Is the Housing Bust Over?

Some pretty big names in the financial prognostication business are recommending that investors start buying houses. Jim Grant has devoted lots of space in Grant’s Interest Rate Observer to the idea. Marc Faber, Donald Trump, Warren Buffett and our own Chris Mayer all like sticks and bricks.

Five years ago, the unthinkable began to happen. It got worse and worse. By the end, housing prices nationwide were down 35%. In some markets like Las Vegas, where I spent time as a banker, the shellacking has been much worse. The bulls figure now’s the time to buy. You know, buy low and sell high.

In a piece for The Daily Reckoning, Mr. Mayer talks about how affordable housing is in the U.S. He points to the ratio of median home price to median income. The lower the ratio, the more affordable the market is. Hong Kong is an unaffordable 12.6, while a number of U.S. cities come in at less than 2, especially in economically ravaged Michigan (maybe because these cities are bankrupt and municipal services are sketchy). But U.S. bargain hunters must steer clear of expensive Honolulu and Boulder.

“I turned bullish on US housing in January 2011,” writes Mayer. “I did this after being a housing bear for about a decade. But the housing bubble that I feared has long since popped. Good bargains abound.”

Is housing the low-hanging fruit that Mayer and others think it is? Housing prices bounced in the first six months of this year, bolstering their case. But housing is anything but on fire. Prices are rising because resale inventory is at eight-year lows and new-home inventories haven’t been this low since the Census Bureau started tracking that data, in 1963.

There are always people looking for houses, because life circumstances change. However, the only reason this tepid demand is moving the price needle at all is the lack of supply. As Nick Timiraos writes in The Wall Street Journal,

Low inventory isn’t necessarily a sign of strength. One problem is that many sellers can’t or won’t become buyers. Millions still owe more than their homes are worth, and even more — about 45% of all homeowners with a mortgage, according to data firm CoreLogic Inc. — have less than 20% in equity.

Mr. Timiraos has put his finger on the housing market’s problem that the bulls are turning a blind eye to. Upwards of 16 million homeowners are underwater. They owe more on their mortgage than their home is worth. In some cases, the amount is hundreds of thousands of dollars. These folks are imprisoned by their debt. They have been told all their lives they must honor their debts no matter the cost.

They desperately keep paying to protect their precious credit rating, handing their savings and their futures over to wards of the state Fannie Mae and Freddie Mac or too-big-to-fail zombies like Wells Fargo and Bank of America.

Many homeowners naively go to their banks and try to negotiate a modification of their loan. They are stunned when the lender either ignores them or refuses to consider a rewrite if the loan is current. Eventually, many give up. But they don’t go anywhere. They just stop paying.

Bank servicers are overwhelmed and don’t file defaults for months, sometimes years. In Las Vegas alone, there are hundreds of thousands of borrowers who haven’t made a mortgage payment in years. Timiraos writes that its ironic that “prices are rising fastest in markets that have the most underwater borrowers because so few homes are for sale.”

The latest numbers in Las Vegas reflect an inventory that has dwindled to 3,981 units, compared with more than 11,000 a year ago. Last month, 44% of all sales were short sales. And currently, “About 85% of homes under contract are short sales waiting for lender approval,” reports Hubble Smith for the Las Vegas Review-Journal.

“We’re really struggling with inventory,” Robyn Yates of Windermere Prestige Properties in Henderson told the Review-Journal. “That’s the challenge. Even though it’s great that prices are going up, it’s not great from the perspective of real estate firms and buyers. It’s very frustrating.”

Many states have passed laws requiring that lenders provide proof they have standing to foreclose. Many can’t provide it. During the boom, most mortgages were assigned electronically through MERS (Mortgage Electronic Registration Systems). Judges like to see actual paper-and-ink assignments.

This legal tangle is keeping the market from clearing. Literally millions of homes are just waiting to be sold, foreclosed upon, or liquidated. This is not the sign of a recovering market. Instead, the clogged foreclosure pipeline artificially elevates prices.

Timiraos makes the point that mortgage rates are at historic lows. If you can qualify for the money, that is. Qualified buyers are few and far between, post crisis. However, for those that do qualify, “Mortgage rates allow borrowers to take out about 12% more in debt without increasing their monthly payment,” writes Timiraos. This boost in sales and prices will not last once rates go back up.

And to top all of this off, wages and employment are just not growing enough to spark a rally in home prices. The only thing bringing down the unemployment percentage is people giving up on finding work. This would have been fine back in the NINJA (no income, no job, no assets) loan days. Bankers are again tightfisted.

There could come to be a time when houses are a good investment, but that day has not arrived. Now is the time to walk away if you’re underwater and forget about buying.

In the new edition of my book, Walk Away: The Rise and Fall of the Home-Ownership Myth, I examine the U.S. government’s constant cheerleading for and subsidy of homeownership. Every argument against walking away is considered and rejected. Also, I take a careful look at the neuroscience of why people continue to pay and battered-homeowner syndrome.

Chris Campbell

Written By Doug French

Douglas French is a Senior Editor for Agora Financial. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles & Increases in the Money Supply, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine.