America stops buying homes

By Felix Salmon
August 24, 2010
said that "the entire housing-finance business in the US would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical". What I didn't realize was that we were plunging towards that state of affairs even with the vigorous and active involvement of Fannie Mae and Freddie Mac.

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Earlier this month, talking about a housing market unsupported by Uncle Sam’s billions, I said that “the entire housing-finance business in the U.S. would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical.” What I didn’t realize was that we were plunging towards that state of affairs even with the vigorous and active involvement of Fannie Mae and Freddie Mac.

The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995.

This number is the lowest that the NAR has ever reported, and I can see why it spooked the markets, sending 10-year Treasuries breaking through the 2.5% level: we’re seeing less housing market activity now than we were even during the depths of the crisis. According to the NAR, there were 4.94 million existing homes sold in 2007, 4.34 million sold in 2008, and 4.57 million sold in 2009. The latest annualized number in that series, for July 2010, is just 3.37 million. That’s a 26% fall from last year’s rate.

The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.

The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.

Houses are rarely a liquid asset; they were, briefly, during the housing boom, but now they’re more illiquid than ever. America is a country where two generations of homeowners have learned to consider their houses an asset; they’re rapidly learning that at times like these, a house can look much more like a liability. (And refinancing your mortgage is just liability management.) The enormous repercussions of that change in mindset are only just beginning to be felt.

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Comments
24 comments so far

There is an oversupply of housing stock which adds to the financing problem. http://www.ritholtz.com/blog/2010/07/the -4-trillion-dollar-question-2/

Also, even if this 3.37 million is seasonally adjusted, it seems like a rational figure at this point. The economy is in recession and demand was pulled forward by the home buyer tax credit. What wasn’t natural was the period from 1998-2007.

(See early 1980′s existing home sales in this link).
http://www.landinfonow.com/Home_Sales_20 08.html

Posted by david3 | Report as abusive

“The number is so low that it looks like a statistical aberration”

Felix,
Looking at Home Sales and Months-of-Supply charts, there is definitely an aberration…but it might have been the recent “better” numbers that were the statistical blips.

Check out the charts:
http://bayarearealestatetrends.com/2010/ 08/home-sales-plummet-which-was-the-stat istical-blip/

Posted by agentgreg | Report as abusive

Economic anxiety is very great among people who are actually doing well. This is a great irony of the present recession. The poisonous class-warfare climate stoked by this administration (which I voted for, silly me) has led to extreme risk aversion in the investor class.

A great transition that should be happening is not happening. As Felix has said the natural trend is for millions to move from buying to renting. With stunningly low rates and reasonable prices, the math of landlording would seem excellent. Yet instead of a smooth handoff of houses into responsible hands, there is total market failure. Families are thrown into the renting class while their previous house is left to rot in the elements.

A political and social climate in which would-be investors feel completely put upon is harmful most of all to renters. Rents have stayed high at a time when one would think they would fall.

Posted by DanHess | Report as abusive

It is hard not to start a bit of nail-biting about the possibly catastrophic price effects that this data suggests.

Where volume goes, there also goes price.

While I fully understand the market clearing necessities for economic health, the decline in aggregate demand for housing bodes ill, in the first instance, for any institution with housing industry inventory obviously including home owners and home builders. But it also bodes quite ill for industry-related institutions like RMBS holders (funds), portfolio mortgage loan holders of first and second liens (TBTF and community banks), and monoline insurers, among many others.

If the price declines in Florida, Arizona, and Nevada have taught us anything, it is that levered financial institutions, no matter how well-capitalized and prudently run before the fact (e.g. banks, say at say 10% Tier 1 Capital, a loan/asset ratio of only 60% and loans with 70% LTVs), cannot sustain a 40% or 50% percent drop in asset prices. The math just doesn’t work. All the capital gets depleted.

Deflation is the black plague of levered finance. And can we really afford to start creating more “Sand State” economies?

Right or wrong, I suspect the housing price problem is so central that we will see more government-induced housing market subsidies via monetary and fiscal policy.

Posted by AABender1 | Report as abusive

Moving is a pain. People used to trade up because they had equity to spend on a bigger house. Now all these people have no incentive to move. Isn’t it as simple as that? The churn in the market over the last 10 years was artificial. This level of sales is normal. There was nothing wrong with 1995. There was a lot wrong with 2005.

Posted by silliness | Report as abusive

The thing that I don’t understand is the markup on new construction houses. Builders are trying to sell new houses for 400% (or sometimes much more) of what it costs in materials to build it. That’s absurd. The profit margins are way too high. Until the prices of new homes come down to reality, I don’t think that the prices on used homes will come down.

