Tuesday, May 06, 2008
Is the housing crisis over? Maybe not.
It is actually possible that new home sales may be nearing the bottom of this cycle, however that doesn't mean the "housing crisis is over" - far from it. But, in addition to the crisis being far from over, there is another major logical error in the piece (this flawed argument was made by many housing bulls during the bubble). Moulle-Berteaux writes:[I]f one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house.No.
Imagine that income was steady, but the available mortgage rate varied every year - during odds years the mortgage rate was low, in even years it was much higher - high enough to double the monthly payment. In Moulle-Berteaux' world, home buyers would be willing to pay twice as much during odd years than even years. That is laughable.
More from Felix Salmon:
I will grant Mr Moulle-Berteaux that it's significantly easier to make your monthly mortgage nut on a new purchase now than it was during the height of the bubble. (I will also note, however, that even he thinks prices are going to continue to decline until "sometime in 2009".)Time will tell, but I'm with the bears on this one.
But there were two big changes which took place during the housing bubble, and only one of them was the run-up in prices; the other was the decline and eventual eradication of downpayments. But there are precious few no-money-down mortgages being offered right now: the moral hazard associated with them is simply too great.
Mr Moulle-Berteaux's prognostications are based on the idea that this housing crunch will resemble previous crunches. But we already know that it won't: it's become a cliché to say that this is the biggest housing crunch since the Depression. Even if prices come back down to where people are willing to buy, those people might well still not be able to buy. And if we have to wait for them to save up their downpayment, it's going to be a long time until there's a housing-market recovery.
2 Comments:
By 
, at
Tue May 06, 04:05:00 PM:
"In Moulle-Berteaux' world, home buyers would be willing to pay twice as much during odd years than even years. That is laughable"
I'd agree with that as stated, but I think CR and MB are talking past each other, and MBs point is valid - just poorly stated. Does he really mean:
[I]f one buys a house with a mortgage, the most important factor in deciding ***how much to spend on a house*** is how much of one's income is required to be able to make the mortgage payments on the house.
I don't think he's saying the buyer would pay more for the same house if the rate was lower, but that the buyer would find a more expensive house.
By 
Who Struck John, at
Tue May 06, 08:36:00 PM:
The bears are right on this one. One of the side effects of no-money-down is that we've cannibalized the next several years worth of buyers (who bought no-money-down at the time rather than saving for 20% down later). Add to this the psychology of a decline -- why buy now when you can pay less later. Remember, you can refinance a high interest rate when rates come down, but you can't renegotiate a high purchase price if housing prices drop (as folks who are now underwater can attest).
