Whitney, Ritholtz Issue Bearish Calls on Housing Market

[RedEarth]

While the headline focuses on her outlook for housing, Whitney is bearish across the board, seeing little reason to cheer on the employment and bank earnings fronts. She sees a 10% fall in housing prices in the next six months (!), which will hit bank earnings (Whitney has argued since at least early 2009 that banks have been goosing earning by underreserving for losses) and the economy generally (a further decline in home equity plus lack of mobility of consumers wanting to sell their houses but facing a declining market has implications for consumer spending generally). She point out that consumer credit is tightening, which puts a crimp on small businesses (both via lower revenues and via restricted access to funds), the biggest engine of hiring, and on top of that, municipalities and states are cutting spending and shedding jobs.

A similar grim take from Barry Ritholtz via John Mauldin:

Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Today, demand is far below what it was during most of the past decade. Home prices are still unwinding from artificially high levels, and remain over-priced. Inventory is elevated. A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. That’s before we get to the fact that unemployment remains high, and is unlikely to improve anytime soon. Oh, and wages have been flat for a decade.

........


Consider price relative to income. From 1977 to 2010, the median US home price was 4.1 times median household income….Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. It’s the same with home prices relative to rentals, or housing value as percentage of GDP….

Further, we should not assume that prices merely mean revert back to historic levels. What usually happens when markets get wildly overvalued – and a ~3 standard deviation price move sure qualifies — is they get resolved not by reverting to the mean, but by careening far beyond it.

In other words, brace yourself for further downside. Extend and pretend is finally about to run into ugly reality.

http://www.nakedcapitalism.com/2010/06/whitney-ritholtz-issue-bearish-calls-on-housing-market.html

[LisaM]

1. Will I finally be able to afford a house?

Anyone with two brain cells could see that houses were way overpriced and people were buying too much house. $60,000 kitchens in ranch houses! Jetted tubs. Home offices. One bedroom per kid.

This housing mess shouldn't be a surprise to ANYONE. Watch "House Hunters" on HGTV. People just out of school with no jobs are getting houses that could qualify as starter mansions.

[Donnachaidh]

2. when a relative who lives in a crappy area in the San Fernando Valley called

and told me the appraiser had re-appraised their 2 bedroom ranch at half a million dollars I was stunned. They called me for advice, because they were thinking of going for an equity loan, based on the new appraisal. I told them do NOT go for a line of more than 200K, and even THAT was a valuation that was pushing it. People went nuts, realtors and appraisers worked the bubble like drug dealers, always pushing people into *more and better*.

It only turned out to be *more and better* for the realtors and appraisers. They got their pound of flesh, and didn't have to stand by while their former clients crashed and burned.

[adnelson60087]

3. Yup, have to agree about the HGTV

connection. I see these youngsters buying stuff they might be able to afford in 20 years of working. Since when was a $300,000 home a STARTER HOME?? I mean, Seriously...

[LisaM]

4. And they're so whiny

"I wanted granite countertops". "I want a three-car garage". "I don't like the tile in this bathroom".

[grasswire]

5. yeah!

I've been puzzling over this for several weeks now. A couple in their early twenties, going for top of the line in everything. Pool, huge house on the waterfront, yada yada. And they didn't like any of the houses shown to them and decided to custom build. Insanity.

Back in the day before the bubble, a young couple was lucky to have a two-bedroom rental apartment and a few pieces of furniture.