Charts show US housing a buy but that also means confidence is rock bottom
Posted on 06 March 2011 with 3 comments from readers
It is curious to read the almost biblical conversion of Agora Financial’s senior editor Eric Fry to the cause of US housing. He correctly called the bottom in 2005, with an impressive collection of nay-saying articles to prove it, and six years later feels confident about calling a turn again.
Mr Fry marshalls an interesting collection of charts to try to win over the skeptics. Let’s review them one by one:
First, and this is the point ArabianMoney made last week in reviewing Warren Buffett and John Paulson’s buy-notice on US housing: 30-year mortgages have seldom ever been cheaper (click here). Now consider how many more times the original price of your house you will pay out in interest over 30-years. Is this not a more important cost to consider than the house itself? Buy now while home finance is at its cheapest in a generation and inflation will turn this into a short on long-term T-bonds.
Second, then again you need not worry about house prices. They have not been this cheap in absolute terms for a generation. Negotiate hard on a foreclosure or with a struggling developer and you could have the bargain of a lifetime, and you only have one so use it wisely.
Third, it maybe that house prices do go lower as a multiple of per capita income but they are looking very cheap from the perspective of recent history. Besides if interest rates shoot up it will be the cost of housing finance that soars – and you can get that cheaply too right now. But for how much longer?
Fourth, there is room for house prices to rise as the percentage of mortgage payments in relation to income is also at a low point. People can afford to pay more, they have just lost confidence, not the ability to pay.
Finally, if inflation is taking us back to the 1970s then this chart shows how houses outperformed the stock market in that decade, so much for the recent rise in the S&P 500. Is this sustainable or another asset price bubble about to blow up?
We think Mr Fry and our friends at Agora are probably right. But like their red flag warning of a stock market crash for over a year it maybe a little early to sound the buying signal. That said as soon as interest rates take off it will be too late to wrap up a housing deal and they are seldom done in five minutes.
3 Comments posted by readers:
While I can’t argue with the data, and while I’m almost always in agreement with Bill Bonner (Agora Financial), guys like Buffett and Paulson have a lot to lose if the US housing market doesn’t recover.
On the “other side” of this bet is the latest housing data from Case-Shiller, which indicates that the US housing market isn’t going to recover until after 2020. Of course, all bets are “OFF” if the US experiences significant inflation next year, since the homeowners’ best friend is “inflation.”
So, yeah, housing is a reasonably good investment in many US cities now; but it seems that the very “affordable” homes are in small towns that are hours from where the jobs are located.
Take Los Angeles, for example: LA, DC Metro area, and a few other cities are the “exception”. My daughter, who lives in LA, has a good job and can qualify for a 3BR or 4BR home. But she has “given up” because the prices there have hardly dropped over the past two years . . . no “bargains” in LA!
Perhaps missing the forest for the trees here; there is no mention of the massive changes underway in the US mortgage securitization machinery. Fannie and Freddie are in the process of undergoing open heart surgery, and possibly are even being marked for extinction in the long run.
FHA has lowered its maximum loan value threshold, and may do so further. The Frankenstein of government subsidized housing finance was the main factor that drove housing prices to astronomical levels, and with the shift away from the political left there is no reason to believe Uncle Sam will be there in the future to keep the bubble inflated.
And make no mistake, prices in the US are still in bubble territory, viewed on a longterm timescale; the above charts don’t accurately capture this. Post-bubble NASDAQ looked cheap at 4000, 3000, 2000, etc.
Ed Note: The main point is that the cost of fixed money will rise, and so your total repayments on a 30-year mortgage will never be lower than now.
Comment by Michael Walker: “And make no mistake, prices in the US are still in bubble territory, viewed on a longterm timescale; the above charts don’t accurately capture this.”
Yes, good to point that out. There’s a (must see) Bloomberg interview today with Michael Feder CEO of Radar Logic where he estimates the whole inventory including for sale, foreclosure and short sales etc, is five years supply. He points out ‘the problem’, of way more sellers than buyers AND that 40% of 50,000,000 US mortgages will be underwater THIS year. This percentage of 40% takes my breath away, because if the market drops off another 10%, where then will the ratio be? Its going to correct down over the next several years, so likely at least another -20% if not -30% before the bottom is reached sometime in the next 4 to 5 years.
Home values are going to continue to slide until 3X average income, but average incomes (let’s exclude the Hamptons and finance sector from the picture) will also slide, especially in real terms, as employment worsens and inflation eats away at shrinking disposable incomes.
Something could come along to change this picture, but i can’t see what. The economy in the US can only turn when people go back to work, and in the US a fact of the last 110 years is that employment growth only happens when housing begins a growth cycle. That’s at least a decade away. As for the equities market 2 year bull run on the back of fudged numbers and growth from 1:4 in deficit spending, the only outcome that makes sense to me is a giant correction and then a ‘34 style currency devaluation (QE3, 4, 5 and so on).
However I’m probably just missing something and we’re all going to be OK. Right?