Excellent summation why housing market will be terrible for a long time

[briansd1]

In economic theory, it’s a good time to buy when buying is cheaper than rent. Because in theory you can jump in an out of the market at will. In theory, you have unlimited capital and perfect liquidity.

In practice, you need a downpayment and credit to buy a house. If you have the sell the house, you have to pay commissions and you might have to sell at a low price just to get rid of it.

In practice, most buyers max out on their mortgages and the vagaries of life can make the purchase unaffordable.

Who knows where your job and family situation will take you a few years down the road.

http://www.washingtonpost.com/business/economy/home-prices-hit-lowest-level-since-april-09-in-double-dip/2011/05/31/AGlmRSFH_story.html?hpid=z4

To me, this statement below is very indicative of borrowers in over their heads. They need prices to remain high, in order to refinance (kick the can further down) or sell.

Despite talk by some that homeowners have plenty of equity and wherewithal, the facts are that the $8,000 rebates and the GSE increasing the limits following the 2008 crisis did spur homebuying.

Now that the incentives are gone, the market is taking the appropriate hit.

If a homebuyer really needs an $8,000 rebate to buy a house, then we have still have an affordability problem.

With prices falling again, economists fear that the nation’s housing market could enter a new downward spiral, with declines pushing more borrowers underwater, triggering more foreclosures and setting off further drops.

http://latimesblogs.latimes.com/money_co/2011/05/case-shiller-index-shows-home-prices-slide-into-double-dip.html

http://www.signonsandiego.com/news/2011/may/31/sp-index-home-prices-keep-falling-san-diego/

[briansd1]

Below is the homeownership rate chart for the nation.

Does anyone have data for San Diego?

I believe that we will see homeownership rates return to the levels before the easy money.

http://www.nytimes.com/imagepages/2011/05/30/business/20110531_HOUSING_graphic.html?ref=business

[briansd1]

Below is the homeownership rate chart for the nation.

Does anyone have data for San Diego?

I believe that we will see homeownership rates return to the levels before the easy money.

http://www.nytimes.com/imagepages/2011/05/30/business/20110531_HOUSING_graphic.html?ref=business

[briansd1]

Below is the homeownership rate chart for the nation.

Does anyone have data for San Diego?

I believe that we will see homeownership rates return to the levels before the easy money.

http://www.nytimes.com/imagepages/2011/05/30/business/20110531_HOUSING_graphic.html?ref=business

[briansd1]

Below is the homeownership rate chart for the nation.

Does anyone have data for San Diego?

I believe that we will see homeownership rates return to the levels before the easy money.

http://www.nytimes.com/imagepages/2011/05/30/business/20110531_HOUSING_graphic.html?ref=business

[briansd1]

Below is the homeownership rate chart for the nation.

Does anyone have data for San Diego?

I believe that we will see homeownership rates return to the levels before the easy money.

http://www.nytimes.com/imagepages/2011/05/30/business/20110531_HOUSING_graphic.html?ref=business

[davelj]

I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.

Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.

So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:

(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.

I could go on…

My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.

Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.

[davelj]

I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.

Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.

So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:

(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.

I could go on…

My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.

Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.

[davelj]

I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.

Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.

So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:

(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.

I could go on…

My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.

Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.

[davelj]

I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.

Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.

So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:

(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.

I could go on…

My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.

Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.

[davelj]

I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.

Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.

So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:

(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.

I could go on…

My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.

Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.

[StaunchLibertarian]

[quote=briansd1]
To me, this statement below is very indicative of borrowers in over their heads. They need prices to remain high, in order to refinance (kick the can further down) or sell.

Despite talk by some that homeowners have plenty of equity and wherewithal, the facts are that the $8,000 rebates and the GSE increasing the limits following the 2008 crisis did spur homebuying.

Now that the incentives are gone, the market is taking the appropriate hit.

If a homebuyer really needs an $8,000 rebate to buy a house, then we have still have an affordability problem.
[/quote]

You’ve hit the nail on the head, I believe. The government (either through GSEs or FHA) is something like 95-100% of the mortgage market now and the government is planning to make it harder to get a mortgage. Just look at all the predicted doom and gloom over the proposal to have the government raise effective down payments on FHA mortgages from a measly 3.5% to to a slightly less measly 7%.

http://www.irvinehousingblog.com/blog/comments/republicans-propose-tighter-lending-standards-to-limit-taxpayer-liabilities/

Can we really be near a housing bottom when a proposal to raise down payments from 3.5% to 7% causes so much push back from the gangs of crack …. I mean home-dealers?

