Let’s start by looking at some of the basic numbers on the demand side and the supply side
Demand Side
- First time home affordability is at a 20 year low.
- Prices have risen by 25% in the last 3 years
- In 2003, the average starter home price was $144,500. As of the last quarter of 2005 it was $181,100. In just three years, new "starter" home prices have risen 25%!
- The median price existing home has risen from $170,000 in 2003 to over $210,000 today
- To qualify for a starter home today, one needs an income of almost $50,000 instead of just $37,000 three years ago.
- Sales for existing homes and condos are down 10% since June of last year
- The University of Michigan has an index which measures the intention of people to buy a home in the near future. It is at its lowest level in 15 years.
DEMAND IS SLOWING DOWN
Supply Side
- Building permits stand at 2.15 million
- Total homes for sale are 25% higher than this time last year, at an all-time high of 3.3 million.
- Major rise in new home inventories(the rise from over the last year has been at the highest pace since 1984)
Why are home supplies rising? The simple answer is that demand is falling.
Freddie Mac reports that cash-out refinancing rose by 70% last year, but they also forecast a drop of more than 50% for this year! . Here are some of the numbers:
Year Cash out Dollars as a % of Refinanced Origination Amount Total Home Equity Cashed out $ billions
2000 11.50% $ 26.20
2001 8.70% $ 82.90
2002 8.00% $ 111.00
2003 7.20% $ 146.80
2004 12.90% $ 142.00
2005 (E) 21.10% $ 243.00
2006 (F) 14.70% $ 116.50
2007 (F) 13.50% $ 94.30
Implications
- New "supply" of foreclosed homes
- Loans which were sold in 2003 and 2004 were ARM Resets loans and hence their reset would have a significant impact on the Mortgage industry
- Mean reversion of Home prices
- Former Goldman Sachs investment banker John Talbott says in his new book, "Sell Now! The End of the Housing Bubble," that many Americans could be facing a 50% decline in housing prices. He estimates that America's top 40 cities will see an average 47.2% decline: Boston is 49.4%, Miami 44.8%, New York 44.6%, and Chicago 27.3%. He suggests that in the space of five years, Alan Greenspan's cheap-money policies have added $30 trillion to housing prices worldwide, an unsustainable 75% increase, he says.
- Consumer spending patterns: A study by former Fed Chair Alan Greenspan estimated that over $600 billion in cash out refis took place in 2004; Goldman Sachs estimated that in 2005, home owners withdrew $834 billion. The estimates are that consumers used between 50% (Greenspan) up to 68% (Goldman Sachs) of that money as discretionary spending.
Will there be a recession?
Equity allocation as a % of overall wealth allocation is higher than real estate allocation. This means that a bearish stock market coupled with a house price bust could take the US economy in to a recession.
