Jamie, I commend you for writing a piece on this today. It is a tough pill to swallow. My negativity may have rubbed people the wrong way, but sometimes the truth hurts. People like to hear how rosy things are and that is just not that case with the real estate market right now. Even the extension on the tax credit won't have an impact on these numbers. I hope people realize what they are getting themselves into. Another 10% to 20% drop in values over the next couple years is a very real possibility. If you are doing an FHA loan and only put down 3.5%, you will be underwater in a very short period of time.

Jamie, I can only say for the market segment I’ve been watching – SFH in 300-375K range in AA/HW counties. We are eager to buy and have money for 20% downpayment, but there are simply no good homes for sale right now. In February-April, even during the Big Snow there were several new listings coming up every day. Now it’s pretty much like crickets. There are no listings and the ones on the market have either a bad location (bad school, proximity to freeway, etc.) or have some other issues (“split” layouts, tiny rooms, small, oddly shaped lots, etc.). Surprisingly, there are actually very, very few foreclosures and, if they’re priced right, they fly off the shelf (we made an offer on one for the full asking price and were outbid). Any decent home in this price range sells very fast.

I guess it should be easier now to negotiate the price, but not sure if many buyers would like to deal with the sellers that are completely out of touch with reality (about 40% of non-foreclosures). For example, a listing came up just a day ago – tax assessment 320K, Zestimate 340K (eppraisal 300K) and asking price is 360K. In any case, I wouldn’t hesitate to make a very low-ball offer, but, like I said, there are simply no good homes right now. We might be picky, but when we plan on spending our life savings, I think we should be.

If you need to sell your house, I think the time is right now. Even though the listings are scarce, so are the buyers (I don’t see many recent contracts either). But the mortgage rates are low and summer is a good time to move. There won’t be more buyers in fall and I’m pretty sure more foreclosures will enter the market. If you don’t need to sell – just sit tight.

Also I see a slight drop in the new construction prices. The homes that were going for 360s before credit are now going for 350s and there is no line either.

Metzger:

Perhaps what rubs people the wrong way is when you speak so dogmatically.

To those with an actual economic background, it comes across as glib and hackneyed. Confidence is often a substitute for ignorance or shortsightedness in academic parlance.

I don't find the permabears you quote any more compelling than Sarah Palin summarizing economics. They come across as excessively ideological using simplistic technical analysis and predictable fundamental readings.

Lastly, if you can foretell the future and predict the commodities and equities market, one wonders how you will be able to capitalize on that knowledge and grow exceedingly wealthy.

"Little Debbie", I enjoyed your post a lot, but don't understand what you meant by "fundamental readings".

"Little Debbie,"

With all due respect, we have all watched you cut down multiple posters on here myself included while alluding to your economics acumen, IBD experience, and "target school" education. Given your background myself and I'm sure others would sincerely appreciate your fundamental and technical analysis on the current situation.

It is true that the "simple technical analysis" and "predictable fundamental reading" used by for example, Yale economist Robert Shiller, point to an additional 10-20% fall from current prices. If you are aware of any methods beyond deviation from longterm historic trend line, price to income, or price to rents, please enlighten us, we would all appreciate it.

DISCLAIMER: OPINION--NOT FACT

Read the Economist's recent article on price to rent a few months back.

Part of the problem is that unemployment does not direct affect the likely pool of buyers, e.g. people making 50-60k each for two income houses (bear in mind that the average college grad earns around 45 upon graduation, so that number is somewhat low for this metro). A DI ratio would make a 300-350k house affordable assuming they aren't too saddled with debt. Why aren't they buying? Fear of job loss or just fear, but not unemployment per se. Unemployment has already affected marginal classes most (enter subprime) and the fear of neg am loans/IO is over blown in my opinion. Will fear and low Cons C last forever? I don't think so, and I think that those will be the leading indicators and unemployment will lag.

Rate increases from Austrian thinking? No. While the Japanese example is most domestically held, I still think that investors and current risk modeling for debt will keep rates relatively low, especially by historical standards. The secondary bond market is more liquid because of favorable tax treatment all around, and unless we see corp income tax rates go down, I think it will remain so and MBS will act similiarily because of RR ratios, especially with current underwriting guidelines and govt backing.

