I love graphs that show GAPS in what is currently happening and what “should be” happening or “what actually happened in the past. From these kinds of comparisons one can draw inferences. One cannot be definitive in predicting the future, but one can apply some common sense to get a sense of what will happen in the future. I saw a great graph in today’s Wall Street Journal, Section C1. It’s in an article by Mark Gongloff in his column Ahead of the Tape. The article is titled “History Aside, Housing Woes Not at Bottom.” “Housing starts, a government measure of new home building breaking ground, in March 2008 were down about 58% from their January 2006 peak.”
http://online.wsj.com/article/SB121366308001479273.html
The article states that “there have been four major home building downturns since the 1960s and each of them recorded peak to trough declines of roughly 60%.” It took the 1972 decline 28 months to start going up again and we are at 30 months into the 2006 decline. But it took the 1986 decline 6 months to hit bottom. Which path will housing starts take?
The article states that there are related metrics that should be considered that will affect housing starts. One is the inventory of houses (new and pre-owned) currently for sale. In April 2008 there were enough houses for sale that it would take 11 months of average sales to sell them all. And there are increasing numbers of foreclosures, adding to the number of homes for sale, and at sales prices that are below what next door neighboring houses are trying to sell for. I know of a home in Antioch, CA that is bank owned and selling for $290,000 next door to a home purchased 2 years ago for $650,000. I know of a home in Brentwood, CA that was purchased for $750,000 that the owner would love to sell, but it is surrounded by six or more foreclosures in the development, selling for far, far less. Comparables are in the $500,000 range. His loan is $550,000.
So, it is the best of times and it is the worst of times. In this buyer’s market it is the best of times for new homeowners who have good credit and have saved for a downpayment, since they can get into homeownership in a far better location than they would have been able to do in a normal seller’s market. Even if prices drop further the buyers in good locations will come out ahead since the market will rebound and the prices in the good locations will go up faster than the average market. Current homeowners with good credit and some good equity can now upgrade to a far larger home in a better location than they would otherwise been able to consider. They have to sell their current home or rent it out but there are plenty of folks in a position to transition manage two mortgages and also plenty of renters out there.
It is the worst of times for homeowners who are investors and who stretched their finances to buy and then flip a house and make a quick killing in a rising market. There’s a GAP between what investors thought would happen and what actually happened since 2006. Luckily the loan indexes have remained fairly low and so resets of many 5/1 ARM loans have not hurt mortgage payors too much. If the mortgage payor was paying interest only payments and the loan reset, the new payments have gone up, but not excessively. A 1% cap in mortgage payment increases per year can be absorbed by most homeowners unless they experience a job loss. So several of my clients have been reassured that they are not headed for a cliff financially and they have a year or more to monitor the mortgage market and to improve their credit scores and to be in a position to refinance when the market rebounds. It’s possible that it may be 2-3 years before the market rebounds. They’re still OK as long as they maintain their jobs and don’t overspend to diminish their credit rating. Banks are getting much more conservative and the old fashioned values of thrift and savings (banks call it reserves) are back in style.
It’s back to the basics and good credit and personal economy and savings are once again in style.
