Several 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 week.

Paul Kasriel, in a recent Daily Global Commentary — “The U.S. Housing Market – Post-Tax Credit Give-Back or Something More Fundamental” — argued the exact opposite. In that piece, he wrote:

“Is there any reason to believe that after a couple of months, home sales will pick up again? Yes.

Why? Because with mortgage rates at rock-bottom levels and with house prices very low in relation to household incomes, housing is about as an attractive a purchase as it has been in the past 40 years.

Are we on the eve of a renewed housing boom, given this attractiveness? No. But are we likely to slip back into a full-fledged housing recession? No. Two steps forward, one step backward.”

I always enjoy it when someone whose methodology I respect is on the opposite side of an analytical debate from me. I would much rather argue against a smart mathematical or economic or psychological thesis, than the usual partisan frippery.

So which is it? Are house prices low or high relative to income? What’s the basis of Kasriel’s homes-are-cheap statement?

To find out, I pinged Paul as to the basis of his Housing is cheap thesis. Here is what he wrote back:

“The chart below illustrates why I think owner-occupied housing on a national basis is cheap. The “yield” on owner-occupied housing continues to be above the cost of financing a home purchase. This is actually a rare occurrence. Of course, if the market value of owner-occupied housing were to fall more, all else the same, the purchase of a house would become even more attractive.”

Nominal Imputed Rent versus Home Purchase Price

click for larger chart


That is an interesting, data driven analysis. Kasriel’s point is that for any potential home buyer, the cost of buying a home is less than what it would cost to rent the equivalent home. Hence, in his analysis, homes are cheap. Think of it as using dividend yield of a stock to determine if its cheap or dear relative to Treasuries.

Might home sales pick up again in a couple of months? Perhaps, but I doubt it. I simply do not see any compelling reason for the marginal home buyer to make that purchase. By September, we will be fighting seasonal factors. The exception is the key bubble bust regions, where foreclosures are driving prices as much as 50% off the peak prices.

But I am unconvinced about prices in general. My problem with imputed rent is that it is not independent of demand for home purchases; Imputed rents interact with home prices, credit availability, pricing trends, employment, etc.

Indeed, one can easily imagine a scenario where: 1) Home prices are thought of trending lower; 2) Credit is tight; 3) Employment is weak; 4) Wages are flat. This would create an environment of relatively soft demand for home purchases (sending their prices lower) At the same time, this would increase demand for rental units.

There are other factors thyat might also pressure prices lower. As we saw last cycle, even very low mortgage rates are no guarantee of home price appreciation. Home buyers have figured out that as rates rise, it caps RE gains. And the move from 1% in 2004 to 5% in 2006 set up not only the end of price appreciation, but home price collapse as well. Perhaps buyers are aware that with the Fed at zero, there is nowhere for rates to go but up. That means price appreciation will be modest at best, and negative at worst.

Category: Credit, Data Analysis, 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.

60 Responses to “Are Home Prices Too High — or Too Low?”

  1. Add to that the perception of house sales as being illiquid or purchases a bit tricky.The lack of ease of movement or residential mobility is another factor making RE sales more challenging.

  2. Paul Ryan says:

    >> Kasriel’s point is that for any potential home buyer, the cost of buying a home is less than what it would cost to rent the equivalent home. <<

    But is this really true? My understanding was that rents on average are still well beneath home financing cost (mortgage rates). Is the marketplace really perceiving that rents are higher than mortage payments for equivalent homes? I'd like to hear a few more voices on the subject, rather than take Haver Analytics word for it.

  3. constantnormal says:

    Not to mention William Gibson’s observation that “The future is already here – it is just unevenly distributed”.

    All of these trends are taking place at different rates in different places, making the mobility of individuals much more significant.

    One can usually — except in the hardest-hit areas — look across town and find prices for near-identical homes that are wildly different from those in the most devastated areas. Home prices are a quite complex entity, depending on schools, the local traffic patterns, taxes, the neighbors, and local history, to name but a few of the elements effecting home prices.

