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Zandi Sees Housing Bottom in 2009

Written By Brian Hicks

Posted February 10, 2009




If you are leaning bullish on housing, then Moody’s Mark Zandi has some good news for you.

Housing, according to Zandi will likely find a bottom in 2009.

Here’s the story from Bloomberg by Brian Louis entitled: U.S. Housing Market May Bottom in 2009, Zandi Says

“U.S. home prices will reach bottom by the end of the year, concluding a slide that will have cut values 36 percent, Moody’s said today.

“Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight,” chief economist Mark Zandi said in a statement today. “Presuming we see strong action by policymakers to help support the economy and the housing market, prices will begin to recover by the end of this year.”

Demand for new and existing homes began to fall in 2005, marking the end of a five-year U.S. housing boom fueled in part by easy credit for subprime borrowers. Existing home prices tumbled from an average high of $230,200 in July 2006 to $175,400 in December, according to data from the Chicago-based National Association of Realtors.

U.S. home prices will fall another 11 percent on average before stabilizing, according to Moody’s The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year, Zandi’s study said.”


Of course, that’s not exactly an opinion that I share—even though Zandi’s analysis in general has been spot on. To me the bottom in housing is still nowhere in sight.

In fact, here are six reasons why I think housing will stay in the in the cellar well into 2010.

They are:

1. Macro-Economic Decline – For years now those who have been housing’s biggest bulls have cited a growing economy, low interest rates and low unemployment as the reasons why real estate couldn’t possibly decline. Nonetheless, after peaking in 2005 housing did fall, completely blind to those same conditions.

However, some three years later, the macro-economic conditions have dramatically changed, led not coincidentally by the bursting bubble. That sets up the real estate market for its fatal blow as both a weakening economy and now job losses are beginning to accelerate. That’s a nasty brew that not even historically low rates can fix. These factors alone are enough to send housing lower in the year ahead.

2. The Credit Crunch – When the money to lend was sloshing all around the globe, rising real estate values were a no-brainer. In fact, those excesses were so large that they helped to turn a normally illiquid asset into a liquid one practically over night.

But with the foreclosures and defaults now off the charts in the U.S., that same pool of liquidity has suddenly gone dry. And as one lender after another has to drain their cash reserves to cover those mounting losses, their pool of deposits to lend against has dropped dramatically.

That means that what each of them can lend in the future will now fall exponentially-to the tune of 10 to 1. That’s the downside of fractional reserve lending. So for every dollar that each lender sets aside for losses that’s $10 that now cannot be loaned out.

3. The Fed is No Savior – A 1% Fed funds rate for over a year may have started the epic bubble, but this go round lower rates have done nothing to stop its slide. That’s because try as they may, the Fed can’t add any air to market, no matter how low rates go.

The reason? Lower prices now and in the future make today the worst to time to be entering the housing market-no matter what your realtor may tell you.

Moreover, price declines approaching 20% will completely wipe out the second mortgage market. And when that happens, the mortgage market will be changed in ways that lower rates will never be able to compensate for.

Higher mortgage insurance and heftier down payment requirements as a result will further limit the ability to qualify.

4. Tougher Lending Standards – Back in the day when anyone and everyone could qualify for a loan, keeping home prices down was nearly impossible. Because when lending standards became as loose as they did, anyone and everyone that wanted to buy a home did. And using a mix of option ARMs, interest -only loans, sub prime teasers, and liars loans, borrowers flooded the markets with a level of demand that will never be seen again. The result was a doubling of home values.

But as the absolute foolishness of those days has been exposed, lenders have gone completely in the opposite direction, turning back the mortgage clock a good ten years. That has made borrowing money considerably tougher, even for “good” borrowers.

In fact, according to a recent study by the Federal Reserve, banks are now raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers. That means that an entire level of would-be borrowers has been locked out of the market for good, further weakening demand.

Simply put, people that can’t borrow money don’t buy homes

5. Massive Oversupply – When home price appreciation was at its peak demand was so great that on average there was a 4 month supply of homes on the market. That skinny supply scenario helped to push the market into another level.

But with demand having peaked in 2005, not even good economic times could stop or slow down the build up of inventory nationwide. In fact, according to today’s numbers from the NAR the inventory of existing homes stands at a 9.3 month supply. Those are figures that will continue to grow as demand shrinks and mounting foreclosures pour onto the markets.

That will push prices lower in the years to come as the laws of supply and demand continue to work in reverse.

6. The Affordability Gap – When liar’s loans and outright fraud disconnected a person’s ability to borrow from their income, chasing home prices beyond real affordability was easy. But now that a persons ability to actually make their payments has suddenly become the rage again (go figure), home prices will return to their traditional anchor. That is income.

The result will be lower values across the board. That’s because historically, median home prices and median income have always shared a pretty consistent relationship. In fact, from the 1970’s until 2001 the historical ratio between median home prices and median income was between 2.6 and 3.0.

So where are we today? Well with the median home price at $175,400 and median income at about $50,000 that leaves us at a ratio of 3.6-more than 20% beyond the historical norm. That means that in order to return to a historical level of affordability either incomes have to rise significantly or values have to fall by as much as another 17% on average nationwide.

That’s a gap that’s hard to finesse. Here’s a bet on falling values rather than rising incomes.

So don’t believe that the stimulus package and its $15,000 tax credit can magically turn around the housing market this year because it isn’t going to happen.

The math on this one simply can’t be conned.