I’ve also done some thinking about banks that own foreclosed houses. As long as they let them sit unoccupied, they stay on the books and keep their supposed value. If the bank sells them in the current housing market, they take a big loss. So they’d rather let them sit and rot. I think it’s like the old stock market adage that you only realize gains or losses when you actually sell.

Posted by krick | Report as abusive

Real estate is so regional that I don’t know if this is relevant, but I see more houses than ever for sale in my small county — which was not affected much by the bubble. Prices have come down, but probably not by more than 10%, and not much at all for new construction (rare where I live). (Fluctuating prices are not an issue at all, I say snarkily, if you bought 20 years ago and never tried to use your house as an ATM.) But I do think sellers were waiting for reports of market changes, which started coming in around April and May, but they haven’t internalized the fact that the market was accelerating because of the tax credit, and because prices were coming down. They hear “accelerating market” and think everything is back to the way it was. And of course, there are some sellers who really can’t sell unless they get a high enough price.

Posted by rb6 | Report as abusive

Krick,

Where’d you get that 400% markup number? If it includes land and labor, that’s interesting.

Posted by AnonymousChef | Report as abusive

@ Krick

Here is how the classification, reserve, and loss allocation process actually works at banks. I am responsible for this process at a community bank, so yes, I know.

1. Delinquent loans are progressively classified as they deteriorate. A newly delinquent loan, ie >59 and 89 and 179 is “Substandard, consider for loss” or “loss” depending on the bank.

2. The bank holds money in reserve taken out of earnings against such loans. If it deteriorates to be “Consider for loss” or “loss” a specific reserve is held against it out of earnings until which point the loan is written off the books, the reserve amount is “spent” and the asset is held as “Owned Real Estate”. Meaning by the time it is actually a loss, it has already affected the income statement of the bank several months prior. The decision to write off the loan is where it affects the balance sheet. This occurs at foreclosure (or if the property is a nightmare, the bank’s claim to title can be abandoned and the loan written off entirely, we have done it…)

Incidentally, at 180 days we have to reassess the value of the property and perform loss calculations based on that current assessment. So it is not as if we calculate the loss based on the original assessment value (as if that is what we could sell it for), it is calculated based on the current value of the property.

3. Loan losses against reserve are offset by asset sale. As soon as a loan has been written off the books, ie foreclosed, the loss is immediate. Sale of the property is a recovery and helps offset previous loss. This is a benefit both to income statement and balance sheet.

4. There is no motivation for a bank to hold the asset for any length of time. It incurs maintenance and utility cost, it deteriorates, poses an insurance risk, and is a further loss risk.

The logic you cite seems like it would be true, but it isnt the way the accounting works, or the way banks like to make money. The FDIC has very specific rules. We are best off coming up with a way to help the customer bring the loan current. Short of that, we are required to write it off immediately. So the faster we sell it and move on the faster the loss can be offset by recovery.

Posted by Ken_H | Report as abusive

I’m not a genius, but how about stop trying to sell homes that are only worth 200K for 600K.

Posted by bennypE | Report as abusive

Houses in our area are still not worth what sellers are asking for them. Houses in my neighborhood DOUBLED in price in the first few years after 2000. They have dropped by about 15 percent, still much more than they are worth. Everybody trying to hold onto the bubble that has already burst.

Posted by lhathaway | Report as abusive

Here on Long Island NY, the prices have finally dropped to the point where we were able to actually purchase a house. Granted it is further out east than i would have liked but we were able to still do it.
I still think alot of home prices are way over inflated, but the real killer here is taxes.

Posted by osito3 | Report as abusive

So what if home sales are weak… It is a weak economy. Quit artificially propping the prices of homes and let them fall where they may. Highs and lows occur naturally in a housing market and if you don’t let it, this is what happens. Too many houses on the market, no new start ups, further job loss and no one left to buy.

Remember many that didn’t walk away are staying in their homes (some houses are homes Felix) because they like them and are not wishing or having to move. If someone truly values their home they will find a way to keep it. (I would rent out a part of mine before I rented myself! Rent can be twice what I pay in mortgage payments.)

Those who walked away couldn’t afford it because were over speculating, lost jobs, or were first time home buyers who got over their heads. Banks are not going to be readily giving a mortgage to any of them anytime soon. They are also going to have to lessen their risks to avoid more loss, so again, just who is left to buy?

Let the prices settle (Of course some really over priced areas will suffer and collapse, but they were really over priced and won’t see that mark up again ever) and they will eventually start to rise and people will see value in homes once again. If not, there will a boom for different style multiplexes.

If so, c’est la vie! Some innovator might build a new’ suburban way of living’ and this will all be a blip in our memory.

