What About the Silent Majority in Housing?

Could it be that current housing prices are not real? Are houses undervalued? Are current prices as artificially low as they were artificially high in 2006?

Something to consider for many market watchers and analysts is that the majority of homeowners are current on their mortgages and fifty percent of home owners have title to their house. These individuals are not participating in the current market. These home owners wouldn't even consider selling at 140% of current appraised values. Most crucially these are the true sellers.

Right now housing prices are determined by transactions between willing buyers and unwilling sellers (i.e. banks, unemployed workers, and forced sellers). This is not a traditional market. It is certainly not an efficient equilibrium- it is a slaughter.

Even with the enormous amounts of inventory coming on line from short-sales and foreclosures, this inventory is a mere fraction of the total houses in existence. So there are seven million foreclosures, so what? That is nothing for a growing population of 330 million strong. The United States needs substantial amounts of additional housing year after year and with home builder's sidelined with prices significantly below their costs to construct, the Country is pure and simply running in a supply deficit in the long run.

For buyers the current situation is an absolute blessing. First time home buyers, investors and people with impeccable timing have gotten a windfall. They are buying an asset for less than its input cost (the materials, land cost and permits to build the house are higher than the sale price). This cannot sustain itself in the long run. Even better for the US economy these home purchases are easily fitting into the purchaser's budget. Seriously, we are talking mortgage payments at 10-15% of the buyer's monthly income. What does that equate to? Disposable income.

Take my friend Dr. C for example. Dr C. paid $550,000 for his home and added $250,000 in cash upgrades and modifications. He also 1031 exchanged an investment into another home at $440,000 as an investment property. Both homes are currently appraised at 50% or less than his basis in these homes. However, if a buyer offered to purchase either of these properties, the offer would not be accepted for anything less than his investment. So what is his home worth? Well, we cannot answer the question because their is no willing buyer or seller to fill the transaction.

The point here is that just as buyers were artificially created by creative financing in 2002-2006 to meet seller's demands, now artificial sellers are catering to buyer's demands. I cannot tell you what the "right" price is, but I can assure you this isn't it. In our Country's more intelligent and logical past, housing prices could be derived either by median income of a given area or as a factor of market rents in an area. In an effort to be concise the reader should see Benjamin Graham and David Dodd's Securities Analysis 1934 to learn these principles. Simply stated, stock prices should be reflective of the earnings of that company in a direct analysis or current bond returns in an alternative analysis- so the same is true of housing prices by the above methods.

If all this is too complicated, simply stated this too shall pass.

It's Over When "They" Say It's Over

The current depression is over as soon as the financial institutions decide it's over.  In a credit based economy where banks decide how many employees a business has, how much our homes are worth, how much inventory a business can stock, whether one can buy a car, attend college, open a business, create IPOs, complete mergers and acquisitions, the current misery is over when those lending institutions say it is.

If a bank owns 8% of the homes on a street, holds the mortgage on another 12% of the mortgages, maintains the deposits of 15% of those homeowners and is one of the few options that an interested purchaser has to buy a home currently for sale on that street, what decision are the citizens really making?  If that bank is willing to loan $300k to the prospective buyer to purchase a home, than the value of their bank owned homes are $300k and the "home-owners" with mortgages with that bank may be offered an equity line on that home if they owe less than $300k.  If one of those "home owners" owed $150k, they could take a loan against their home for $150k and start a business, invest in stocks or purchase goods, services or additional assets.

Until the stumbling incoherence financial institutions consider to be reliable computer based risk models are scrapped for the favor of common sense and rational human judgement, these banks will continue to wound themselves and have the citizens as a whole suffer.  If any intelligent person owned a home and was in the business of loaning money, that person would loan as much as a willing and credit worthy buyer could reasonably afford to pay.  Loan to value would be without regard, as payment to income would be the "trump card."  This would certainly be the case if that same person had more homes for sale and currently had balances owed to them against homes purchased from them as the values of those assets would appreciate.  In essence, a home's value is substantiated by the incomes of the people who wish to purchase them.   

 

Sound simple?  Well it's not for massively inefficient corporations, or as I like to call them governments of shareholders. Common sense and rational judgement are just the types of intangible variables that will get a person fired.  Follow the model is the cry of executives, upper middle management, middle management, branch managers and credit analysts (glorified bank tellers) alike.  After all, the model is quantifiable and predictable.  Follow the model or find new employment.  Never mind that the model rewards loaning as values appreciate creating inflated valuations that will invariably correct in a massive fashion every one to two decades when lending institutions decide that they no longer wish to outrun losses. Never mind that the model shall exacerbate the correction by magnifying price declines as the model reduces loan to value requirements in a race against price declines creating a fury of crashing prices.  Never mind that this article is exactly on point and almost all loan officers and credit analysts could not refute it with candor.  

Follow the model, follow the model- least we be without the ability to make a decision or decide on what criteria to lend.   Thank goodness that when these banking models fail again, and they will, we will have the only organization less efficient than large corporations, the Federal Government, to rebuild them and remind them through massive tax payer waste and societal loss of wealth that they are the sole solution to their self created problem.