Wednesday, December 24, 2008

Housing bottom is here

I was getting a little worried. Almost a week had passed by without yet a new call of a housing bottom. Today's call is not only a call of a bottom, but a prediction that prices will "soar" next year too. So says an expert named Richard Bove.

This puts the count at the number of housing crash bottom calls since 2006 at an estimated 121,871 by my count.

The rationale from monsieur Bove is that the refinancing boom will cause house prices to rise. Hmmm interesting. Except people refinancing don't buy houses. They simply refinance existing mortgages. New buyers, ie those not refinancing, are the people who determine prices. Despite what every real estate shill may tell you, buyers, not sellers, set prices.

And these new buyers that will supposedly come out of the woodwork as young Mr. Bove suggests still don't really exist. The typical American still thinks buying a house is a good idea. He thought this way a year ago and 2 years ago as well. He kept on buying, getting 125% mortgages with $0 down. Now, even if the typical imbecile American wants to buy - and there are plenty who do - he can't get the 125%, $0 down loan anymore. And that means no matter how low the interest rate is, the American making $40K a year can no longer buy the $750K house. You could have 0% interest rates and no bank in the universe will lend the $40K a year earner enough to buy the $750K home.

And there is also that pesky new thing called a down payment that went the way of the do-do beween 2001 and 2007. 20% is the new 0% these days as far as downpayments are concerned. At a bare minimum you need 5%. Yet most Americans have $0 in savings. The vast majority of Americans have negative equity (for thoe of you who voted for Obama that means they owe more money than the values of their assets). The days of sign and own are gone.

And also there is also that quaint notion that when 550K people lose their jobs every month, chances are they won't rush out to buy a new home. Even assuming they have the 20% saved up. In every single past recession going back as far as records exist on the issue, housing prices fell during recessionary times. It is the one thing in economics you can be sure of. When people lose jobs or are afraid of losing jobs they don't go out and buy a new house. Even the most optimistic predictions are saying 8% unemployment in 2009. Today it's under 7%. That means millions of new people without a job in addition to the millions currently without a job. How can anyone possibly predict higher asset prices - especially real estate - when it is a given that there will me millions of jobs lost? It's insane.

So in this current environment mortgage interest rates are almost a non-factor. Housing prices began falling in 2006 when rates were around 6%. Prices fell when rates went to 6.5% in 2007. And prices fell even more when rates went below 6% in 2008. And each week along the way, experts were predicting the bottom was at hand and prices were sure to bounce right back up.

Just remember one thing when listening to expert advice. About 98% of experts didn't see the housing crash. About 98% of experts didn't see the stock market crash. 100% of executives who worked at Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac and Countrywide were considered experts.


1 comment:

Anonymous said...

"100% of executives who worked at Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac and Countrywide were considered experts. "

Well put.