The Housing Market: May and June Will Be Crucial
Check out this interview with Ex-Goldman Sachs Banker, turned housing Bear John Talbott. I'm not sure things are going to be as bad as he projects, but once the housing sell-off starts, anything is possible:
What do you think is happening to the housing market right now?But an accompanying interview with National Association of Realtors' economist David Lereah, paints a much more optimistic picture:
The smart money is getting out. The inventory of homes for sale is increasing dramatically across the country. That's typically what happens before you see price declines.... The investors who are flipping homes for profit, like non-owner occupied condominiums, those are the people you would expect to sell first. You're already seeing that happening.
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How much do you think prices will decline, and how long do you think it will take?
I think that it's a worldwide phenomenon, and in the 25 cities that have had price run-ups, which make up 40% of the market, we'll see corrections of 40% to 50% in real terms over the next six years. It has already started, and you'll see it happening in more cities in the May-June time frame.
How did housing prices get so high?
The banks have made a terrible mistake in how they calculate how much to lend. In the early 1980s, about a third of your income had to go to your mortgage and those worked out fine. Today, they've increased that limit to about 40% of your income, and they think those should work out fine, too. But the banks have actually been lending too aggressively.
We're seeing hints about the housing market all over the place. When and how do we know what's really happening to it?
Because of the cyclicality of the business, prices have been down in most places four months in a row. Most cities have seen slight declines in December, January, February, and March. What typically happens is when the weather warms up in spring, people want to move their children during the summer before school starts. The buyers start to come out and then prices start to shoot up in May and June. Those are the two key months. The question is what happens in May and June. Will there be a flood of for sale signs -- people trying to get out at the peak? Or will buyers return to the market?
What happens to the U.S. economy if the downturn you predict really happens?
I think it will be a disaster. Not only will people in fields like banking be unemployed but consumers themselves will spend less. They're spending a lot now because they think their house is worth a million. If they find out it's only worth $400,000, they'll spend less. As foreclosures increase, the banks will get hurt and pull back on lending. That can drive the country into a recession.
Why do you think prices will continue rising?Housing has gone up too high and too fast, based on historical returns. There is bound to be a correction, sooner rather than later. The fact that people view their homes as their retirement savings and ATM implies that any correction will be painful.
The economy is growing and there are job gains, so consumers have the financial wherewithal to purchase homes. Sure, the rise in rates has been inhibiting buying recently. A lot of the boom markets that boomed over the last several years are cooling off and home sales are dropping. But if the economy were in a recession, this would be worse. And mortgage rates aren't rising too high -- they're only going up to 7% by the end of the year.
What supports the housing markets are income gains, job creation, consumer confidence, and mortgage rates. We have all of the above still supporting us. Meanwhile, the demographic trends are wonderful. You have boomers buying homes and retirees living longer. The boomer children are now first-time home buyers. Everything still points to strong demand for home buying.
Are you worried about the drop in non-owner-occupied real estate values in certain cities, such as San Diego?
That's not going to spread. The health of a local economy tells us whether a real estate market is in good shape or bad shape, and most of those are very healthy. If you go to Miami, Washington, Chicago, or Los Angeles, those are healthy economies, and they're not going to be affected by what happens in San Diego. And prices are too high in San Diego because it's not an affordable city. The economy there isn't thriving, so it's hard to keep up there right now.
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Do you think the housing market could ever crash?
I'm getting tired of all these doomsayers. We live in houses, and our houses are not going to crash. This isn't the stock market.... Local economies are relatively healthy. There's job creation -- this isn't a scenario where bubbles burst. Can there be one or two or three or several local markets where prices actually go down? Yes. But to generalize for 30 markets or the whole real estate marketplace -- that's absurd.
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