This simple chart depicts several different measures of changes in home prices:
chart courtesy of PMI
Rates of home price appreciation are obviously slowing, and in a few cases, slipping into negative territory.
Yet, home affordability continues to be an issue for many buyers. Mortgage insurer PMI observes:
"Price appreciation has slowed in many areas and incomes continue to rise. As a result we saw slight improvements in many areas’ Affordability IndexSM scores this quarter, the first improvements we’ve seen for some time. Still, after years of record increases prices are still far ahead of incomes in many areas, and affordability has a ways to go to catch up. We expect appreciation rates to continue to moderate, allowing prices to move back into better alignment with incomes over time."
That’s a polite way to say that prices remain too high in most regions.
Why? Consider the issue of down payments:
"Using the traditional model of a 20 percent down payment, buying the national median-priced home, at $218,000, means saving more than $40,000—a challenge for many low- and moderate-income borrowers. In high cost areas such as California, where the median home price is more than $550,000, saving a 20 percent down payment is even more of a challenge. Because the American dream of homeownership is alive and well but home prices remain high, low down payment mortgages will continue to be a significant factor in the marketplace."
Hmmm, I wonder if there’s a clever way to get around this lack of a down payment issue:
"With prices increasing much faster than incomes in many areas, consumers often turned to nontraditional mortgages, including piggyback loans (a first mortgage for 80 percent of the home price and a second mortgage that covers the difference between the borrower’s down payment and the first mortgage), interest-only loans, and payment option ARMs.
These products offered low initial monthly payments in exchange for higher payments down the road, when interest only periods ended, option ARMs reset, or interest rates on seconds increased."
Hence, the ongoing risk of foreclosures in the sub-prime space.
More on this later this morning . . .
PMI releases Winter 2007 Economic and Real Estate Trends report (pdf)
Economic and Real Estate Trends Report
The PMI Group,Winter 2007
PMI’s Winter 2007 Risk Index Reflects Slowing Housing Market
WSJ: Toll’s Housing Outlook May Have Some Soft Spots
When luxury-home builder Toll Brothers last reported earnings, its chairman, Robert Toll, said the housing market was seeing “a floor in some markets.”
The comment added to a bounce in the whole sector. Toll’s own stock is up about 10% since then. Investors will get a better idea about how solid the floor is when Toll gives its outlook for its first quarter and fiscal 2007 today.
The company’s fate will likely depend on which markets have hit a floor. Toll is highly exposed to one of the softer housing markets in the U.S.: the mid-Atlantic. Nearly 40% of its earnings derive from the region, according to Merrill Lynch.
But it isn’t clear mid-Atlantic sales have really stabilized. A Raymond James report shows new orders for homes in the Washington area — which includes northern Virginia — were down 22% in December from a year ago. That isn’t as severe as the 40%-plus year-over-year drops seen in the summer, but still not convincing enough to call a bottom.
What’s more, the average number of days homes sat on the market in northern Virginia jumped 28% in the fourth quarter from the third — and was up 139% from the same period in 2005, according to the Northern Virginia Association of Realtors.
The floor, in other words, might have some cracks.
The “floor” does not have cracks…it so happen that it is made of toothpick sticks and nothing else. The glue tying them up together is a 99% alloy of grade triple-A BS and hope.
Whenever I hear the hope and market in the same sentence, I can’t help remember the old say: “Hope rhyme with dope”.
This floor look like a trap ready to swallow the unfortunate soul stepping on it.
Bottom line? One of two things need to occur:
1) Sellers come to terms with the new reality.
Question is: when will that happen?
“What is worse is that the speculators are still so insanely greedy. How far can it go down? Exhibit #1:
Margie Bushnell is one land speculator who said she’s willing to wait to get the price she desires. The 77-year-old widow from Flagler County, Florida, owns a half-acre parcel on Highway A1A in the coastal town of Hammock. The carrying costs are killing her, she said. She’s paying property taxes of $4,500, triple what she paid when she made the purchase three years ago.
“It’s an extremely lot of money,” Bushnell said. “I’m retired and it’s hard for me to come up with that.”
Bushnell is offering the land on Craigslist.com, a free on- line advertising site. A year ago, her price was $699,000. Now she’s asking $650,000. She said in a half-whisper that the land, zoned mixed commercial and residential, could be had for $595,000. She’s ready to wait another year for a buyer at that price.
How much did Bushnell pay for the half-acre in 2004?
$80K in 2004, yet Bushnell and other speculators are only willing to part with their land for just under $600K (if you had to twist their arms). Let’s see… could it go back down to $80K, perhaps lower? Out of the question! Right? That would be a loss. Or in other words, what market in history has dropped 90% from it’s highs? Impossible, right?”
With a mindset like that, it looks likes Professor Pain will need to exert it’s educational therapy for quite a while.
As for the residential sellers, they sure can decide not to sell and wait for better times. And what if they MUST sell in the near future in a market already hostile to sellers? Hmmm! I’ve seen quite a few examples of that in my neighborhood and I can assure you that sellers in that situation didn’t look very happy.
2) Middle class income will have to rise MUCH faster than in the previous decade.
Fat chance for that happening, considering that in the USA, from education policy (or should I say non-policy), tax code to campaign financing, the deck is stacked more and more against the low and middle class.
[Off topic note: For those who consider that there is nothing wrong with an increasing concentration of wealth at the top, just take a look at the history of other countries that took a similar path. Talk about pain!]
Some data from a California Association of Realtors release on their 2006 market survey:
The median home price for first time buyers in the state last year was $450K, the median down payment by first time buyers was $10K.
With this little capital under the mortgage, there is no margin for error.
Where’s Nussbaum? I want a piece of him.