Perhaps not coincidentally, I ask in my May 1st post, “Is the Worst Behind Us?” the question, is the all too familiar housing crisis over? According to Cyril Moulle-Berteaux, managing partner of Traxis Partners, LP, a NY-based hedge fund firm, in his Wall St. Journal On-Line op-ed, “The Housing Crisis is Over”, of May 6th, it is.
Some key points he makes:
- Though being at the bottom does not indicate a return to booming prices, the trend is no longer getting worse.
- This current housing bust is the better part of three years old. Home sales peaked in July, 2005. He quotes homes sales down 63% from peak levels of 1.4 million. When adjusted for population growth, housing starts are off 50%, falling to 1982 levels.
- Residential construction is near 15 year lows.
How then is the crisis over, he asks. Affordability. During the 1990s and early 2000s, housing prices began their journey towards unaffordable, especially for first time home buyers. A conforming mortgage for an average home purchase required an average of 19% monthly income to service. In 2005 and 2006, that rate increased to 26%, and for some first time buyers it went from 29% to as high as 37%. People who wished to occupy their homes were priced out of the market.
As house prices have since fallen 10% to 15%, mortgage rates reduced by as much as 70 basis points and incomes increased, buyers are finding their ways back to those 19% numbers, with 31% being the norm for first time buyers.
Mr. Moulle-Berteaux goes on to observe that “in the past five major housing market corrections, every time home sales bottomed out, the pace of house-price declines halved within one or two months.” When home sales stop declining, unsold home inventory has typically begun “falling in ‘absolute terms’ and begin to peak out in ‘months of supply’ terms.”
It’s a pendulum swing. Home prices and new home starts escalate beyond a buyers’ ability to purchase or the market’s to absorb inventory quantities. The bubble bursts. Home prices come down, making market entry more affordable. Existing inventory clears out as buyers take advantage of declining prices. New starts, having dropped off, begin to ramp up again with the balancing of supply and demand. Income-to-mortgage payment ratios balance out and thus the market gains traction.
I’ve shared with so many of my clients in recent months that, in my opinion, our market in the northwest has returned to “normalcy” after years of aggressive expansion and pricing gains. In some regions where the pendulum swings are predictably more pronounced, the good news may take longer to manifest. Regardless, it’s refreshing to read an upbeat prognosis of the housing market.