Previous housing booms coincided with good economies or job booms. I doubt that all of those fancy new jobs created by the boomlet in Cousin Burger franchises and the like are going to be enough to fuel a new housing boom.

The dollar may collapse, but if the plebeian hordes can only find work at Chotchke’s or Spatula City, housing isn’t going anywhere.

[StaunchLibertarian]

[quote=briansd1]
To me, this statement below is very indicative of borrowers in over their heads. They need prices to remain high, in order to refinance (kick the can further down) or sell.

Despite talk by some that homeowners have plenty of equity and wherewithal, the facts are that the $8,000 rebates and the GSE increasing the limits following the 2008 crisis did spur homebuying.

Now that the incentives are gone, the market is taking the appropriate hit.

If a homebuyer really needs an $8,000 rebate to buy a house, then we have still have an affordability problem.
[/quote]

You’ve hit the nail on the head, I believe. The government (either through GSEs or FHA) is something like 95-100% of the mortgage market now and the government is planning to make it harder to get a mortgage. Just look at all the predicted doom and gloom over the proposal to have the government raise effective down payments on FHA mortgages from a measly 3.5% to to a slightly less measly 7%.

http://www.irvinehousingblog.com/blog/comments/republicans-propose-tighter-lending-standards-to-limit-taxpayer-liabilities/

Can we really be near a housing bottom when a proposal to raise down payments from 3.5% to 7% causes so much push back from the gangs of crack …. I mean home-dealers?

Previous housing booms coincided with good economies or job booms. I doubt that all of those fancy new jobs created by the boomlet in Cousin Burger franchises and the like are going to be enough to fuel a new housing boom.

The dollar may collapse, but if the plebeian hordes can only find work at Chotchke’s or Spatula City, housing isn’t going anywhere.

[StaunchLibertarian]

[quote=briansd1]
To me, this statement below is very indicative of borrowers in over their heads. They need prices to remain high, in order to refinance (kick the can further down) or sell.

Despite talk by some that homeowners have plenty of equity and wherewithal, the facts are that the $8,000 rebates and the GSE increasing the limits following the 2008 crisis did spur homebuying.

Now that the incentives are gone, the market is taking the appropriate hit.

If a homebuyer really needs an $8,000 rebate to buy a house, then we have still have an affordability problem.
[/quote]

You’ve hit the nail on the head, I believe. The government (either through GSEs or FHA) is something like 95-100% of the mortgage market now and the government is planning to make it harder to get a mortgage. Just look at all the predicted doom and gloom over the proposal to have the government raise effective down payments on FHA mortgages from a measly 3.5% to to a slightly less measly 7%.

http://www.irvinehousingblog.com/blog/comments/republicans-propose-tighter-lending-standards-to-limit-taxpayer-liabilities/

Can we really be near a housing bottom when a proposal to raise down payments from 3.5% to 7% causes so much push back from the gangs of crack …. I mean home-dealers?

Previous housing booms coincided with good economies or job booms. I doubt that all of those fancy new jobs created by the boomlet in Cousin Burger franchises and the like are going to be enough to fuel a new housing boom.

The dollar may collapse, but if the plebeian hordes can only find work at Chotchke’s or Spatula City, housing isn’t going anywhere.

[StaunchLibertarian]

[quote=briansd1]
To me, this statement below is very indicative of borrowers in over their heads. They need prices to remain high, in order to refinance (kick the can further down) or sell.

Despite talk by some that homeowners have plenty of equity and wherewithal, the facts are that the $8,000 rebates and the GSE increasing the limits following the 2008 crisis did spur homebuying.

Now that the incentives are gone, the market is taking the appropriate hit.

If a homebuyer really needs an $8,000 rebate to buy a house, then we have still have an affordability problem.
[/quote]

You’ve hit the nail on the head, I believe. The government (either through GSEs or FHA) is something like 95-100% of the mortgage market now and the government is planning to make it harder to get a mortgage. Just look at all the predicted doom and gloom over the proposal to have the government raise effective down payments on FHA mortgages from a measly 3.5% to to a slightly less measly 7%.

http://www.irvinehousingblog.com/blog/comments/republicans-propose-tighter-lending-standards-to-limit-taxpayer-liabilities/

Can we really be near a housing bottom when a proposal to raise down payments from 3.5% to 7% causes so much push back from the gangs of crack …. I mean home-dealers?

Previous housing booms coincided with good economies or job booms. I doubt that all of those fancy new jobs created by the boomlet in Cousin Burger franchises and the like are going to be enough to fuel a new housing boom.

The dollar may collapse, but if the plebeian hordes can only find work at Chotchke’s or Spatula City, housing isn’t going anywhere.

[Author]

Posts