Is the Housing Crisis Over?

There is an Op-Ed in the Wall Street Journal today arguing that the housing crisis is over and that April 2008 was the bottom.

The reasoning? Housing is now “affordable” again.

The author of the article, called “The Housing Crisis is Over“, is a New York hedge fund manager.

Forgive me for thinking that someone who makes millions (billions?) and lives in Manhattan can begin to understand what is going on out in “main street” America. But let’s say he does. This is what he argues:

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

Apparently- because housing is now a much lower amount of your take home pay, it’s now “affordable.”

But what’s different between now and 2005?

Lending.

In 2005, you could get a 100% financed loan. You didn’t need a dime to go to the closing table and buy a house. Now, those loans are almost extinct. In most cases, you need at least 3% down (to get an FHA loan) and more if you’re just going to your local bank. If you’re in a “declining market” area (which is over 200 metropolitan areas), then you will need at least 10% down.

In the housing busts of the 1980s and 1990s, you also needed a downpayment and the housing market eventually recovered. But as recently as 1990, Americans were saving about 8% of their income every year.

The savings rate now? Negative 1%.

The REAL question isn’t that housing is more affordable, it’s who can come up with the now required downpayment.

Let’s say you make $100,000 a year and want to buy a $400,000 house. You would need $40,000 for the downpayment. Let’s say you’re a first time homebuyer and have no savings. How long will it take you to save the $40,000? (we’ll assume you get no parental help.)

An aggressive saver could save $1500 a month (after taxes) into a house fund. At that aggressive savings rate it will take you 26 months to save the downpayment.

So I ask Mr. Moulle-Berteaux, the author of the WSJ article: we hit the bottom last month?

He talks about the decline in new home inventory. Some of that, I would argue, is from developers renting out empty housing units. It is not “real” sales.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

And, I would argue, the new home inventories pale in comparison to the existing home inventories where investors are being caught with properties they can no longer sell and foreclosures are surging.

The housing crisis is over?

Nah.

It’s only just beginning.