    Homes, while to a certain extent are interchangeable commodities, are not perfectly interchangeable. And so the changing of prices proceeds at different rates all across the nation.

    However, so long as the trend of the economy is lower, home prices will follow. And the trend of the economy is not encouraging …

  4. flipspiceland says:

    As a seller of my father’s home in an estate for the last two and a half years, located in a lower middle class income neighborhood, your take on home prices is dead on.

    I could likely give it away, or sell it at auction, but I’d rather mothball it and wait till inflation takes off in the next several years. Real estate and school taxes are not too high, should be able to recoup them with an up tick.

    Contantnormal is also right. Everything he mentions is affecting this potential sale.

    Attempting to rent it has been a real education in the predominance of Section 8 renters. Single, sorry to say it, black mothers (90% of most recent attempt), 2-5 children (accidentally did not put in number of bedrooms, nearly all want 3-4 bedrooms), no job, or government job, in some other welfare agency, abysmal credit scores, if any, ….comparing the last two years of responses to my ads it has only gotten worse, twice as bad as last year.

    I don’t see it selling or renting for at least 2-5 years, without lowering the price to by 50%, if that.

  5. Expat says:

    Economics is fun when it’s disconnected from reality. What is Kasriel using for rent? What is he using for ownership costs? We need those data to truly accept his argument.

    That said, perhaps the issue is also that rents are still too high. There is both anecdotal and documentary evidence of falling rents in most markets. If Kasriel is using imputed rent, then the rental rate is based on the price of the home!

    But most importantly, Kasriel’s arguments ignore the basics of the economic crisis: unemployment, debt, and lack of lending. Many renters are forced to pay a premium simply because they cannot justify a mortgage under typical economic conditions. A landlord will willingly rent at a high price, knowing he can evict non-paying tenants while a bank will not lend to those same tenants because the risks and costs of a foreclosure are much, much higher.

    People gots to live somewhere, one might say, but they don’t gots to buy. Rental is a fallback for the unemployed or the overindebted. Meanwhile, there is still a massive oversupply in housing.

    Finally, when interest rates start climbing in a few years and mortgages rise to eight or ten percent, does anyone believe house prices will rise with them?

    It’s a cute graph and it’s typical academic economics, but it’s unrelated to the real world.

  6. miamiocean says:

    The comparable sales in my neighborhood are abysmal, actually the worst I have seen yet. They can be related to an average 60% decrease in home value from peak. That is not a mistype — 60%. As a home owner, I kick myself on a regular basis for not selling at the market peak. According to my paper napkin scratchings, my home today has an approximate market value which is below a 3% annual appreciation rate. It is closer to 2%. I can already see potential for that to close in on a 1% annual appreciation rate.

  7. Marcus Aurelius says:

    High supply and low demand. Nothing else really matters.

  8. insaneclownposse says:

    I don’t think Kasriel can honestly take one piece of the home price equation – low rates – and use it to make a case that residential real estate is going to appreciate from here. The banks certainly don’t agree with him. Has anyone tried to buy a decent house in a major metropolitan area lately? You have to scrape together damn near 30% of the purchase price for a down payment. That is not a positive sign for near-term real estate price appreciation. More likely, the banks are protecting themselves against another five years of declines.
    The only way we are going to have sustainable real estate price appreciation is if housing prices come down relative to income. It’s not that hard to figure out.

  9. scharfy says:

    High end homes bad.

    Low end homes good.

  10. cewing says:

    There are too many houses available on the market for prices to rise. Of the portion of the consumer public that can afford to buy, one segment is too busy paying off credit cards and wondering if they will have a job next year to worry about investing in real estate. Another segment is made up of people who already own a home that’s worth less than they paid for it.

    When consumer behavior is factored in, buying a house is NOT an attractive option, even at rock-bottom interest rates.

