US Housing Crash Continues(ZT)

"US Housing Crash Continues
It's A Terrible Time To Buy
Why?

Pricesstill disconnected from fundamentals. House prices are still far beyondany historically known relationship to rents or salaries. Yearly rentsare 3% of purchase price. Mortgage rates are 6.5%, so it costs morethan twice as much to borrow money to buy a house than it does simplyto rent an equivalent house. Worse, total owner costs including taxes,maintenance, and insurance are about 9%, which is three times the costof renting. Salaries cannot cover mortgages except in the very shortterm, by using adjustable interest-only loans. Anyone who buys now willsuffer losses immediately, and for the next several years at least.

Buyersborrowed too much money and cannot pay the interest. Now there are massforeclosures, and senators are talking about taking your money to payfor your neighbor's McMansion.
Banks happily loaned whateveramount borrowers wanted as long as the banks could then sell the loan,pushing the risk onto Fannie Mae (ultimately taxpayers) or onto buyersof mortgage backed securities. Now that it has become clear that atrillion dollars in mortgage loans will not be repaid, Fannie Mae isunder pressure not to buy risky loans and investors do not wantmortgage backed securities. This means that the money available formortgages is falling, and house prices will keep falling, probably for5 years or more. This is not just a subprime problem. All mortgageswill be harder to get.

A return to traditional lending standards means a return to traditional prices, which are far below current prices.


Interestrates increases. When rates go from 5% to 7%, that's a 40% increase inthe amount of interest a buyer has to pay. House prices must dropproportionately to compensate. The housing bust still has a very longway to go.
For example, if interest rates are 5%, then $1000 permonth ($12,000 per year) pays for an interest-only loan of $240,000. Ifinterest rates rise to 7%, then that same $1000 per month pays for aninterest-only loan of only $171,428.

Even if the Fed does notraise rates any more, all those adjustable mortgages will go up anyway,because they will adjust upward from the low initial rate to thecurrent rate.


Extreme use of leverage. Leverage meansusing debt to amplify gain. Most people forget that losses getamplified as well. If a buyer puts 10% down and the house goes down10%, he has lost 100% of his money on paper. If he has to sell due tojob loss or an interest rate hike, he's bankrupt in the real world.
It'sworse than that. House prices do not even have to fall to cause biglosses. The cost of selling a house is 6%. On a $300,000 house, that's$18,000 lost even if prices just stay flat. So a 4% decline in housingprices bankrupts all those with 10% equity or less.


Shortageof first-time buyers. The percentage of San Francisco Bay Areahouseholds who could afford a median-price house in the region plungedfrom 20 percent in July 2003 to under 10 percent in 2006.

Surplusof speculators. Nationally, 25% of houses bought in 2005 were purespeculation, not houses to live in, and the speculators are going intoforeclosure in large numbers now. Even the National Association ofHouse Builders admits that "Investor-driven price appreciation loomsover some housing markets."

Fraud. It has become common forspeculators take out a loan for up to 50% more than the price of thehouse he intends to buy. The appraiser goes along with the inflatedprice, or he does not ever get called back to do another appraisal. Thespeculator then pays the seller his asking price (much less than theloan amount), and uses the extra money to make mortgage payments on theunreasonably large mortgage until he can find a buyer to take the houseoff his hands for more than he paid. Worked great during the boom. Nowit doesn't work at all, unless the speculator simply skips town withthe extra money.

Baby boomers retiring. There are 77 millionAmericans born between 1946-1964. One-third have zero retirementsavings. The oldest are 61. The only money they have is equity in ahouse, so they must sell.

Huge glut of empty housing. Buildersare being forced to drop prices even faster than owners. Builders havehuge excess inventory that they cannot sell, and more houses arecompleted each day, making the housing slump worse.

The bestsummary explanation, from Business Week: "Today's housing prices arepredicated on an impossible combination: the strong growth in incomeand asset values of a strong economy, plus the ultra-low interest ratesof a weak economy. Either the economy's long-term prospects will getworse or rates will rise. In either scenario, housing will weaken."