Friday, June 11, 2010

Long Way to Go

Housing prices need to fall yet further.  From Calculated Risk:

After 2000, as the housing bubble inflated, the value of American homes (blue line) spiked in a way outside of historical bounds.  At the same time, mortgage debt constituted a larger percentage part of the American GDP than ever before.  The mismatch between the two of these indicates that for a time, the value of homes was rising faster than mortgage debt. But as the peak in the blue line shows, that is over now. The exponential growth in housing value peaked in 2006 and began reversing itself. But mortgage debt continued to grow in a classic overshoot pattern, as people continued to buy houses in expectation that housing would continue to grow in value. They did not, and instead went into freefall.

The little kink at the end of the blue line is the massive Federal intervention. Whether that represents a break in the trend, (like a falling climber who has caught himself mid-fall) or a temporary hickup remains to be seen. I favor the latter. While the graph seems to show that housing values have returned to something like historical normality, the mortgage debt load has not. To return to something like its historical norm, it would need to return to the level it was in 2000, at a little over forty percent. It is now running closer to eighty percent. Given that 50% of households have no mortgage debt, that means that 50% of mortgages are carrying a debt burden equal to 80% of our GDP.

Historically, the difference between the two data series has been about 45 percentage points. For all of recorded history. It is now running closer to 30%. God forbid the lines should ever cross. But with the 50% of households with no mortgage debt, it looks increasingly viable for homeowners underwater to default, starting the whole fire-sale process of housing price slides again.
The number of customersapplying for a mortgage to purchase a property fell to the lowest level in 13 years last week, a sign the housing market is struggling without government incentives.

This quote shows the fundamental danger of using federal dollars to prop up the housing market--when you remove the prop, the housing market needs to come down. It was a bubble and it needs to deflate. Houses cost too much--they cost more than people can afford to pay. The median national house price should be about 2.5 times the median national income. It is nowhere close. People are still buying houses that are out of their price range, and paying too large a percent of their monthly income. Faced with a financial shock (illness, loss of job, car crash), default is almost inevitable.

The housing market is struggling because it needs to struggle, to return to some sort of economic discipline, instead of the speculative carnival Wall-Street financiers created. Pumping more public money into the housing market only keeps housing prices high, rewarding speculators.

There is nothing wrong with renting. No matter what your real estate agent says, buying a house doesn't automatically build equity.