  11. wunsacon says:

    Offshoring is not done by a long shot. Private sector wages will continue falling. And, come November, there’s at least the “rhetorical” threat of deficit reduction, if the GOP is to be believed this time. That will kill public sector wages (or wage growth). Considering both trends, Richard Russell’s prediction (“you won’t recognize the country”) may prove to be correct.

    So, I bet housing won’t simply revert to the mean of the past 30 years. I expect a significant overshoot to a “new normal”. Without jobs, there’s no reason obvious (to me, anyway) why much of America can’t go the way of Michigan.

  12. wunsacon says:

    …and “how far from peak” do homes sell in Detroit?

  13. wunsacon says:

    …Man, I’m so negative. Hey, BuffaloBob, is there room next to you on that ledge?? lol…

  14. beatstreet says:

    By using Kasriel’s chart and analysis, one could conclude that the early 80′s were the worst time in the history of the planet to purchase a home.

    I don’t trust the red line data either. It seems to be that the housing market is too wide varied to even calculate such a number.

  15. cvienne says:

    Forget about house prices…

    The idea or merits of owning a home “as an investment” is dodgy AT BEST (and AT WORST, a complete farce)…

    It’s another form of SERFDOM (whereby it enables bankers to dangle loans in front of your face, state & local governments to TAX you)…

    When both of those go hideously wrong due to their own mismanagement, then you will end up losing your job (and ability to make payments to either)…

    At that point you’ll be kicked out and will figure out that a cardboard box, an overhead bridge, and a can of sterno are actually a more peaceful means of survival… (and probably lowers your IDIOTIC “carbon footprint” which is the next thing they want to tax you on)…

    Or, you could opt to work for either a bank, or the government, and/or just siphon money off their inWESTments and legal fees…

    You will THUS be rewarded in this life and take your chances in the next…

  16. jf789 says:

    His analysis is reasonable, but it has a very simple flaw: Rents might be too high!

    For example, a friend was thinking of renting out an extra bedroom in New York City. They thought the room would command a high price until the comps were examined. And shock! They come in much lower.

  17. Pete from CA says:

    I have a slightly different reason for not buying: uncertainty.

    Even Kasriel acknowledges that a new housing boom is unlikely. So why take a risk by buying a house in an area where I may lose my job, and in a state that may be going to hell in a handbasket. I expect that in a year or two house prices will be approximately where they are today and we’ll have more clarity as to what to expect from the future.

  18. chrisqbn says:

    I recently bought my first apt. I have a long time horizon and can easily afford the payments. A 2 bed 2 bath apt in a nice building would rent for somewhere around $900 – $1000 in my neighborhood. My total cost of ownership (without major repairs) is approximately $700 a month. The apt is strikingly nice and very comfortable for the money. I bought it direct from Fannie Mae.

    I will take my $200 – $300 dividend every month and laugh all the way to the bank.

  19. Paul_the_engineer says:

    The velue of a home is directly related to replacement cost. I would figure it as what I could dsign and general contract the construction for myself, which I have done. Then I would compare it to the value of an existing structure, allowing 1% per year of age depreciation.

    The land price is usally the obstacle in high priced areas. That’s why when I retired I moved to an area with land prices only 20% of the costly suburb I left.

  20. wally says:

    “Kasriel’s point is that for any potential home buyer, the cost of buying a home is less than what it would cost to rent the equivalent home.”

    From my own experience looking at comparables, I’d say this is untrue. If you look at only the mortgage cost, it is true… but you have taxes, higher utilities amounts, maintenance… all greater for a house and none of which are elastic like purchase price. You also have purchase costs – closing costs – which are huge compared to what they were 20 or 30 years ago.

    Beyond that, you have a psychology issue: bargain or not, people don’t want to buy in a market that just burned everybody. That may take years to overcome.

  21. CuriousCreature says:

    I watched the CNBC interview with Meredith Whitney. She is fact oriented and spot on. She believes in a double dip in housing why? Because the numbers are already there. There’s a huge number of non-performing mortgages on the books of lenders.

