The Housing Crisis is Over!

We continue to hear reports from analysts and publications that we are not out of it yet and probably will be in it for another 9-12 months before we see things turn around. Yet there is chatter here and there indicating that April 2008 will mark the bottom of the U.S. housing and condo market. There are already bidding wars in certain areas of San Diego already according to local agents.

Cyril Moulle-Berteaux, managing partner of Traxis Partners LP, a hedge fund firm based in New York. Claims that "...most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New condo and home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50%, and, adjusted for population growth, are back to the trough levels of 1982."

Now let's be honest - a market turnaround does not mean that we will see prices return to the days of 2005. That probably won't happen for a very long time. What we will see is that things are going to stop getting worse - which needs to happen before they get better anyway.

Moulle-Berteaux goes on to state "...furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability."

Part of the problem that brought on the housing crisis and subprime meltdown simply boils down to the fact that housing became too unaffordable for first time homebuyers. When you are spending over 33% of net income on your mortgage - it is proven to be too much - hence the subprme crisis.

When prices got too high for enough buyers - the bubble burst, and people stopped buying.

No we are seeing prices fallng anywhere from 10-15%, while incomes have continued to rise and mortgage rates have come down 65-70 basis points from their previous highs. All of these factors are making things more affordable for all homebuyers. People that previously could not afford a new home are now falling into the category of being able to afford one.

There are a lot of new condos, homes, forclosures, etc. on the market right now, so the next question is "Will prices stop falling and when?" The best way to answer this is to look at historical trends from previous housing slumps in the last few decades. In the past five major housing market corrections, every time home sales bottomed, the pace of housing price declines slowed significantly - up to 50% within one or two months. So, once home sales stop declining, inventories of unsold condos and homes have historicaly already started falling in absolute terms. Moulle-Berteaux remarks, "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 primarliy because construction activity has been falling for such a long time..."

Many of the "housing gloom analysts" claim that house prices need to fall another 30% to bring them back in line with where they've been historically for things to turn around. What many people don't know is that this is usually based on an analysis of house prices adjusted for inflation. Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

Nonetheless, housing prices are what led us into this credit crisis and this recession. These are also what is likely to lead us out. And that process is underway, right now. Now that you are convinced the time is rignt for a new condo or home - check out www.newcondosonline.com for the largest selection of for sale attached housing on the internet.