Friday, December 12, 2008

Will there ever be a rebound?

As for property values - probably not. Prices will have to stay in line with incomes. All bubbles pop eventually and this is one that hopefully will never be inflated. There is a great (we mean really great!) article in the USA Today titled Why home values may take decades to recover that illustrates how out of hand the bubble really was. Lets take a look (but make sure to read the entire thing!) -

As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.

"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."

The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.

So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income,
according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.

That is still a long way to tumble. Of course, the article has Lawrence Yun from the stating prices will be back to bubble heights in a few years. Always the optimist. Well lest look at the three standard measures used for real estate values -

When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:

• Income —
Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.

Rent —Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.

Appreciation —Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.

What appeared to be unrealistic growth - was. House values were growing at unsustainable rates. The article also outlines what changed that helped inflate the bubble. Lets review -

• Optional payments on principal —
In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.

• No verification of income —
Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.

• Tiny down payments —
In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.

One of the worst ideas ever - the pick-a-payment mortgage. Mix those in with No Income, No Assets loans and we were just looking for problems. And how many 0% down payment loans do we see. In our examples we find those regularly in the foreclosure listing. The 0% down were really just renting from the bank, and if they used a pick-a-payment loan with 0% down they really had a good deal going on.

Well, lets end with some good advice regarding helping homeowners, not just the lenders and financial institutions that helped get us into this mess.

[Economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.] and [Susan Wachter, professor of real estate at the University of Pennsylvania] want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.

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