    Is it possible for prices to remain stable or go up in the wake of this data? No. Is a home purchase attractive in this environment? Only if you can get a deal on a foreclosed home.

    Non-performing loans will turn into foreclosures. Foreclosures will increase inventory. Prices will go down. It’s that simple.


  22. dad29 says:

    If you look at only the mortgage cost, it is true… but you have taxes, higher utilities amounts, maintenance

    Particularly at “taxes.” It is reasonable to expect that property taxes will rise, as will income taxes.

    Proptax increases will result from decreased State/Fed aids to munis and schools; income taxes will rise b/c States and the Feds have to pay debts.

    Even worse, the AMT will crush high prop-tax areas, and that may be the vehicle for increasing Fed taxes.

    So it is dicey to assume that cashflows will sustain housing purchases, when adding economic uncertainties we have today.

  23. All the comments about supply/demand are correct. What the press and pundits also forget is if rates rise housing will get killed. Homes may be arguably affordable at record low rates, but any jump in rates will destroy affordability. The only way it won’t is if wages rise with interest rates, which is highly doubtful at this point.

    The best time to buy a house was when mortgage rates were 13% and no one wanted to own a home. Prices were below norm based on Case Shiller so the new homeowner then bought at lower prices and was able to refinance as rates dropped.

  24. Niskyboy says:

    “Indeed, one can easily imagine a scenario where: 1) Home prices are thought of trending lower; 2) Credit is tight; 3) Employment is weak; 4) Wages are flat. This would create an environment of relatively soft demand for home purchases (sending their prices lower) At the same time, this would increase demand for rental units.”

    Indeed one can! More generally, what is this dynamic called? Deflation. With what do we normally associate severe, ongoing deflation? The Great Depression. Are we falling into another one? Who knows, but we certainly do have overcapacity in just about every area of human endeavor. Absent widespread war, famine, pestilence etc. which no sane person wishes for, it will take a while to reduce overcapacity, and thus for deflation to wring its way through and out of our economic systems.

  25. Mike in Nola says:

    I think the advantage is still to renters at the moment based on my own local info.

    We’re renting an almost 2k sq ft. nicely renovated 1950′s house for $1750/m0. It’s a nice small neighborhood inside the Loop in Houston which normally commands a premium. The owner’s taxes and insurance eat up almost half the rent. He works for an oil company and lives out of the country, so he has to pay some percentage to the lady who manages it. Plus, they’ve had to make repairs of over a thoousand on electricity and plumbing over the 4 months we’ve been here. It think the owner is only able to do this because he bought it about 10 years ago before the bubble and probably doesn’t have a big note.

    There are several other nearby houses for rent at comparable prices and apartment complexes around the area have billboards out touting move-in specials.

    Basing rents on a surve yof realtors’ sites can be deceiving. See a lot of handwritten signs advertising rentals.

    Browsing on the website yesterday, I saw plenty of high end ~$700k-”million dollar houses” on the market; many of the prices had been cut recently.

    I saw that a couple of houses in the neighborhood sold over the past few months for what I thought was way too much, about $300k, esp.considering what rents are. I assumed that the buyers had been stampeded by brokers and the tax credit. Driving home this morning, I noticed that it looked like they had actually been bought by builders and are being renovated. I’ve seen reports that a substantial percentage of sales in other areas are to investors. I suppose the idea is to flip them when the turnaround comes. I hope they are very patient and that their lenders are, too.

  26. eightnine2718281828mu5 says:

    There’s also the timing issue; after the mini-bubble in 89 it took 6-7 years for the market to bottom, and the economy wasn’t nearly as fragile as it is now.

    There’s no reason to think prices are headed up any time soon.

  27. ashpelham2 says:

    I am reading a lot of negativity in these posts. usually, I’m going to side with the bears who are present, but I’d like to offer another idea.

