have consumers hedging mortgage payments against future increases. Plus in this market an element of risk is present that most did not see a few years back, and risk always drives down valuations. Ask any start-up CEO.

    All this will have a greater impact on the market greater than historical averages…..its current and future costs to own and economic fears and risk levels that have a bigger impact.

    So how to fix it. INFLATION (Gov prints money and floods the market) Not that I am in favor but high inflation will drive up home values artificially faster than the market can organically, and offset negative valuations on banks books. Thus, banks balance their books, homeowners will have equity to trade up, banks start lending and the whole cycle starts again. History is always doomed to repeat itself.

  31. formerlawyer says:

    One of the problems is that housing prices are “sticky”, see for example dead hobo’s arguments above, his ten year window may see housing prices being lower or he may lose employment in the meantime. In any event, your house is not an investment. It is primarily a home for you and your loved ones.

    How many people do you know that will try and hold on to their home, even after one (or both) wage earners lose their job? How many people will dip into their savings to keep going after they lose their job?

    Selling your home should be your choice and under your control. Foreclosure, unemployment and the inability to re-finance take this away. The market “adjusting” to a fair price carries consequences. The immediate consequences will be the migration of economic (and perhaps psychological) cripples to some other location, usually in the Western part of the United States, in search of work. Housing markets are more a punctuated equilibrium and not a smooth “process”.

    And yes, I know this the “Big Picture” but the big picture is made up of many small pictures.

  32. Don Gary says:

    One point I would like to address is the price of housing also needs to be correlated to the increase in size/amenities of the “average home” over the last three decades. In the 60′s and 70′s a house of 1800 to 2400 square feet was average middle class, by 2000 we were much nearer to 2600- 3200. By 2005-6 it was even more skewed by buyers/flippers/investors seeking leverage on the “next big thing”. All this BTW, without even considering the additional expenses of maintaining a much larger facility. Some of the best commenters on the web here, what’s your take?

  33. BarryGetAGrip says:

    NormanB is right and all of you extolling the charts are the choir to Barry’s preacher.

    Price-to-income and Price-to-rent are stock-to-flow comparisons and don’t take into account record low fixed-rate mortgages. House payments are therefore much more reasonable in comparison to incomes or rents and the supposed reversion of prices to some arbitrary 1970-present or 1977-present period average is much less meaningful.

    The housing affordability index compares median household income to the mortgage payment for the median home assuming a 20% down payment and is at record levels of affordability. Maybe that’s why the economists who disagree with BR don’t see a doomsday scenario. Of course they’re not actively rooting for a deflationary spiral either.

  34. andrewp111 says:

    House prices must drop to a sustainable level, or else the government must print enough money to raise general prices of everything else by 50% or more. If the government instituted a massive public works program to the tune of trillions per year, and financed it with special 30 year 1% bonds that are only purchased by the Fed (super QE), they could get the unemployment level down to the point where a wage-price spiral would start to inflate. And they could give the USA some really nice highway and transit infrastructure for all those trillions. Once general inflation raised all wages and prices by 50% or more, they could slowly ease off the accelerator, and let the economy stabilize.

    What is the alternative? Another Depression?

  35. Jim67545 says:

    Several beat me to the influence of interest rates while I played with my HP12C. A home that is 4.1x income, assuming a 90% LTV loan, at the rate of 6.50% (common prior to the bubble) consumed 28% of gross income. A home that is 5.2x income, (same 90% LTV), at a rate of 4.9% (common during the bubble) consumes 29.8% of income.

    Some have said that the Fed’s keeping rates so low during the period contributed to the bubble. It also contributed to the 5.2x income phenomenon. Rates are so low now that I do not see the validity of using the multiple of income to predict the normalized housing price. It just leads one back to the 5.2x.

    What may be occurring, however, is deleveraging. As is occurring in other areas of the consumer credit world, homebuyers are making the decision to devote less income to housing debt. This, of course, will either cause them to buy less expensive homes, make bigger down payments (which does not seem to be happening – witness the surge in FHA), or it will exert a downward pull on the market prices in general. Anyway, the net effect is to bring down that percent of household income multiple.

  36. Jim67545 says:

    One more thought.. the real risk is if rates rise. As you can see by the above example, if rates rose from 4.9% to 6.5% the homebuyer’s buying power will shrink by about 20% (from 5.2x to 4.1x). That is why the Treasury is absorbing mortgages at low rates, why Freddie/Fannie/FHA are still doing their thing and why nobody seems to want to “fix” the GSEs. We cannot afford to disturb the GSEs right now. The entire market stands on one leg – the Gov. Take that away and all will fall.

    I will go further and speculate that keeping rates low has less to do with restoring banks to profitability and more to do with pumping financial adrenalin into keeping the heart of the housing market beating.

    Trying to arrange some home improvement in the Southwest. Tough. All the block layers went back to Mexico.

  37. MikeW says:

    I find the difference in psychology between equity investors and home buyers remarkable.

