The Housing Crisis Is Over (Ha!)

Mr. Moulle-Berteaux, along with Barton Biggs, is a partner of Traxis Partners, a hedge fund firm based in New York.

They have had a series of disasterous calls recently: Shorting Oil three years ago at $50, and a mere 6 months ago, this horrific call in the WSJ, declaring the end of problems in residential real estate: The Housing Crisis Is Over.


There is an important lesson here for investors. Read this, and them join me at the other end:

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982. Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in . . .

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

I recall reading it at the time, and saying to myself: “Wow, that is simply awful analysis.” Hence, the diary for 6 months later and the current look back.

The logic errors within are myriad: Comparing different time periods and expecting identical parallel results, the failure to recognize how significant the credit crunch was, the extrapolation from past lows to present using insufficient variables, the failure to use traditional metrics of affordability, such as median home price to median income or price of rent versus own ratios, and lastly, the unsupported assumption that a 15% drop over 3 years, after a 100% increase was sufficient to make homes affordable.

If I was grading this, it would get a D minus.

The lesson you should take away when you read dumb things from smart guys running big piles of cash: They are talking their books, and having drank the Kool-aid, have little or no objectivity.

This is a classic example of that.


The Housing Crisis Is Over
May 6, 2008; Page A23

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