    Perhaps we don’t continue to drop in price. Those that can stay in their homes do, and the banks decide collectively that continuing to force people out is nonsensical. So, mortgage workouts are done, principal balances are cut SUBSTANTIALLY, and we see a leveling off. Then, after we’ve had some time of personal and private austerity, people decide they want to own again, for whatever reasons. I see this kind of a change taking place over a short period of time, theoretically. And all of the things I mention, including people wanting to stay in their homes, therefore sacrificing to make the note, and banks deciding that continuing to force people out rather than give them REAL options (not $100 per month mortgage cuts) is the smartest thing for their other investments.

    It’s a story that could gain some steam, and make progress in stopping the bleeding. It has NOTHING to do with zero interest rates, nothing to do with the current job market, assuming it gets no worse. It’s all about those who have survived the worst of this deciding to make it work, and the banks deciding to stop the bleeding.

    Just a possibility. Shoot the messenger if you will, but I just don’t see a dead sprial to zero on home values.

  28. ashpelham2 says:

    EDIT: should be dead “spiral”. Which I still don’t see :D

  29. Mannwich says:

    @ash: For what it’s worth, we clearly are much closer to the bottom. The question remains though – might this be the new “normal” whereby home prices either deflate slowly or just bounce around at these levels for a long, long time? If so, what are the ramifications to the wider economy if no other driver of economic activity emerges?

  30. Expat says:

    @Mannwich: I am not being snarky or picking a fight, but your comments are very typical of the Rah-rah CNBC type commentary and the thinking of our government.

    I agree we are closer to the bottom than the top but that does not mean I still don’t see 20-25% more downside for house prices, with some areas being hit much worse. (Now sit back and wait for the “But my state/city/town/street/house is different” crowd to chime in.).

    As far as the ramifications on the wider economy of a housing market that stagnates at best, I would have to say that our economic leaders and our economy as a whole are a waste of time if the only productive thing we can do is make more and more housing which is more and more expensive.

    Why don’t we write blogs decrying declining prices for cars, computers, and appliances. Think about great the economy would be if everyone had to pay $50k for a laptop or $20k for an oven.

    42, my friends, 42.

  31. mdod says:

    Fantastic chart. How does one calculate that housing yield? The OER index for housing costs is an index…not expressed in dollars? Need it reported in dollars to be able to create that yield plot…

  32. Ted Kavadas says:

    good post and comments…

    I think that the main shortcoming with the chart and associated reasoning is that it fails to address, from an “all things considered” basis, the exceedingly complex nature of the current residential real estate market.

    In essence, one can come up with all types of “bullish” arguments and statistics that are very “narrow” in nature, but, IMHO they fail to pass muster when the entire situation is considered.

    The professional consensus for residential real estate seems to be that of mild price appreciation; I think this is incorrect. My latest thoughts on the subject can be found here:

  33. scharfy says:

    Expat just gave me a great idea for Residential Oven-backed Securities….

  34. Transor Z says:

    I have the same question as expat at 7:31 am: how exactly does he define ownership costs?

    You posted a graphic on this just the other day:

  35. couragesd says:

    I actually think that Kasriel is on the right track but may be overlooking a couple of points. First, in southern California it may actually be a better time to buy than to rent because housing prices have come down so low. Rents are actually higher than most mortgages at current interest rates.

    So here is where the trouble comes in. I believe that rents are based on inflated mortgages of properties purchased during the housing boom. During this period wages still could not support the cost of these grossly inflated rents. What to people do? They get roomates (including married couples), they move in with the person that they are dating, kids move back home. I have seen homes with 10+ individuals living in a “rental.” So the key here is that those properties are still not worth the rent and landlords are trying to squeeze the dollars out of people just trying to make a living.

    The other trouble is that we know that the U.S. population has not been able to save money, partially because of the low wages and some because of their own ignorance. These people won’t be able to have the money to put a down payment on a home and the people that can actually buy the homes will be investors and cash buyers. As these investors are going to try and eek out a profit, they will look at comparable rents (those based on inflated mortgages) and price them without concern as to whether or not wages will actually support them. I think that the days of the flipper may be over but the days of the new slumlord may just be beginning. I also think that renters rights will be one of the charged issues in the next several years.

