Housing Crisis Over? Mixed Data Suggests….

P2P-Loans.com has recently noticed a number of smart folks writing about the end of the housing crisis. In two separate articles in the WSJ ("Opinion: The Housing Crisis is Over" and "Is Housing Slump at a Bottom?"). These articles make very valid points with regard to housing starts, low interest rates, etc. What these articles fail to debate in any material fashion is that housing prices relative to disposable income are still extremely high!

This chart from Ned Davis Research (the line graph at the bottom of this page is most relevant) demonstrates that we remain at very high price levels relative to historical data. Ultimately, the value of housing is a function of affordability. When it's all said and done, this is the single most important factor that drives demand for new housing and the price of such housing. For example, the data in the chart suggest that in 2001 (yes, interest rates were in the sub 7% range for 30-year fixed mortgages then as well) the Median New Home Price / Disposable Income ratio was near its 30-year average, which is where it had been for the better part of 15 years. In fact, the ratio had been even lower before that, however this is likely due to the artificially high interest rates of the 1970's and early 1980's.

This dynamic has served to dramatically reduce demand for housing in conjunction with tougher lending standards (fewer buyer approved for new mortgages) and skitish buyers (when will prices stop falling). As a result, housing inventories have spiked to record highs. Accross the US, housing inventories are more than double typical levels, and are as high as 4-5 years worth of inventory (versus a long-term average of 5-6 months) in formerly hot markets such as Florida and California.
According to a recent post at Seeking Alpha, housing inventories are beginning to come down, but remain well above historical averages. Seeking Alpha points out that, at the current sales pace, inventories of new homes will be "back to normal" by the end of 2009. Simply put, we will be in a supply/demand imbalance for the next two years (and this is assuming that the market doesn't overshoot to the downside, which it's been known to do in prior busts - think about when many tech stocks were trading at less than cash value in 2003). The data is similar on the inventories of resales as well. In my estimation, this means we still have a ways to go before calling the end of the housing crisis. I hope I am wrong.

On a side note, the government is trying to push through a MASSIVE bailout program. Generally, when the government makes a move like this, they are too late to the party. Thus, this single fact alone could lead one to believe we are at the end of the housing crisis.

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Is there a tax-payer funded (err... "government sponsored") bailout coming for honeowners? Momentum appears to be building for a broad-based program to bail out folks that bought homes in the boom times and can no longer afford to make their payments (e.g. are approaching or are already in foreclosure proceedings). This has been a topic of much debate. For those that made smart, sound financial decisions (e.g. didn't borrow more than they could afford to pay back, and read the fine print on their mortgage documents, etc.), this seems like it might be unfair since the taxpayers will potentially be bailing out these folks. But, as the outline below reflects, the current debate in Congress revolves around structuring a compromise that enables any eventual program to pay for itself. P2P-Loans.com is encouraged by some of the provisions being discussed (especially the payment of insurance premiums to the FHA and a sharing in any equity gains to homeowners upon a sale). We would hope that the equity gain sharing is substantial and not a pittance given any gain will be made entirely on the backs of tax payers (errr...the "government-sponsored" program). Generally speaking, the government has a terrible track record on projects like this (they underestimate the total costs, botch the execution and mess up a market-based system that works pretty well in the long run).

Here is a summary (from an article at Money.com) of what's being debated (P2P-Loans.com will report back on this issue once a program is passed):

While critics worry that an FHA rescue plan could amount to a bailout, supporters say it's not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.

Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a "haircut" - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.

Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.

Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.

I don't normally re-post blogs, but I found this posting from the WSJ and found it particularly interesting. In fact, I have some experience with this area as I know someone in my local market that has executed the home squatter strategy to near perfection over the last few years.

This person owns a second home (it's actually a condo on the beach) and has had foreclosure proceedings started on him on 3 different occasions. Each time, he's taken the bank for a "rent-free" ride for 9-12 months. During each of these processes, he negotiated a "new deal / payment plan" with the bank, which ended in dismissal of the foreclosure proceedings. The net result of his actions has been effectively free rent for nearly 3 years (e.g. no cash payments) on his second home since the back payments, interest and penalties/fees were simply added to his mortgage balance (which he may or may not make payments on going forward). I suspect he'll try this again in a few months, and maybe the bank will wise up (doubtful). Or, maybe he will just continue to live in the condo as long as he can continue to play this game (in reality, he cannot afford this second home without playing this game with his bank).

With so many folks upside down on their homes (their home is worth less than their mortgage balance), one might expect to hear about more of these cases going forward. Let's hope that the banks will show a little compassion since many folks in foreclosure today are not gaming the system (per the story above), but genuinely need their help to keep their families in their homes.

Here's the blog posting and a link to the blog (there are some interesting comments on the actual posting, so I encourage you to visit).

Why Walk Away? Mortgage ‘Squatters’ Stay in Their Homes
by Lauren Baier Kim

We’ve written about homeowners who are walking away from their homes instead of paying back their mortgages as home values fall. But why give up your house when you can continue living in it without paying a cent? That’s essentially what some people are doing, according to a recent post on the Big Picture blog.

The blog shares the observation of one South Florida developer, MW, who says that in “the very best neighborhoods of Florida,” owners of houses valued in excess of $2 million have ceased making mortgage payments and are essentially squatting in their luxury homes. And thanks to a backlog of foreclosure cases in the local courts, they may be able to live in their home for months, maybe even years, before the banks can take action (many have also quit paying property taxes and insurance, the post notes).

The post reminds us of a December Journal article written by Amir Efrati about a family in Cleveland who fought off foreclosure in the courts and continued to live in their home for 11 years without forking over a single mortgage payment. Ultimately, the bank foreclosed on the house, the family was evicted and the house was sold to another family, Mr. Efrati says.

There’s a similar tale on Bloomberg.com of a Boca Raton, Fla., resident who hasn’t paid his $1.5 million mortgage since 2002, but still has ownership of his home because the bank can’t prove that it owns the mortgage note. The article says that homeowners across the U.S. have seen foreclosure cases against them dismissed because of lenders’ inability to prove ownership of mortgages that have been pooled into securities and have changed hands multiple times, sometimes with poor documentation.

Of course, many people stay in their homes for a year or two while awaiting eviction. But with so many folks holding negative equity in their homes, should we expect to see more of this? — Lauren Baier Kim