Home Prices Still Need to Decline More to be "Affordable"

Home affordability is a reltaive thing.  However, that affordability should not be based on interest rates.  It should be based on income and housing prices - in other words the cash value of the home.  According to this Wall Street Journal article, Home Prices: Low, But Still No Bargain, home prices do indeed need to fall more.  I agree with this overall assessment.  Of course this will lead to more foreclosures as more homeowners experience negative equity situations.  If you do factor in financing then there is another problem: the looming commercial real estate crisis (more on that soon).

President's "Making Home Affordable" Program Not Enough to Stop Foreclosures

According to this Inman News article, Negative Equity: a housing timebomb, President Obama's Making Home Affordable Program (MHA)  will only have a small impact on reducing foreclosures because it igores one of the key drivers of foreclosures: negative equity.  The article also mentions that investors being excluded is also a problem with MHA.

As usual, I predicted this before the "real media".  Per my blog post on March 5, 2009 regarding the new government foreclosure programs, since investors are excluded and many people have negative equity in their homes the government foreclosure programs (now labeled MHA) will not be successful in significantly reducing foreclosures.

Higher Unemployment = More Foreclosures

According to this New York Times article, unemployment increased in March 2009 with another 663,000 jobs lost bringing the total jobs lost in this recession to over 5,000,000.  No doubt this will mean more foreclosures.

Recent "Sales Uptick" Not Really Good News for Real Estate

According to this Forbes.com article, Riskiest Places for U.S. Homeowners, there are several places in the country (mainly parts of CA, FL, MI, TX and parts of the Midwest) where things will get significantly worse.  However, even outside of those places things are not likely to improve.

"While the National Association of Realtors estimates existing-home sales rose 5.1% nationwide in February, foreclosures are still on the rise. Dr. David Berson, chief economist of mortgage insurer PMI Group, says the sales uptick simply reflects re-sales of foreclosed properties.

"Sales will turn up before the recession ends," says Berson, but they will be at lower prices. That does little for those who already bought homes during the boom and now face the dual forces of negative equity and job loss. "Delinquencies and foreclosures lag behind unemployment," he says, "and unemployment lags behind the recession."

I think it is clear that while the recent sales uptick is nice and presents some people hope it is more likely just a sign that prices were dropped on distress sales and foreclosures.  It is only when the distress sales and foreclosures decline significantly and regular sales increase and prices increase can this poor real estate market be deemed "over".  Until then the market is still in decline.

A Brief Synopsis: How We Got Here and Where We Are Going

How We Got Here

• Government - The problems were caused by the relationship between Fannie Mae/Freddie and the Community Reinvestment Act (pushed by social agenda politicians (think Bill Clinton, Barney Frank, Chris Dodd, etc.).  The result was that more and more high risk loans were made to financially unstable and under-capitalized borrowers under the guise of social justice.
• Greedy Bankers - Pushed by the government, bankers soon realized that they could make more money lending to unstable and under-capitalized borrowers as a result of being able to make more loans and charging higher rates and fees.
  
• Foolish Consumers - Consumers started viewing buying a home as an "investment".  While that may sound good, the problem is that what most people classify as an "investment" is really noting more than speculation (i.e. gambling).  As a result people took on more and more debt to buy bigger and bigger homes since they were "investments".  In reality, the only investment part of owning a home is that in the old days you would buy a home and eventually own it free and clear instead of perpetually paying rent.  Now, "homeowners" just perpetually have a mortgage which is not much different from perpetually renting other than you benefit if the price goes up and get hurt if the price goes down.  This is made much worse by leverage (think 0-5% down mortgages).  In reality, owning a home was never meant to be an investment other than you would eventually own the home free and clear and maybe get some appreciation, which would protect you from inflation (not 20-50% annual appreciation, but more like 3-7% per year).  Owning a home was primarily meant to provide a lifestyle.   People just had the common sense not to buy a lifestyle that they could not afford.

Where We Are Going

• Some recent real estate news shows existing homes sales up 5.1% and new home sales up 4.7%, but home prices only improved 1.7%.  This is likely the result of more builders dumping their homes for cheap, but their median prices are still higher than resale homes so the overall prices went up a bit.
• Despite sales increasing a bit the number of homes in inventory increased for the first time since July 2008.  This means supply will likely increase.  Not good for prices.
• As soon as the general public thinks the market has improved there will be additional inventory added to the market as all those sellers that gave up on selling flood the market with their homes.  Again, this will not be good for prices.
• The problem now is the absurd Obama stimulus plan, which will surely drive up inflation (and as a result interest rates) and drive up unemployment as investors and companies pull back investments (i.e. in start-ups, equipment, facilities, etc.) due to higher future taxes (necessitated by the huge government spending in the Obama plan) reducing their future returns.  This is what will likely break the back of the real estate market in the mid to long term.  So while prices may increase a tiny bit in the short term, in the long term they will suffer.  As a result I do not see the real estate market rebounding back to the pre-2006 price levels any time soon.