  36. Transor Z says:

    Expat said:

    @Mannwich: I am not being snarky or picking a fight, but your comments are very typical of the Rah-rah CNBC type commentary and the thinking of our government.


    Wait for it… wait for it…

  37. Mannwich says:

    @Expat: ???? I guess you aren’t a “regular” on this blog. I’ve been consistently among the most bearish/pessimistic (I think realistic, but some disagree) commenters on this blog. Not sure how you got any “rah-rah” vibe from my post above but I guess for some if we’re not all apocalyptic in all of our comments, we’re somehow “CNBC rah-rah” types. Color me puzzled by your comments.

  38. Mannwich says:

    @Transor: Did I show enough restraint? ;-)

  39. Mannwich says:

    @Expat: And I would agree with you that we should be focusing on more productive activities aside form building homes and commercial RE space that we don’t need but as a people we seem incapable of doing things that have any long term foresight or imagination with the greater good in mind. It’s all about the quick flip now so I just assume that we’ll try to go back to the well because we know no other way at this point. It’s culturally ingrained.

  40. ashpelham2 says:

    @mannwich: thanks for the further insight. I also agree that while we could see a bottoming soon, or perhaps near it now, I don’t expect to see any meaningful appreciation for a hell of a long time. I’m talking 20-plus years here. Heck, my house near Birmingham, Alabama (the Detroit of the south…..) has basically been flat since I bought it in 2003/04. My 30 year note was fixed at 6.000, and I thought that was a hell of a deal at the time. Now I hear it’s less, though not markedly so, and it still wouldn’t motivate me to refi or buy again. There is simply too much that is now unknown that was once taken for granted.

    Man, why did this $hitstorm have to arrive in the first 10 years of my career? :D Or, more importantly, how I can make a buck from it? :D :D

  41. alfred e says:

    IMHO there’s a lot more room for price drops than increases. There’s a lot of wishful thinking going into optimistic chart generation.

    And as Reagan famously said the truth is hard to come by.

    Realtors in this area have been overly optimistic for the last two years, saying prices had bottomed a year ago as they continued to drop. And are still dropping. More houses on the market, fewer selling.

    Why? No jobs. Nada. Squat.

    And the mortgage companies are sitting on tons of properties, holding them off the market until prices improve. Lots of luck with that one.

    High supply, high latent supply, interest rates only up, taxes only up, jobs???? Personal income flat at best?

    Who are these buyers that will take the bait forcing prices up? Oh, the tea party sheeple?

    Even Bernanke has become more pessimistic.

  42. Mannwich says:

    Agreed, ash. As someone who bought at/near the top, it pains me to say/admit that too, but reality is reality. And besides, if I’m wrong, then anything to the upside will be a bonus! Set your expectations low and you can’t lose! ;-)

  43. Mike in Nola says:


    Your idea about cutting principal was put forth a couple of years ago by John Hussman His idea was for the banks to cut the mortgage principal in exchange for an ownership stake and a percentage of any increase in the price of the house when it is sold.

    Of course, it never went anywhere.

    The main problem is doing that would require the banks to write down the value of the mortgages they hold and probably would require writing down similar mortgages on houses nearby. Most of our banks would be insolvent if they put realistic values on their loan books and this has been dealt with by accounting leniency which allows them to pretend their loans are still worth what they lent and by the banks going slow in foreclosing, since that also requires a wrtite down of the loan to the current value.

    It would also be deflationary which is anathema to the current ruling economic clique even though the US has had long periods of deflation outside of wartime. So, the response, instead, has been extend and pretend, hoping that the problem will just fix itself, which we all know won’t happen.

  44. Mike in Nola says:


    From what I’ve read, your idea about it being a good time to buy depends on the market segment and area. It sounds like the lower end in some areas of California has possibly bottomed out, or at least doesn’t have a lot farther to fall, but the Dr. Housing Bubble Blog, keeps showing examples of what he calls “Real Homes of Genius” which are still outrageously overpriced in certain areas.