Current price rents are good (see above) as is affordability when interest rates are considered. That doesn't mean prices will go up, but it stanches any argument that they must go down.

And besides, a lot of PE shops are unloading their non-commercial inventory. And PE shops have a reputation for buying at the top and selling at the bottom, unlike J. Paulson.

Longterm historical trends don't account for increased housing sizes, lower interest rates and lower (non-regressive) taxation historically. The whole median income ratio is bunk because it adds old ladies with pension and college students. Median income of likely buyers is all that matters. But for the City, high taxes, crummy schools and crime simply make things unappealing.... but ultimately causes safer areas to become more expensive much like Angola is more expensive than NY for an expat.

Schiller is certainly brilliant. But I disagree. Gary Shiller, however, is simply a permabear whom I dismiss. I get tired of people saying the sky is falling especially to those who talk about their house and wanting to buy or having bought with an attitude of schadenfreude over their loss or impending loss. And, Josh, haven't you cut down others as well? Oh well... two wrongs don't make a right so that's no excuse for myself.

Given what I've said, why haven't things changed already? A crisis of lending across the board leading to collateral damage, but the ship, IMO, has slowly beginning to turn. But I guess I see different shoots than others.

bwahahahaha

this is great comedy from little debbie:

"To those with an actual economic background, blah blah blah"

Ya mean those with economic backrounds who can't spot a housing bubble when it's right in their face?

Look, hon, there is a difference between being dogmatic and being spot on. You are the former, and Metzger is the latter.

You have had your moments, however, your "gold, guns, and greenland" call was on the mark!

I just spoke to a homeowner in Guilford today who said she was planning to take her home off the market. She has a gorgeous, semi-detached Tudor home that was listed for just over $500K. According to her, not many people have 20% to put down, and her home has lingered on the market without any offers.

I found her story a stark contrast to the bidding wars for the Pier Homes wherein the smallest units with the worst views still garnered prices over $500K.

So, I see another declining market for the year to come, especially for homes priced over $400K.

Further, I think that the majority of institutional money benefits more when asset classes are not declining in value.

Okay Darwin Rules, henceforth I change my position from dogmatically questioning the fundamental/technical analyses of "across the board bears on housing" to Tyler Durdenite approach.

See you at the next G-20! I'll be wearing the pink rabbit suit--will you bear wearing the priest's outfit from the Temple of Doom again? :)

Thanks. That was a well thought out argument and you raised some good points.

To summarize your argument:

1. Based on current interest rates ownership is affordable and rates are likely to stay at this level for.....shall we use Fed language...."an extended period."

My response-You're absolutely right on the first point. A few months back I ran numbers based on the current rates and found that while prices were still out of line based on longterm trends, the monthly cost of ownership is actually inline due to the exceptionally low rates.

Where we differ: I think rates have no choice but to head up, the only question is when and how far and when that happens affordability will fall about 10% for every 1% move in interest rates. It is true that a flight to quality both from Euros to USD, and from stocks to bonds are helping to push and hold rates down. And it is true that with the move from an implicit guarantee to an explicit guarantee, mortgage backed securities carry the exact same risk as Treasuries, and the yields bear this out. Backing out the servicing strip of about 1%, yields are almost identical. It is also true that through "quantitative easing" (a fancy way of saying print money for the non IBD crowd), the Fed has shown a willingness to pin down the long end of the yield curve (resort to central planning rate manipulation that goes beyond the traditional targeted Federal Funds Rate). But this all has a limit, and that limit is investors, both foreign and domestic, willingness to accept this behavior. Central banks around the world are already accelerating their physical gold holdings while decelerating their USD based holdings. It is also true that given the Bretton Woods holdover and the fact that it is so much in the rest of the world's interests to avoid a serious USD devaluation, the worst case scenario of foreign central banks dumping dollar holdings may not play out, but they certainly will stop buying past a certain point. Warren Buffet, ran numbers showing that based on the current size of the deficit, the maximum Chinese lending ability, and the maximum US lending ability, we still have about a $900 billion dollar a year hole that is most likely to be filled through debt monetization. Past a certain point we will be forced to raise rates or the price of everything is going to start going up fast. There is a possibility they keep rates low in the face of accelerating inflation and if that happens your house will probably price about the same in nominal terms. But measured in gallons of milk, gallons of gas, loaves of bread, or ounces of gold, your house will have fallen in price.

