As we reach a record 16 year high of inventory, the biggest supply since 1991 we are starting to realize that housing was fueled by easy credit. If housing wasn’t fueled by easy credit and went up because of rising incomes and demand as many in the housing industry proclaimed, then why in a few short months has stopping subprime lending and Alt-A loans brought the entire market to a screeching halt? It is becoming more apparent that lax lending standards and easy credit were the fuel that kept this fire burning even though the wood was turning into ash. We were running on fumes. The only thing that would keep this boom going is less restrictive standards and I’m not sure how much lower we can go without our money turning multiple colors and becoming a real game of Monopoly. Unbelievably those in the housing industry and politicians are calling for weaker standards. Here is a list of some of their ideas:
· Increase mortgage caps from $417,000. Since anything above this is considered jumbo many in the industry want these caps higher because areas such as
· Dropping the Fed Funds rate. The Fed has already dropped the discount rate.
· Bail Out Funds. A local official is looking to create a multi-million dollar bail out fund for families in foreclosure. The preliminary information seeks to give struggling families $10,000 in assistance. $10,000 will buy a family maybe 4 months at current
· Bring the Government Into the Subprime Arena: This is one of the absurd propositions and a perfect example of corporate welfare. Wall Street is no longer buying these risky loans. Instead of learning the lesson that maybe there was some irrational exuberance in the credit markets many are now calling on the government to back these loans.
These “solutions” miss the boat completely because homes are simply not worth what people paid for them. Plain and simple. Incomes could not support market prices without the crutch of exotic banana republic loan products. The loans almost by default encouraged flipping and a nomad culture of moving up into larger homes. There is really no purpose for a 2/28 loan or many of the other mortgage products that flew into the market. Many will argue otherwise that this is for the sophisticated investor. Maybe. But it wasn’t used this way. See, the underlying message of a 30 year fixed conventional mortgage implies that you are looking to stay in your home for a few years. If the market goes up, then you sell and move on. You didn’t have a ticking time bomb forcing your next move with an invisible hand. If the market went down and wallowed in the dumps for a few years, at least you knew your payment was fixed. Now many are facing down the barrel of a locked and loaded mortgage ready to reset in the face of a depreciating market. Whether they knew it or not, they’ve suddenly become speculators and are witnessing a margin call. Either pay more cash to stay or sell. And many of these loans had 3 year prepayment penalties. Basically these products only made sense to those earning higher commissions and hungry investors chasing higher yields.
With this as our back drop, I wanted to dig into the demographic facts of
Argument #1 – Housing has boomed because of population growth.
First, as you can see from the above chart the population of
Argument #2 – Income growth is in direct proportion to housing appreciation.
Clearly income growth is not the reason for housing growth. Even with the big jump in 2005, the median family income only increased by 5.5 percent. The previous three years saw stagnant wage growth. However, during this same time period we find the following data for housing prices in
Median LA County Home Price:
2002: $266,000 (July 2002) YoY Increase: 15.1 percent
2003: $328,000 (July 2003) YoY Increase: 23.3 percent
2004: $406,000 (July 2004) YoY Increase: 23.8 percent
2005: $488,000 (July 2005) YoY Increase: 20.2 percent
2006: $520,000 (July 2006) YoY Increase: 6.6 percent
2007: $547,500 (July 2007) YoY Increase: 5.3 percent
Doesn’t exactly coincide with the data we are finding does it? In fact, we had three years of consecutive 20+ percent annual price gains! The annual housing price gains amounted to more than the annual family median income in the county for 3 years. Why work when you can live in your home and make more money than your job?
Looking at Owners vs. Renters
Argument #3 – 70 percent of people own their homes in the
The caveat to the above argument is that this statistic doesn’t apply to
Argument #4 – Many people own their home with no mortgage.
Clearly those without a mortgage are a very small subset of the market. In fact 4 out 5 owner occupied homes do carry a mortgage in
Argument #5 – It is only slightly more expensive to own as opposed to renting.
Again, for 2005 the monthly cost for a home owner was $1,919 while the median renter carried a monthly housing cost of $918. Owning a home, as opposed to renting is 109 percent more expensive in
Argument #6 – When you own your home outright, you no longer have to worry about any further payments.
As you can see from above even the untouchables, those who have paid off their mortgages completely still have to pay something. In fact, in 2005 with approximately a $400 median monthly payment, they are carrying half the amount of a median renter. Given that this is a very tiny sliver of the market it is interesting to break some of the myths flying around
We’ve seen countless articles hitting the mainstream media regarding the mortgage debacle. Yet the mainstream media paints in large strokes. That is, it is hard for them to devote a 5 page in depth analysis on one specific market. That is the implication behind broadcasting – you try to reach a broad audience. However, when we examine the demographics under a magnifying class for
Do not make the mistake of seeing this as only an economic chart. Behind this data, 7 years of dreams and hopes built on the back of real estate play out like a novel. In this chart we see the birth of shows such as Flip this House, Property Ladder, Flipping Out, Real Estate Pros, and of course the Apprentice where 20 to 50 percent of the contestants made their small fortune in real estate depending on the season. In the chart is also the story of new industries and high paying professions. The number of California Real Estate Agents jumped in tandem with the above chart. Mortgage brokers, construction, hedge funds, and all things real estate seemed invulnerable to any market woes. This was an unstoppable train with an endless supply of steam. As we sit at the apex, wondering how this decade long housing bull market will end, many have been conditioned to know only one thing about housing. And that is real estate never goes down. As this speculative game winds down, there is an eerie calm engulfing the market.
Keep in mind the data we are digesting regarding sales and prices is still 1 to 2 months delayed since escrow filings and closing data lag the current market information we are seeing. Which means data we are digesting today was immune to the recent ugly stick beating the mortgage market underwent. Logically it follows that any future data will be worse because of the now dwindling credit markets. If we are to revert to market fundamentals, housing in
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