Home prices have tumbled more than a third from their bubble-induced peak. The last time that happened was during the Great Depression, and it took two decades to recover.
In any market there are buyers and sellers, winners and losers.
With that in mind, there's some bad news for homeowners, but good news for potential buyers.
U.S. home prices fell again in December, reaching their lowest level since the housing crisis began.
The S&P/Case-Shiller 20-city composite fell 1.1% in December, ending 2011 with a 4% downturn. The index hasn’t been this low since February 2003 and has dropped 33.8% from its peak.
If history is a guide, it could be two decades before prices return to their previous highs.
The latest news is a tough way for the beleaguered housing market to begin the new year.
While the data does show increasing housing starts, what does that really tell us? After all, there is already a surplus of existing homes, many of which are in some stage of foreclosure. Are builders just overconfident? Sales of new homes are moving at an annual rate of 321,000 — some 75% below the peak.
The housing market is being held down, in part, by the so-called shadow inventory — unsold homes that big banks, Fannie Mae and Freddie Mac own but haven’t yet put on the market, plus soon-to-be foreclosed houses.
As it stands, distressed sales (short sales and foreclosures) account for a third of existing home sales. That pushes prices down almost across the board.
According to some estimates, the current shadow inventory may include as many as 10 million properties.
That shadow inventory is virtually certain to grow.
By the end of the third quarter of last year, some 12.6 percent of homeowners with mortgages — or more than 6 million homeowners — were either delinquent on their payments or in foreclosure, according to the Mortgage Bankers Association.
And roughly 22 percent of residential properties with mortgages were underwater at the end of the third quarter, according to CoreLogic. This could lead to even more strategic defaults and yet more unwanted inventory falling into the hands of lenders. That would be a nightmare for already stressed banks.
Though home prices continue to fall and mortgage rates are at historic lows, demand — though somewhat improved — remains historically low.
The pace of existing him sales is about 4.5 million a year; still much less than the 6 million rate that’s considered “healthy.”
Home prices have a long way to go before recovering their 2005 peak. The last time home prices fell 33% was in the 1930s, when the full cycle from peak to trough to peak took 19 years.
If that pattern were to repeat, home prices would not recover until the year 2031 — assuming that we've finally seen the bottom. Give that a moment to sink in.
Yet, even potential buyers who feel persuaded by the historically low rates and fallen prices are finding that it is now quite difficult to qualify for a home loan.
Lending standards are much tighter now than during the bubble era. Today, nearly 90% of mortgage applications require full documentation, which is much higher than the pre-bubble level, when it got as low as 60 percent.
And these days, a much higher credit score is also required. Last year, the average FICO score was 730. During the boom, borrowers with scores in the high 500s were routinely steered to high-cost subprime loans.
The National Association of Realtors says 33% of contracts were canceled in January, “caused largely by declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price.”
There’s also less money available for lending. During the housing boom, investors quickly bought up the mortgage-backed bonds issued by Wall Street bankers. That market has all but vanished; 90 percent of new mortgages written today are backed by the government.
Analyst Barry Ritholtz, of the Big Picture blog, is not optimistic about the housing market. He thinks home prices still have a long way to go before rebounding.
"If this is the bottom then this will be the first time that a major boom and bust hasn't careened past fair value," says Ritholtz.
Historically, when a bubble bursts it tends to overshoot on the downside just as it does on the upside. The big question, the one everyone wants an answer to is, Where's the bottom?
As Patrick Newport, an economist at IHS Global Insight, sees it, “Our view is that foreclosures, excess supply, and weak demand will drive prices down another 5 to 10 percent.”
The current state of employment (13 million unemployed and nearly nine million underemployed) is a recipe for further price declines
A housing recovery is being held up by the fact that too many Americans are still unemployed and those who do have jobs have experienced stagnant or declining wages.
John Williams of Shadowstats notes that the January 2012 payroll employment level remains below the level that preceded the 2001 recession, more than a decade ago. That's simply stunning.
Housing and employment are inextricably linked. Until the employment picture improves considerably, until the massive shadow inventory is liquidated, and until we have full and true price discovery (i.e. housing hits a true bottom), the housing sector and overall economy will not — cannot — begin to fully heal and recover.
But with housing, what's bad for sellers is good for buyers. However, unlike previous buyers, new homeowners will not be able to view their homes as investments; they will merely be places to live.
That should be good enough.
Ive been following this market for about 10 years now and it is really interesting to see how it really still remains overinflated here in LA. I didnt realize there was so much of the shadow inventory which is helping to keep the inflated prices propped up. How long can these banks hold onto these properties and what about the property taxes on these homes? Do the banks get a break on that and then is this a source of lost revenue for the government? That would be interesting to know. Great, informative article Shawn.
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