2. Discounting the median income measure and longterm measure based on outliers and house size.

My response: If you're referring to # of people per housing unit, that number has actually fallen over the decades so should add downward pressure. If you're referring to an increase in square footage, you're applying the same contentious hedonic adjustment that the BLS does to try to under report inflation. Median incomes have always factored in the outliers of little old ladies and college kids, so it makes no sense to try to trim them to fit a higher modern income to price ratio.

3. Consumer/worker expectations. You argue high unemployment doesn't matter. If someone has a job, the 10-17% of people who don't have a job don't impact that person.

My response: Job security is your ability to find another job fast, and right now almost no one has that. Even if you're pulling down 50-60k/year, knowledge that if you lost your job a good replacement would be hard to come by is a strong deterrent from taking on a big, 30 year obligation. Additionally, a weak labor market limits real wage growth. While inflation and elevated unemployment can coexist, real wage growth and elevated unemployment cannot.

Last points of disagreement:

It is my understanding private equity firms are buying up huge blocks of Miami condos, the most recent one I heard of was a bulk purchase of 140 units. If your logic is to bet against PE firms, they do appear to be betting on a rebound.

The neg-am time bomb is huge. There's more volume at play than the subprime bomb, and I've run numbers showing that even at these low rates and low indexes, most borrowers will still be looking at an 2.0-2.5 factor increase in their minimum payment when they do hit that recast date.

DISCLAIMER: THIS IS AN OPINION, NOT A FACT.

"Little Debbie", I appreciate your response. However, I never said my opinion is a fact. No one can predict the future. With that said, you can only base your opinions/predictions on statistics and trends.

I have seen many reports that foreclosures are still increasing. Since the tax credit expired, purchase contracts are at a 47 year low. These trends do not support that we have hit bottom. It would be poor judgment to say we have hit bottom when the housing market has been subsidized by this tax credit. To fully realize if we have hit bottom, you need to see what happens after the tax credit. The tax credit was used to unload inventory and stabilize prices. It did it's job. Now it's time for the free market get back to work and see what happens. I just happen to think we are still headed lower. Maybe I am wrong. In fact, I would love for you to be right and everything is great.

I agree with you that the unemployed are not included in the buyer pool. In fact, I would even go as far to say that many of these unemployed are current homeowners who are facing foreclosure. As unemployment remains high, foreclosures will remain high. There is a direct correlation between unemployment/loss of income to foreclosures, no?

You also bring up a valid point that dual wage earners (50k to 60k each) can afford a $300k mortgage. I don't dispute that. In fact, I agree with you. The problem with your analysis is what home you will get for that price. Just because you can afford to pay a $300k mortgage does not mean you go out and buy a home for $300k, no matter what it is. For $300k, you are not going to get much. In fact, all you may get is a really nice townhome or a small SFR that needs work.

You see, people don't want to pay $300k for a townhouse or a beat up SFR. People want their money to get them something that is nicer and bigger. Yes, these people can afford it. They just don't want to overpay for it.

I understand people don't want to lose value on their home. This has affected everyone. I, myself, am now upside on my home after putting 20% down back in '05. Do I want to see the value of my home keep going down? Of course not. It is, what it is.

The point is that the only way we see a real recovery is when prices go down to a point where the market can support itself. Throwing $1.25 TRILLION to purchase mortgages, $700 BILLION for TARP, $140 BILLION to Fannie/Freddie, and implementing a tax credit, etc. have not solved the problem.

Again, I appreciate your analysis. I, however, am not a "permabear". I do think the market will turn around, but only when the free market is allowed to act on its own. Yes, prices could go down another 10% to 20% for that to happen. If the government continues to intervene, we could also see prices stay flat for a very long time. Which is better? That is another debate for another day.

Oh, one more thing concerning commercial properties. Aren't vacancy rates also at an all time high?

Left one thing out,

Underwriting standards: They are adding downward pressure to prices, not upward pressure. Tightened standards are assuring that even if we have 2% interest rates we won't have anywhere near the buyer swell we had from 03-06 that drove prices up. Any downward pressure they add to interest rates is trumped by the explicit government backing. Why should an MBS investor care what underwriting standards are being applied if it carries a "full faith and credit" backing?

To summarize my overall argument:

For housing prices to stay the same, so must rates and incomes.

For housing prices to fall, rates only need rise.

For housing prices to increase, you either need rates to fall even further, and then stay down for an extended period (a scenario I suspect even you would say is unlikely), or you need real wage growth, a scenario that at 9.5% U3 and 16.7% U6 looks to be a long way off. Or I suppose you could return to 2003-2006 "fog a mirror" underwriting standards.

Breaking it down, it would appear that your best realistic hope is for a long, flat, sideways, but all it takes is rates increasing to send housing down another leg.

Also remember that momentum tends to overshoot fundamental fair market value in both directions.

Safe areas in the Baltimore city market are inflated by $50 - 100k and the taxes are ridiculous making the monthly payment a challenge. York road drops value significantly and there is increasing flight from there and rightly so. I've been trying to relocate from Northern Virginia since March and can't believe the prices--which were buoyed by DC buyers five years ago--but that market is nonexistent.

You are also paying top of market for the county listings because of the schools, etc. Taxes are lower but prices are higher--and what you get for $500-600k is acceptable, but not great

The product out there hasn't even been cleaned for viewing in many cases and the concept of staging a home not worth the time.

Sellers are getting a wake-up call. We are looking for something that will appreciate in value but at $500k for a town home or a semi-detached home--you will be lucky to get that back ever.

DISCLAIMER: OPINION--NOT FACT

Haha, this is a good 1 ;)

Maybe someone wanted to invest based on "Little Debbie's" thoughts. Then, this disclaimer is obviously in place to protect in case something goes wrong with investments.

MY DISCLAIMER: OPINION--NOT FACT

Josh,

I understand your points and have minor disagreements, and look, I can understand your overall frustration in changes to the US economy that have left blue collar workers in a worse off position and what that implies about your perspective and the importance of equality and opportunity. I don't want to niggle at every point (e.g. I think you occluded domestic financing with Buffet (cf Japan)), and at the end of the day, we should know in 1-2 years and the degree .

1. There isn't necessarily a correlation between affordability and prices when rates rise. Studies of this were done in NZ. The recent weakness of the market is one example, and if rates rise along with CC, I think that buyers will buy. I think that you should say "prices will go down in consumer sentiment deteriorates further."

We can start talking about creating DCF models with historic tax rates vs. increasing standard deductions and lower marginal tax rates, using more advanced AMT shelters (since MI is an above line item), etc., etc..... but I hardly think that these issues come into the conscience of most people. So I think it all boils down to CC and if things happen to be affordable based upon several longterm metrics, good. And if things are less affordable, people still buy because of how they feel.

What metrics do you use to establish an average? Please don't use a low point in the market when rates were 8%--you are better than that.

2. Good point about the weak labor market limiting income growth. And your point about finding a job was what I meant, not unemploymed people being able to purchase.

I think this will change.

3. The point about PE firms was more wry than anything. There are some that are buying, but most are actually trying to unload their assets and cannot. In any case, I wouldn't use this as a real argument.

We always have to be clear about not equivocating Baltimore City, crappy areas of Baltimore City with nicer areas, other counties, nicer areas of other counties, the US, and Las Vegas.

The strongest rebuttal in my opinion, which Metzger brings up. Supply/demand, in which case Canton, Federal Hill and Washington Village could still fall a lot further.

Also remember that momentum tends to overshoot fundamental fair market value in both directions. Fair enough.

I have been able to sell a Townhouse to be able to get into a SFH - all in Baltimore Co. and now renting an apt. Having major problems finding a recent colonial in 400k range. There're plenty of listings in under 300k or over 700k. Anything thats under 300K is really old, ugly, and requires major renovation. Perhaps somewhere around Baltimore you can still find something decent for 300k but I choose not to live in that area. 700k+ homes are nice, but what kind of job do you need to have to afford that monthly payment? Sellers refuse to lower the prices, they'd rather not sell at all. Foreclosures....where are they? As much as I hate to remain in this rental apt for over a few months, my prospects appear worse than I thought.