Posted by hsvkitty | Report as abusive

> the math of landlording would seem excellent

Cap rates for rental properties in San Francisco outside slumlord neighborhoods are in the 3-4% range, which after taxes leaves you maybe 2% net. Or you can buy CA Munis and get a tax-free 5%.

In the suburbs, the math is better, but vacancies are elevated.

> markup on new construction houses

Download a homebuilder 10-K.

> Rent can be twice what I pay in mortgage payments.

You must live in Toledo. In the real world, this still is not true. AFTER tax subsidies for mortgage interest, property taxes and the eventual subsidy to capital gains, however, this statement is less false.

Posted by wcw | Report as abusive

without a real president to run the country and make changes to stimulate the economy the US is getting very close to a major collapse and just shutting down.it is now clear that the change must be made at the top…

Posted by langco | Report as abusive

It’s nice to see a lively discussion live on the internet on what’s in people’s minds regarding housing prices. It was 1988, I bought a town house in Somerset NJ for 171K. Then market tanked. I sold it in 1998 for 149K. That’s 10 years, for a ~ -12% loss in value. There was no internet and only the newspapers or people at bars or parties discussed things like real estate. In 1989 the S&L crisis was in full swing and 1995 400B cost to the government to buy all the banks , who were idiots at that time, who gave loans that had no hope of being paid back.

In 1989 the housing market tanked for 5 years. House keys were flying back to banks so fast the couldn’t banks throw them into a shoe box fast enough.

Now we have the government trying to prop up deadbeat borrowers. Here we go again, can someone please say that borrowing 400K for 30 years is a privilege and not a entitlement.

That’s a eye catching headline, and you drew me in, but the solution is invisible, yet Adam Smith saw it 234 yrs ago.

http://en.wikipedia.org/wiki/Adam_Smith# The_Wealth_of_Nations

Posted by freedomadvocate | Report as abusive

This is great news!

The market is finally starting to work correctly and is overwelming the government’s efforts to make housing artificially expensive.

Lower home values are good for the economy. Having consumers spend huge proportions of their income on housing – a basic necessity and a 10,000 year old, stagnant technology, keeps them from spending on newer industries that will drive the economy forward.

We should recognize that the problem is not now, but with what happened to housing prices from 2000 – 2008. This is the cure. We should cheer this news.

Posted by forecasts | Report as abusive

12 million homes are underwater in the US. There are 110 million homes total

Posted by STORYBURNthere | Report as abusive

The housing market will not improve until the unemployment rates drops to around 6%. If we didn’t ship all of our jobs overseas we would not be in this situation.
I spoke to someone who has been collecting unemployment for over 2 years. What a great country !

Posted by paul3669 | Report as abusive

Home prices are still way too high with the current level of unemployment. The real unemployment rate is around 18% when you factor in all the people that quit looking for work and lost their benefits.

If the next president can start creating some jobs and put these people back to work again, you’ll start to see the housing market improve in about 2014.

Posted by gruven137 | Report as abusive

Why buy homes when you can read,write,eat and sleep in the news papers?

Let the Government and Developers make more houses it maybe helpful for birds and animals.

With the arrival of promised 21st century by Bill Clinton, housing is not a basic necessity so the must fall down to earth with the law of physics.Now back to news papers,internet,and Tv’s but oh! where to keep all these utilities?

Posted by satv | Report as abusive

I agree with the people who are cheering this.

I am a mechanical engineer, and I make in the neighborhood of $70K, with an upper ceiling of about $100K. Frankly, most non-slummy houses are STILL out of my reach, at least insofar as for me to buy one without being the slave of a bank.

Let the housing prices fall. People are going to need to start selling for what the market is willing to give to them. I’m holding on to my money until that happens. To buy now would be effing retarded.

Posted by murfster | Report as abusive

Confidence has been eroded to the point that people stopped buying except for food and other essentials. With the lack of leadership and accountability in the business and government what can you expect. We have puppits in the Presidency and in the Congress.

Posted by fred5407 | Report as abusive

I know nothing of the housing game, really its all gobelydegook. Which is one reason for me to stay out of it all.

I do know what the word value means, and that it has nothing to do with dollars, and ultimately thats what confuses me the most. You mean all these folks are in this kind of tizzy because of what we are THINKING about the economy and the housing market?

What I see is a bunch of folks who, for whatever reason, believe thier homes have value but that value no longer exists.

The “value” I associate with buying a home has to do with security, how likely am I to become homeless by making the choice to buy?

What Im seeing is that I am less likely to become homeless if I rent because these days, the rental managers are a lot better behaved, and have a better sense of customer service than the home dealers.

Posted by rogueokie | Report as abusive
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