    You buy a stock, even with your precious retirement savings, and if the share price collapses, you eat it. For instance, when those Indonesian coal mining shares that I impulsively plunged into lost me five grand in three trading sessions, I didn’t expect congress to bail me out, I just sold the position, reflected on what a gullible moron I was and moved along with a little more humility. Other equities worked out for me. That’s how it goes. I’m a big boy now and I accept that.

    But let someone buy a house at the peak of a real estate bubble, with little or nothing down and with a loan that they wouldn’t get in a fiscally prudent credit system – and they scream at the slighest price drop, as if a guarantee of ever-rising home prices had been amended to the constitution.

  38. [...] And, more recently, Barry Rinholtz explains why (with chartpr0n), why housing still has a ways to go. [...]

  39. [...] ‘The residential real estate market is about to experience price [...]

  40. daro says:

    rates are very low so mortgages are affordable but people are still not buying, why?
    1) it is very hard to sell and people fear that if they need to move they will never sell their house without a loss– reasonable
    2) people fear being laid off and will not be able to make payments- reasonable
    3) people fear that the market is in a tailspin so why should they risk putting up 20% equity when people recently bought homes with no equity and there is a good chance prices are going lower. They are following the crowd: real estate is bad now. reasonable
    4) some people do not have the 20% equity required- true before, more so now
    5) some people have lousy credit. why would banks lend them money when they can borrow from the fed for zero and lend it to the treasury for much more and make a risk free spread. No wonder the banks are not lending to real businesses or people! a shocker.
    6) rates are so low now that any drop in interest rates does not give it a one for one lowering in monthly payment due to amortization. look at a mortgage amortization chart carefully like I did in 198o’s when I was a commercial mortgage broker. you will see what I mean re “constant payment”
    other observations
    of course the tax credit worked. with an FHA loan, there was no equity in the deal. of course people would do that. no equity no risk. everyone is walking away from crappy deals so if things get bad these buyers will walk too. why wouldn’t they, they have no equity in the deal anyway.
    The fed announced it bought 1.3 trillion of mortgage backed securities. that means that the fed owns the worst of the worst of mortgage loans. they have not foreclosed most of it. they will be very slow to foreclose. but when they do they will either have to print money to pay the real estate taxes and maintenance (inflationary) or sit on vacant homes (not pay taxes– which will cripple local governments). If there is too much inflation than holders of mortgages including some banks will get crushed when rates take off . But wasn’t that the point of buying the MB securities in the first instance, namely to save the banks? the fed is in a a bind. they did not foresee how much demand would drop off. But we are in depression so that cant be a suprise (with huge unemployment).

    I do not think the fed can hold up this market. it looks like they boxed themselves into a corner. there is just way too much supply now and much more coming and not nearly enough buyers who are willing to put 20% down on a property in this environment. that wont change until the employment picture changes. so my guess is that until you see the employment picture improving dramatically prices can only go down. they can shock absorb some of the decline, but they cannot stop it.
    I lived through the last real estate crash. what happened. the banks stopped lending. the values dropped between 60 and 80%. the people who understood real value stepped up with all cash (except for friends of Pres. bush sr.) and bought real estate. things slowly improved from there over many years. no one is stepping in until the numbers make sense. they are not anywhere near that level (when you include the risk to your equity/mobility). The other difference is that the last crash involved commercial real estate. this involves resi. home buyers are much more picky (or scared) when it comes to an “investment” and risking their money for a house. they would rather rent.

  41. [...] readers expressed surprise that I still believed home prices remain too high, as discussed in the A Closer Look at the Second Leg Down in Housing last [...]

  42. [...] Ritholtz of The Big Picture thinks that housing prices have much further to fall. Here’s part of his analysis: Today, [...]

  43. [...] US blogger Barry Ritholtz says US houses are still significantly over-valued. That would be bad news for everyone, given that the US consumer is vital for a global [...]

  44. [...] fast, they are going to be dropping prices.  Ten months is a huge supply as you can tell, and  Barry Ritholtz’s blog was picked up by the wall street journal is predicting a price drop in the housing market to help [...]

  45. [...] A Closer Look at the Second Leg Down in Housing (June 24th, 2010) PERMALINK Category: Bailouts, Credit, Real Estate. [...]

  46. Robert M says:

    I realize this is late but does anyone maintain a new home prices vs median income smoothed for interest rates. Having been a homeowner during the phases of sky high interest rates I find it fascinating that home prices were low to income in the 80′s w/ interest rates so high yet flat as they came down. Having bought in 1991 @9 7/8th%, watched as homes didn’t appreciated till 1998 at all, actually saw a home bought in 87 sell for less than paid for in 1998 and then a doubling in prices in 2002 yet the chart says no impact by interest rates.

  47. [...] reality, I thought it would be a good time to revisit a particular past folly described in this article: Following the 2,000 Dot Com crash, then Fed Chair Alan Greenspan brought Fed Funds rates down to [...]