The only way to correct this is to let the free market take the charge by stopping all aid and bring all foreclosures to market ASAP. Abundance of inventory will increase competition and lower the prices. Govt needs to encourage people to walk away from homes and not clinging onto them by eliminating barriers to repeat homeownership after one has filed for bankruptcy or had a foreclosure. Property taxes need to come down to early 2000's levels because they are still high, 600-800 per month, which is ridiculous for an average colonial on 1/2 acre lot. Locally, we may need to open more land to building, and thus lowering the cost of land.

By considering various changing tax rates your approach to affordability is certainly more nuanced than most, but the conclusion is the same: affordability most certainly decreased during the run-up and is being restored through the collapse. A fully nuanced approach, which I admittedly did not use, would have also factored in rising property tax and hazard insurance bills.

For a monthly payment affordability comparison I used the national average contract mortgage rate: http://www.fhlbc.com/fhlbc/docs/index_reports/fhfb_national_avg_mtg_contract_rate.pdf
It considers a weighted average of ARMs vs fixed.

I am unaware of the NZ study, but just Googling for it revealed multiple studies referencing the traditionally accepted inverse relationship. For an MBS buyer or any fixed income investor, discount cash flow explains the inverse rate/price relationship, but for a home buyer it's really just a straight affordability function. I can't count the number of initial applications I took during the hot years with combined household income in the 50-80k range that just couldn't afford anything halfway decent. To simplify what I'm talking about, I was seeing people with probably 60th percentile income who were looking at probably 20th percentile housing. That's not right.

You are spot on about institutional money being healthier in a rising asset price environment, but what's good for bankers is not necessarily what's good for everyone else. That's an off-topic and deep enough subject that I will only point out that I made a case for that point in an article I got published on Seeking Alpha: http://seekingalpha.com/article/207254-what-s-the-cost-of-an-inflation-free-bank-bailout

Hey Josh, interesting article. One question for you though. What do you think would happen if FASB did not change the accounting rules? What if banks/financial institutions went back to "mark to market" accounting on their assets? Are the banks still insolvent? Are we in fantasyland? Are the banks really making money? If the answer is they are not solvent, is there a way to estimate how much more capital reserves would need to be raised to restore liquidity?

Anything will sell if you price it right. It's also true that if everyone is trying to sell at the same time collateralized debt obligations (secured loans) can fall to prices below even the fire-sale price of the ultimate underlying secured asset. 1st lien subprime mortgages were going for as little as 30 cents on the dollar even at a time that no reasonable person projected the underlying houses falling to more than 60 cents on the dollar. At first glance this would seem both a buying opportunity and irrational market behavior, but that's ignoring some of the realities of foreclosure: houses are often vindictively trashed, and you can mount a year of unpaid carrying costs, and thousands of dollars of legal fees that get backed out of your gross sales price. Layer on the uncertainty of various foreclosure moratorium laws, and suddenly 30 cents on the dollar for a bundle of secured loans you know are going to default doesn't sound all that crazy.

I can see the reason for the change from mark to market to mark to model, but it's kind of like allowing a homeowner who's underwater and trying to refinance to estimate their own appraisal. The rule certainly should have been temporary.

There's a more advanced rule change trick that could help to restore solvency, eliminate reserve requirements as proposed in February's Fed notes (very bottom of #9 here: http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#fn9). Mull those implications over. Also, the stress tests favored big banks and disfavored small banks. They forced small banks to mark down the value of individual portfolioed loans even though evidence shows those perform better than securitized loans which the mandated less of a markdown on. Big banks securitize, little banks don't.

Banks are making money, but it's through a circuitous theft from the public: they borrow from the Fed at near zero, and lend it back to Treasury at about 3-4% and multiply those spreads by fractional reserve lending rules. We might as well have an I.V. hooked up from the Treasury Department to their vaults.

I've been in the market all summer. We definitely have the 20%, but the problem is the still overpriced mediocre homes out there. You'd think 500k was not a lot of money even now. Sellers don't appear ready to deal.