The state of the housing market … at this very moment!

July 29, 2009

A housing bottom is not a boom. My guy Ed Yardeni sums things up nicely (bold is mine):

The unemployment rate was 9.5% in June, the highest since the summer of 1983. Average hourly earnings was up 2.7% y/y during the month, the lowest since September 2005. The CPI tenant rent index was also up 2.7% y/y in June, the lowest since November 2004. This is not a scenario that triggers a V bottom in home prices. But then why does the latest batch of home prices suggest that they’ve stopped falling? Bear markets don’t last forever. In many neighborhoods prices are down 25%-35% from their peaks. Housing affordability has soared. While many young adults may have moved in with mom and dad to save on rent, household formation tends to run over 1 million per year, even during bad times. In other words, there is underlying demand for houses, and they are certainly more affordable.

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From where I’m sitting right now, I have access only to experience and anecdotal evidence – that being said, I worked for mortgage brokers during the begging of the end (2006-2007), and currently work in retail banking.

It is understandible that low interest rates on lending coupled with depressed home values would lead to an uptick in home purchases. My big concern is that I suspect a majority of new mortgages from the past few months are backed-up by FHA programs and other federal ‘stimulus’ incentives.

The problem this presents is that a lot of us younger people who are moving into our first homes are unlikely to have plunked down the 20% we should have for a down payment. We are even less likely to have a comfortable 20-30% debt-to-income ratio once our shiny new mortgage payments enter the mix (I’d guess more like 40%-60%).

The result is that a new generation of homeowners who should be coming out of this recession as hard-nosed savers who fear debt like the plague have been goaded into spending more than they should on homes they can’t afford and don’t have much equity in…sound familiar?

The myth of homeownership as a driver of wealth is one of the problems with our current economy. When the government has to offer tax incentives (and now stimulus incentives) to convince people to buy homes, it should say something about the real market for homes. I won’t belabor the point here, but for the average American home ownership is a money pit once you account for taxes, maintenance, insurance, etc. Did anyone here with a mortgage care to look at the discounted present value of your note (as disclosed by law in the documents you signed)? I’d bet good money your home wasn’t worth that much even at the peak of the boom.

Sure, you can make money on arbitrage in housing, as with any other asset. But the bubbles are rare and dangerous. I’d much rather see a slow recovery that *isn’t* driven by consumer debt, than a quick one that repeats more of the mistakes of the past.

Posted by hariolor | Report as abusive