Tuesday, May 06, 2008
Is the housing crisis over?
Are we at the turn of the housing market?
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.
By some measures, housing affordability has returned to late '90s levels, and that is presaging a turn in demand. Since new construction will lag rising sales by many months, housing will start pulling GDP and employment instead of weighing them down early in the first term of the next president.
3 Comments:
By 
, at
Tue May 06, 10:43:00 AM:
Just bought some Lennar two weeks ago. We're hoping you are correct!
By 
Charlottesvillain, at
Tue May 06, 01:51:00 PM:
I think you'll see some floor in selected markets, but overall I don't think we've bottomed. While we are through the "subprime" rate resets and probably throught the bulk of defaults, we have 2 years of option arm resets coming, which was a huge part of the market. These are negative amortization loans that allowed borrowers to pay less than amortization, with the difference adding to principle. I think default rates there will get a lot worse once that cohort starts resetting to full amortization payments.
Furthermore, I disagree with the author's assertion that we are reaching historical norms of housing affordability. The spread between home prices and rents is still way above the longer term historical relationship. Throw in a huge amount of lost equity, a mortgage market that remains disfunctional, and a growing aversion to over leveraging, and I just don't see where the demand is likely to come from. And that's not even taking into account a recession, which will clearly have a negative impact as well. I don't think we're there yet.
By , at
Wed May 07, 05:18:00 PM:
To simply say that the US housing crisis is over is too simplistic and irresponsible. The mortgage crisis is far from over, with so many people upside-down in their homes and no end in sight. Many have loans on homes that are no longer available and wouldn’t qualify for others that are now available. That also means that those first time homebuyers, who may have qualified for home loans last year, will not be able to buy this year…or likely in the next either. This is contributing to another major issue here is that there will be a expanding divide between those who can afford housing and those who cannot. Many people will simply not be able to afford to live in the communities in which they serve. Once again, the middle (and lower) class families are struggling to survive with gas and food prices on the rise. Very soon, many Baby boomers, who will want to retire, will have to unload their homes, which are likely to have high mortgages, in order to survive…In other words, there are major socio-economic, both national and regional, variables that have yet to come into play that will play significant roles in recovery or not…