  45. Transor Z says:


    Yes, very nice. :-)

  46. termlimits says:

    @dad29 Says:
    June 28th, 2010 at 9:19 am

    If you look at only the mortgage cost, it is true… but you have taxes, higher utilities amounts, maintenance

    Particularly at “taxes.” It is reasonable to expect that property taxes will rise, as will income taxes.

    No question. In many areas, taxes aren’t directly tied to market values, they are set in total for the taxing body and then just divided up based on relative market values. Our house in Illinois bought 20 years ago had been pretty steady at around 1% of market value for taxes, until the past 5 years when it has steadily risen to now around 2% or slightly more. (combination of rising taxes and falling house value) The state and county have no choice but to raise taxes going forward – what happens to the buying decision as taxes approach 3% of market value? Houses are increasingly seen for what they are, liabilities, or at best depreciating assets. (with other, non-financial benefits) When you factor in rents under mortgage, plus the addition of 2-3%+/yr in taxes/insurance, plus the maintenance/replacement costs needed to keep the house in good shape, many I think are concluding it’s a financial risk they don’t want to take on, not even counting whether the house value will go up or down going forward.

  47. [...] Are Home Prices Too High — or Too Low? – The Big Picture [...]

  48. Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’

    A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were “strategic,” where borrowers who appeared to have the capacity to pay their mortgages stopped doing so.

    The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are “strategic.” Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments.

    The report finds that the share of borrowers who strategically defaulted through the first half of 2009 is unchanged from the end of 2008. Still, the absolute number of strategic defaults in the first half of 2009 increased 53% from the year ago period.

    Researchers suggest that the share of strategic defaults may have hit a plateau as total mortgage delinquencies and may have also peaked in the fourth quarter of 2008. “We’re seeing this encouraging break in the quarterly data,” said Charles Chung, general manager of decision sciences at Experian.

    But those results are “heavily contingent” on the stabilization in home prices that materialized one year ago, as government stimulus aimed to set a floor for home prices.

  49. Rescission says:

    Further to fall.
    Big houses are dead in the water. Not pretty.
    Think the unthinkable.

  50. Mannwich says:

    Yes, Rescission. Been saying that since last year’s fake rally. More and more higher end homes sitting on the market for months, years even. It’s a slow motion disaster unfolding.

  51. Rescission says:

    Here’s a data point. My city has unfinished “upper end” houses all over town. These are partially completed homes in the 4,000 to 6,000 or more square foot range. They are all over the place, left to rot or perhaps owned by the lenders. These are in very desirable parts of town, and I live in the southeast in a major city, not CA, AZ or FL. Never have we seen this in the 30 years I have lived here. They are trying to give them away, yet no one wants them. Crazy…

  52. impermanence says:

    Why would anybody expect housing prices to be anywhere near “correct” when the global debt bubble has just started its unraveling? Housing prices will be correct(ed) when the vast majority of people can actually afford to buy a house in balance with their other needs. In my community, we are nowhere near that. Housing is still 6-7x’s medium income (coastal CA). Rents are definitely coming down…big time!

  53. douglasbtrain says:

    Take a look at down payments in terms of number of months of equivalent rent. It’s ugly.
    I currently rent a condo. Our landlord is trying to sell it. Based on his asking price and the current rent, I would need to save 37 months worth of rent in order to save a 20% down payment.

  54. nucemgd says:

    >> Kasriel’s point is that for any potential home buyer, the cost of buying a home is less than what it would cost to rent the equivalent home. <2yrs!! They’re just sitting there. They’re listed, then they’re delisted, the price drops a little, rinse repeat…I walk by these places everyday.

    The property taxes in northern NJ are absolutely insane. People say that renting is “throwing money away” but I completely disagree. Buying a house around here is throwing your money away.

