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.

The Detroit metro area has the distinction of being #2 in the nation in foreclosures (only Miami has more). We all know Detroit’s problems. Jobs are gone. Unemployment is high. The state of Michigan is in a recession.

And the housing market is brutal. Nothing is selling. Foreclosures are pushing down prices in nearly every neighborhood.

Detroit is a “dying” city. Or is it?

It has long been my view that as the climate changes, Americans will not longer be so eager to move to the deserts of Arizona and Nevada but instead will eagerly be eying the Great Lakes region for both its plentiful water and food.

There’s a reason, after all, that the Indians prospered in the Great Lakes region and why the earliest settlers came in droves. Chicago, after all, was nothing more than a swamp, literally, only 150 years ago.

Some investors are making a bet that Detroit will recover in the next decade. They’re buying houses on the cheap. Do you have the guts to do it?

From the Detroit Free Press:

Investors from as far away as Hong Kong and Hawaii are coming to Detroit to make their fortune buying foreclosed homes in bulk.

“This is a millionaire’s market,” said Jeremy Burgess, a 28-year-old investor from Washington state who has been living in Detroit for the past year. “I feel like I’m driving through the city and stopping to shovel diamonds in the back of my truck.”

His wife, Jeanna Kiehle, and partner Jared Pomranky formed Urban Detroit Wholesalers to scour the city for houses they can fix and rent. The idea is to generate cash flow until the market improves, and they then can sell the houses. They own 38 houses now and close on 15 more before the end of the month.

Some buyers are looking to buy larger numbers of homes, perhaps 100 or more at a time.

People tuned in to the Detroit area’s distressed housing market say the majority of sales now are to investors, often in bulk deals.

Sales were up dramatically in Detroit in February, rising 49% from a year before, and realty watchers say foreclosure properties played a key role in the increase.

How cheap is it? Houses can be had for $5,000 to $10,000 (yes- that’s the TOTAL price.) Even in the “best” neighborhoods in Detroit, four bedroom vintage colonials can be had for $150,000- $200,000. You can’t even pay for the materials to build that house anymore at that price.

According to the article, 80% of sales in the city are now being bought by investors.

Are they foolish or are they smart?

Smith Kitporka, 28, an investor in San Jose, Calif., said he has been buying Detroit foreclosures for two years, often paying as little as $10,000.

“No war-zone houses or anything like that. Just good houses in good neighborhoods,” he said.

Burgess said he can pick up an $85,000 house in Detroit for $20,000 to $30,000 these days. Listings on Fannie Mae’s Web site show many Detroit foreclosures for less than $25,000.

Are the California and other out-of-state buyers simply lured in by the belief that these houses are incredibly cheap without understanding the market? Perhaps.

It’s hard not to get lured in. Check out this house on Craigslist. Priced at $344,900. Bank-owned. Six bedrooms. In Grosse Pointe Park (nice Detroit suburb.)

Detroit: City of the Future?

Ideas have been floating around that the government should take bulldozers to the extra homes in America to get rid of the excess supply which is bringing down prices.

Do you think it’s crazy?

There is an op-ed espousing just that in today’s Wall Street Journal- so apparently the idea has reached the mainstream now.

Called “The Radical Solution“, the op-ed says there are 80 months worth of inventory in some parts of Florida. Apparently, if we simply get rid of that inventory, it will solve the problem.

The article cites to four main states as the real culprit in the housing downturn: California, Arizona, Nevada and Florida.

Question: what percentage of the population of the country is in these four states? Quite a large percentage, I would think.

The argument goes that the bulldozers go into the planned communities in, say, the Inland Empire of California and just gets rid of the houses. They aren’t selling, they are a scene of crimes (thieves are stealing the copper piping and appliances out of the houses, squatters move into the homes etc.) and it costs police and fire manpower to watch over the empty homes.

But what do you do about all the condos? A big percentage of the empty homes in Nevada and Florida are condominiums. You can’t just blow up a 30 story high-rise to get rid of inventory- or can you?

And do you take the bulldozers into the subprime neighborhoods where lower income homeowners have been foreclosed? In some neighborhoods in Detroit and Cleveland, there are 5 homes out of 10 on a block in foreclosure and boarded up. What do you do there? Does the government buy out the other five homeowners and then bulldoze the whole block?

Apparently, that’s already happening:

Cleveland spends $6 million a year to demolish buildings. Dayton plans to demolish 550 this year.

In the article, the author mainly focuses on the new housing developments instead of the older inner-city neighborhoods.

Many analysts have called the housing boom “unproductive.” Apparently- if we’re going to bulldoze new housing developments that were built in the last three years- that was an understatement.

The housing boom was such a waste of resources and the talents of America. Imagine the businesses we could have been building with all of that “investment” money? Imagine all those smart 20-something “developers” who could have been making the next iPhone instead?

Hopefully, now that housing is busting, we get back to the basics and turn the country’s top talent to industries that will push us to be more competitive on the world stage. Flipping a house in the middle of San Francisco or Miami is not going to help us compete with the Chinese or the Brazilians.

There has been a lot of discussion lately in the business press about who should be bailed out in the housing bust.

The Fed is bailing out investment banks (ala Bear Stearns.) But many analysts believe it won’t be enough and that the government will have to actively intervene in the housing market. There are several choices for the intervention, including these:

1. The government can mandate that banks simply write off the excess mortgages. Basically, if you bought a house two years ago for $700,000 but now it’s “worth” $500,000, the bank would write off the $200,000- so the homeowner isn’t on the hook for the larger amount.

2. The government could buy out mortgages directly. Some aspects of this plan have the government “loaning” 10% of the house’s “value” to the homeowner so that they have equity in the house. The loan will be low interest and must be paid back- over time, of course.

Not sure what each of these will do to “save” the housing market. If you don’t allow prices to come down, then it cannot correct. Housing prices are simply unaffordable compared to incomes.

How many of you are paying more than 30% of your income towards housing costs?

Me too. I’m raising my hand.

That is historically abnormal. Imagine making $80,000 a year and buying a home for $160,000. That used to be the norm in most parts of the United States. Until it gets back to “normal ratios” in most parts of the country, the housing bust won’t be over.

The question is increasingly turning to: who should get bailed out?

Obviously, the investor buying five houses or condos shouldn’t be bailed out. But if that investor goes into foreclosure, doesn’t that foreclosure bring down home prices in that neighborhood or building all the same as a foreclosure by a non-investor? Of course it does.

And what about foreclosures on upper income homeowners. It isn’t just the subprimes which are going down. Increasingly, I’m seeing foreclosures on million dollar homes.

Take this house in Glencoe, Illinois, an extremely upscale suburb north of Chicago. Million dollar homes are the norm in Glencoe. The median household income is $164,000.

It’s a new construction home that was sold in February 2006 for $1.89 million. It has been on the rental market for $6,000 a month.

It’s a 4 bedroom, 4.5 bath home.

It recently went into foreclosure for $1,778,574.

Should this homeowner be offered help from the government?

It will be interesting going forward. The cries for a full-fledged bailout are growing as the number of foreclosures rises to records in some parts of the country.

The moral hazard is great. But the risk of doing nothing could be greater.