Q: When will housing prices bottom-out?
A: When housing becomes affordable.
What do I mean by affordable? I mean a family of median income can afford a median-priced home with 20% down, a standard 30-year mortgage, and obligating no more than one-third their income to monthly payments.
There is your problem.
The people who sell houses say we’re there, but a look inside the figures show we have far to go. Homes in the Midwest and South are becoming affordable, but the median price there is south of $175,000. In the Northeast and West prices are still over $280,000, so those hard-hit markets still have far to go.
If banks in the Midwest and South had capital they could make good loans. But writing down the Big Shitpile destroyed their capital, destroyed their ability to make new loans. That’s what the new housing bill is all about, to enable lending on a sound basis.
Oh, and once we do get to affordability we have at least a year of inventory to sell before we can start building again. Add in the millions of homes which are not on the market, but whose owners want to sell (like my next-door neighbor, recently transferred) and you’re looking at another year of pain before a bottom is reached.
There is a second problem which has yet to be addressed.
The exotic loans of the last decade caused home builders to move
completely into McMansions. The average home size is now nearly 2,400 square feet. And homes are even larger than average on the coasts, where affordability is presently weakest.
How do you heat or cool a McMansion? This makes them even less affordable.
Builders have a long way to go toward adjusting to these new
realities. I live in Kirkwood, less than 5 miles from the center of
Atlanta, and our neighborhood group is still seeing developers who want to build two-car garages on cul-de-sacs. It’s ridiculous.
It will take time to address all these problems, and it’s nearly guaranteed that we will overshoot, because that’s how markets work.
Until we get down to realistic home sizes, affordable mortgages, and adequate capital, housing prices will continue to fall.
Why would putting 20% down be a good idea. This just seems a terrible waste of capital to me. $30k down on a $150k is equivalent to nearly 3 years of rent on an equivalent apartment and when you factor in the property taxes and maintenance costs, the apartment makes far more financial sense. Things like market adjustable rates and no money down are bad, but 20% down is just silliness in the other extreme. 5-10% down, depending on credit worthiness makes far more sense.
Why would putting 20% down be a good idea. This just seems a terrible waste of capital to me. $30k down on a $150k is equivalent to nearly 3 years of rent on an equivalent apartment and when you factor in the property taxes and maintenance costs, the apartment makes far more financial sense. Things like market adjustable rates and no money down are bad, but 20% down is just silliness in the other extreme. 5-10% down, depending on credit worthiness makes far more sense.