Wednesday, October 13, 2010

Underwater? Just wait - the tide's getting higher.

The median income in the US, which is now hovering at just under $50,000 a year, is wildly insufficient to qualify for a mortgage the way housing prices have been the last 10 years or so, but especially since the mid-2000s when banks, realizing this, gave up even trying to stick to making loans to qualified people and instead gave loans to anyone who could breathe unassisted.

Granted, this was not a brilliant idea - but a lot of people have the strange impression that this whole economic mess began with a "mortgage crisis" and will go away once housing sales pick up again (presuming they ever do). The mortgage crisis is a symptom of the problem - not the problem itself. The problem itself is wage stagnation, which not only isn't going to go away - it's going to get worse.

An article was posted on the Web last week including a slideshow of 27 charts and graphs showing why housing prices will continue to fall, not rebound. Since we all just love slideshows (that was sarcasm, of course), I have excerpted a few of my personal favorite charts here for your consideration.

Business Insider
Here's Why House Prices Will Now Drop Another 20%
Gary Shilling
October 5, 2010

Last spring, many believed that not only was the housing collapse over but that a robust rebound was underway...But then a funny—or not so funny—thing happened on the way to housing recovery...

Already, Real Estate Owned by lenders due to foreclosures—perhaps the most hated term among bankers—is climbing. Estimatesare that a major share of the 7 million houses that have delinquent mortgages or are in some stage of foreclosure, as well as those yet to come, will be dumped on the market, adding to the already huge excessive inventory glut. Some 4.5 million loans are now in foreclosure or at least 90 days delinquent...

One reason housing prices simply will not be able to rise anytime soon is the sheer volume of homes that are either for sale, about to be for sale, or should be for sale but have been held back from entering the market. There just aren't enough people qualified that can buy all these properties.

As Shilling shows in this chart, less than 10% of people looking for a home can actually qualify for a mortgage. So unless the other 90% all win the lottery, they aren't going to be able to buy. Indeed, the home ownership rate amoung Americans is falling drastically as fewer and fewer people are able to buy homes.

...the homeowner rate, which spurted from its 64% norm to 69%, is now back to 66.9% in the second quarter and probably on its way back to 64%...With the negative zeal for home ownership of late and weak incomes and high unemployment deterring renting, household formation has been weak...

One reason formation of new households has been falling is because people are having to move in with their parents, children, siblings, or friends because there is simply no way they can afford to buy or rent a place of their own. Shilling's data confirms what we predicted some time ago - the return of multi-generational housing.

...Of course, homeowners thrown out of their abodes by foreclosures can continue to be separate households by renting houses and apartments, but many of those and other discouraged folks are shrinking households—and adding to vacant housing units—by doubling up with family and friends.

The Census Bureau reports that in the last two years, multi-family households jumped 11.6% ( Chart 22) while total households rose a mere 0.6%. Those aged 25-34 living with parents—many of them “boomerang kids” who have returned home—increased by 8.4% to 5.5 million. Not surprising, 43% of those were below the poverty line of $11,161 for an individual...

So with a dearth of qualified buyers and more and more units flooding the market due to job losses, income reduction (hours cut or pay cut), lack of health insurance (which drives tens of thousands of people into bankruptcy every year), and the inability of young college grads to find adequate living wage jobs to form their own households, prices of homes still have nowhere to go but down.

If you're thinking this graph looks familiar, it's because both last year and the year before similar graphs with similar trendlines were posted here. As you can see, the numbers haven't improved - projected equilibrium average home value is still trending towards less than $120,000 for a single family home. This is very much in line with the average median income of just under $50,000. At this level the average home price is at or under 3x the average annual income. That is an economically sustainable level.

...This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%. This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890...Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline, but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles...

Unfortunately, most people paid far, far more than that for their homes they would like to sell (or are stuck in). They owe far more for their homes than the homes are now worth, and are desperately hoping prices will go up again so things can "get back to normal."

Bad news, class - this IS the new "normal." As median wages continue to ratchet downward (or, adjusted for inflation, stay level with the 1970s, if you prefer) as workers try and compete with "free trade" partners in third world countries that have no wage and labour laws, no worker safety laws, no environmental laws, and crooked governments who prefer cash-under-the-table to enforcement even if they did have such laws.

That's the state of housing at the moment: underwater and sinking fast. Perhaps there will be some good news in a few weeks if companies hire many extra seasonal workers - that may boost household income for several families, at least over the holiday season. After that, though, I fail to see how most people are going to find living wage jobs - there just aren't any. God help us.

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