The Housing Market Recovery
The housing market is in full recovery mode. If you need an official start date of the recovery, it was July 24, 2007. That was the day that Countrywide co-founder Angelo Mozilo, announced to the top Wall Street analysts that no one had seen a housing downturn coming. And then to make sure there was no misunderstanding about the situation, he stated that we are experiencing a huge price depression not seen since the Great Depression. Wall Street and the financial world has been reeling ever since, despite an all time high in October of 2007.
While some may say that the price declines we have seen, actually starting in early 2007, are far from a recovery but instead a disaster- I say that is the wrong perspective. The market was very sick from early 2004 until late 2006. Historical income and home price relationships were completely out of balance. Tract housing neighborhoods with 1000 homes were springing up everywhere and people were paying $250,000.00 to live there. If this were one subdivision with 1,000 homes it would have been ok, but they were everywhere. Then there were the subdivisions of only 500 homes but the houses were going for $500,000.00. Say the prices in these terms: “a quarter of a million dollars” and “half a million dollars.” I think when it is said like that, the sickness becomes easier to detect. Of course, the semi custom homes became three quarter million dollar homes and if it was custom then it was a million dollars. Are these prices bad? Not at all, with the right numbers.
How did this happen? It was simply a matter of supply and demand. Not housing supply and demand but instead money supply and demand. Money does not follow most commodity rules. With money, the rule is that with more supply you will have more demand. The supply was from everyone. Individuals were investing, looking for higher returns. Countries were investing, looking for higher returns. Wall Street obliged us all by touting a high return instrument known as Collateralized Debt Obligations. They/we could not get enough of them so money was literally thrown at housing. And since everyone wanted higher returns, the money was thrown at the higher return of sub-prime mortgages. These “Asset Backed Securities” offered 1% to 2% higher yields. With a billion dollars on the line, that is significant. Obviously, things did not work out like everyone wanted.
So now the recovery is in full speed mode. Prices and incomes are getting back to historical norms. Since income curtailment accounts for two thirds of foreclosures, that problem will persist as long as the economy is shedding jobs. But for those that are employed, a good house at a decent price is available. Once the recovery is complete, a person making $11 an hour will be able to buy a nice house for around $100,000.00. Since there are a lot of jobs that pay $11 an hour, there will have to be a lot of homes for $100,000.00. And the numbers go up from there.
What we cannot have is an artificial, government induced, stop to the price recovery. The market must rule! Prices have to recover so that the number of homes at a certain price level matches the number of jobs at the appropriate wage level. The government “cavalry” touted by some, is nothing more than a bunch of Bolsheviks’ on horseback.
While some may say that the price declines we have seen, actually starting in early 2007, are far from a recovery but instead a disaster- I say that is the wrong perspective. The market was very sick from early 2004 until late 2006. Historical income and home price relationships were completely out of balance. Tract housing neighborhoods with 1000 homes were springing up everywhere and people were paying $250,000.00 to live there. If this were one subdivision with 1,000 homes it would have been ok, but they were everywhere. Then there were the subdivisions of only 500 homes but the houses were going for $500,000.00. Say the prices in these terms: “a quarter of a million dollars” and “half a million dollars.” I think when it is said like that, the sickness becomes easier to detect. Of course, the semi custom homes became three quarter million dollar homes and if it was custom then it was a million dollars. Are these prices bad? Not at all, with the right numbers.
How did this happen? It was simply a matter of supply and demand. Not housing supply and demand but instead money supply and demand. Money does not follow most commodity rules. With money, the rule is that with more supply you will have more demand. The supply was from everyone. Individuals were investing, looking for higher returns. Countries were investing, looking for higher returns. Wall Street obliged us all by touting a high return instrument known as Collateralized Debt Obligations. They/we could not get enough of them so money was literally thrown at housing. And since everyone wanted higher returns, the money was thrown at the higher return of sub-prime mortgages. These “Asset Backed Securities” offered 1% to 2% higher yields. With a billion dollars on the line, that is significant. Obviously, things did not work out like everyone wanted.
So now the recovery is in full speed mode. Prices and incomes are getting back to historical norms. Since income curtailment accounts for two thirds of foreclosures, that problem will persist as long as the economy is shedding jobs. But for those that are employed, a good house at a decent price is available. Once the recovery is complete, a person making $11 an hour will be able to buy a nice house for around $100,000.00. Since there are a lot of jobs that pay $11 an hour, there will have to be a lot of homes for $100,000.00. And the numbers go up from there.
What we cannot have is an artificial, government induced, stop to the price recovery. The market must rule! Prices have to recover so that the number of homes at a certain price level matches the number of jobs at the appropriate wage level. The government “cavalry” touted by some, is nothing more than a bunch of Bolsheviks’ on horseback.
posted by Terry Schonert at 11:20 PM
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