Changing Market?

Real Estate Agent with Weichert Pacific Equity Properties

I am hearing and seeing so many conflicting signs in our market.  I was (half joking with) one of my Buyers last week that I think the best time to buy was between December 2007 and February 2008.  It is amazing how the market has changed in the past months.  Since about February or March, we have seen multiple offers, and properties go pending sale in just 3 days!!   Yet I believe we still have 2 more waves of ajustables tha will reset bring yet more foreclosures.  At least for now we are seeing homes sell quickly in many Sacraento areas, especially those under $300,000 (many going above asking price).  Buyers, it may not get better than this.  Where will interest rates be in a year?

See the below article byCYRIL MOULLE-BERTEAUX as seen in the May 6th edition of the Wall Street Journal (

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis

is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the

housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of

2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting

worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005.

New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more

than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this

year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the

same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During

the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the

average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers,

it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to

speculators) stopped buying. This caused the bubble to burst. Since then, house prices have fallen 10%-

15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70

basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer,

and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on

average are back to being as affordable as during the best of times in the 1990s. Numerous households that

had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses

vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s

when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales

bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually

already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case

right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of

Is The Housing Crisis Over?



By CYRIL MOULLE-BERTEAUX as seen in the May 6th edition of the Wall Street Journal (


Is The Housing Crises Over?

the end of March. This inventory is equivalent to 11 months of supply, a 25-year high but it is similar to

1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six


Inventories are declining because construction activity has been falling for such a long time that home

completions are now just about undershooting new home sales. In a few months, completions of new

homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 or seven months of supply by the end of 2008. This shift in

inventories will have a significant impact on prices, although house prices won't stop falling entirely until

inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled

tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where

they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real

house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This

simplistic analysis is appealing on the surface, but is flawed for a variety of reasons. Most importantly, it

neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a

house with a mortgage, the most important factor in deciding what to pay for the house is how much of

one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-

year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the

1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage

point from GDP for almost two years now, which is very large for a sector that represents less than 5% of

economic activity. When the rate of house-price declines halves, there will be a wholesale shift in markets'

perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that

went on for the past decade will change. Right now, when valuing the collateral, market participants

including banks are extrapolating the current pace of house price declines for another two to three years;

this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders

are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their

mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized

mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs

do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related

to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still

unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years.

Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that

process is underway, right now.

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

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