    “I recently bought my first apt. I have a long time horizon and can easily afford the payments. A 2 bed 2 bath apt in a nice building would rent for somewhere around $900 – $1000 in my neighborhood. My total cost of ownership (without major repairs) is approximately $700 a month. The apt is strikingly nice and very comfortable for the money. I bought it direct from Fannie Mae.

    I will take my $200 – $300 dividend every month and laugh all the way to the bank.”

    see that’s what I feel about renting my condo from the poor bastard who paid height-of-bubble prices.

  55. nucemgd says:

    ^^^damn, sorry for the non sensical post, I screwed it up!

    the jist of the post was that Kasriels point may work in Binghamton or Buffalo NY but here in Metro NY, not so much.

    I rent a condo from a guy who purchsed as an investment at the height of the bubble. My rent doesn’t even cover his monthly nut. I’ve already received a rent reduction due to all of the competition in the area.

    The condo towers just keep going up…what the hell are they going to do with them all??

  56. cheparro says:

    I am a broker in a California market that has faired fairly well so far ..prices have retraced to about 2003-4 levels. I just don’t buy Kasriels argument. While anecdotal, my experience in my relatively affluent market is that, while very few new building permits have been taken out for rental units, the rental inventory is increasing, Why? – For two reasons: (1) many recent buyers have been investors taking advantage of perceived price weakness especially where there are short sales or REOs and (2) many sellers, not being able to sell at a price they are willing to accept but still needing to vacate their homes, are putting the homes up for rent.

    No market will be immune to the next down leg.

  57. Captain Jack says:

    …the cost of buying a home is less than what it would cost to rent the equivalent home. Hence, in his analysis, homes are cheap.

    This argument seems nutty to me. Consider: Why do poor people pay interest charges out the yin-yang for payday loans? Because they are too cash-strapped to borrow at more reasonable rates. Similarly, lots of folks rent not because it is the optimal solution from an economic standpoint, but b/c they simply can’t afford to be owners. (Or, because they like the physical mobility that renting provides.)

    The ability to purchase a home is significantly impacted by one’s financial situation, namely factors like 1) money saved for a downpayment, 2) overall creditworthiness as assessed by the lender, 3) willingness to part with liquidity (cash on hand), 4) willingness to commit to a single location for an extended period (5+ years at LEAST to make buying make sense), and so on.

    Against that backdrop, calling for a rise in home prices simply because prices look cheap in comparison to rents seems asinine. In a situation where consumer credit is constrained, of COURSE renting is going to become a more attractive option than buying — even if the short term costs are higher — and may well be the only option for many.

    For a better market analogy, think of the liquidity crisis of Q408 / Q109. For a while there you had sound companies with excellent cash flow trading at three and four times earnings, simply because everyone was forced to dump and no one had any damn money to buy. Similarly, to the degree that U.S. consumers find themselves ‘liquidity constrained’ by factors like long-term unemployment and general economic malaise, it isn’t hard to imagine the “own vs rent” ratio getting a lot more out of whack than it is now. Buying that spread blindly requires some heroic assumptions.

  58. Expat says:


    You’re right, I unilaterally transformed your questions into affirmations, for which I apologize. I suppose, despite my caveat, I was looking to pick a fight for no good reason. I am a regular reader and an intermittant poster.

    I have to run now…Sharfy and I are setting up our hedge fund in Residential Oven-Baked Securities.

  59. santamonica says:

    jf789 is right…rents are too high.

    Supply of homes v household formation will determine rents….supply too high due to overbuilding…rents will continue to drop as foreclosures/banks sell assets.

  60. [...] During the boom, renters became buyers. In the current environment, you must apply the opposite logic: People are reluctant to purchase a falling asset. Hence, traditional buyers become renters.  This drives prices higher, and OER — anywhere from 23% to 30% of CPI — goes higher. This is true even as home prices tumbled in fact, its true because homes pries tumbled. Indeed, falling home prices appear cheap, when measured by Rentals — but that metric fails to consider the causal relationship between the two. [...]