Wednesday, July 9, 2008

Montpellier's Comment: Too Many Sellers With High Prices Combined With Buyers Who Can't Qualify = Our Local Market

Montpellier, a frequent insightful commenter, has as usual left a well-reasoned comment, this time on the "Fed in Crisis Mode" post from yesterday morning. We're reprinting it here because it details reasons for local and national over-supply of properties, in addition to the fact that the higher house prices are, the more difficult it is for buyers to qualify for a mortgage.

And at the end of the post, he links us over to a cautionary tale, at REALCentralVA, and we have a link to a story about troubled borrowers/multiple applications.

We don't have any way to contact Montpellier except publicly on the blog, so we want to thank him for commenting and apologize for not getting permission, first, to feature his words in a post. We know that there are some readers who only read posts, not comments, and we wanted this to reach a wider audience.

[Note: All bolding and italics added by The Bubble Blog]

Montpellier writes,

Simply put: there are more sellers than buyers. The question becomes, why?

At the simplest, let's just start with population...are people leaving our MSA? Are we seeing a net outflow of jobs and population - reduced "household formation"? I think anyone who's looked around the area anytime in the past three or four decades can readily attest that the exact opposite is happening. Should be plenty of buyers!

Next, how about new construction? Is there a real glut of housing in our area - overbuilding? Well, it's difficult to say for certain without researching housing occupancy permit numbers, but given the constant media buzz over the past decade about lack of affordable housing in the area, I think it's a safe bet that construction didn't out-pace household formation. Moreover, the rapid rise of the price bubble here, versus places like Atlanta (developer's heaven) where they just bulldozed and built without restriction, suggests that the supply didn't outstrip demand - or those pesky laws of supply and demand would have kept the price increases somewhat in check.

Perhaps, as the head of a local housing trade association, Dave has access to or have compiled hard numbers on occupancy permits and household formation? Care to share Dave? [Montpellier is addressing the previous commenter, Dave Phillips, CEO of CAAR -- BB]

So, if the number of units built and the number of new households didn't deviate from their historical pattern, what caused the sudden surge in new home buyers and prices? Prices in our area from the late 80s through the late 90s were more or less flat, by comparison with '00-'06. Where did all these new people with lots of money to bid up prices come from?

Well, how about an economic boom? Did people's wages suddenly start growing such that a whole bunch of previous renters were able to save up downpayments and qualify for bigger mortgages? How many people really saw their income increase? During the 90s we had the great productivity boom of the internet. There was the dot-bomb bubble, but more than that, there were big productivity gains by corporate America. So, how many people got that much richer? Only the top 1/2%! There was no trickle-down.

However, wages did improve slightly, as we recovered from the post-Reagan hangover, and the economy picked up. And what happened to housing prices from 1992-2000? They did increase - modestly - they 'recovered' from the popping of the previous bubble.

So, after the dot-bomb bubble burst and wages were flat (declining with inflation), where did all this new money for housing come from?

Simple - suddenly cheap credit was available at deceptively and artificially low rates to people who weren't really creditworthy. Sure, there's always been a pent-up demand for houses among the non-credit-worthy - we'd all like a pony, please - but that doesn't mean we can all really afford one.

I don't agree that the excess of supply in the MLS is a 'problem' or somehow 'unnatural' - really, the credit markets are no less man-made than houses are - I don't recall seeing a house grow from a tree.

I believe that's the free market at work - according to the Natural Laws of economics (versus faith-based reality & statistics). It is a perfectly natural reflection of market fundamentals: there are more high-priced properties than there are buyers who can afford them. That itself, just like the bubble on the way up, is a reflection - a symptom/side-effect - of the credit bubble. If these properties were priced such that buyers could afford them - including their current owners - then there wouldn't be so many on the market. Many, many of the current buyers are people who could only afford to 'own' (and I think that belongs in quotes when the bank has a lien for >50% of your house) with a teaser rate and constant refinancing - essentially eternal revolving mortgage debt. They cannot afford to really pay them off - not at the inflated prices they paid.

Moreover, anybody who really could afford a house they could actually pay off, already has one!

The world is terrified about the downfall of FNMA and FRE [Fannie Mae and Freddie Mac, for our civilian readers - BB] because they are the only big institution still making loans. The bad housing market will turn into a true housing driven depression if they stop writing. The bad conditions were seeing are a direct reflection of the fact that the GSEs refused to completely throw out standards of credit-worthiness for borrowers. They do not give loans to people who can't really afford them, and that means there are many fewer buyers. The higher prices are, the fewer people really qualify.

This is a "natural" result of the free market. Jim Duncan has a post up on this today. His tale perfectly illustrates why the current market situation is a direct and "natural" result of the credit markets.

[Also, see this article on troubled borrowers completing multiple mortgage applications. -- The Bubble Blog]


Montpellier said...

[snark] own tag. Gee, I guess I've arrived [/snark]

Although I've learned most of this by watching and reading - I've found the blog Calculated Risk to be an exceptional resource - on my own, there is a great condensed version:

from Ira Glass at Chicago Public Radio did a wonderful show titled "The Giant Pool of Money" in which they present a wonderful, and very accessible narrative of the entire Credit and Housing bubble.out for public consumption anyway.

Keith said...

The question of affordability that Montpellier addresses is most simply put this way.
Most people don't say they can afford a $xxx,000 house. They say they can afford a $x,x00 monthly payment.
If that payment isn't going to get them a better home then they currently have, they have no incentive to move.

Montpellier said...

Keith - the problem with that "payment approach" is that it masks financing tricks - precisely that kind of approach is what got us into this mess.

However, if you hold rate, origination points (and other fees) more or less constant, the payment varies according to total purchase price. Since the only deals which seem to be getting funded are FHA (FNMA, FRE), and they use the same guidelines (more or less), then there is a more linear (apples to apples) comparison with the payment and the price.

Sorry to be nit-picky, because when generalizing, your point is correct, but it can be an oversimplification.

Keith said...

Actually, Montpellier, I think you support my comment completely. When the financial trickery was happening, people who should not have qualified for a mortgage, did anyway. They were able the buy the house for an amount they shouldn't have. That in turn drove prices up. Now, that the trickery isn't available, and most borrowers are going fully conforming loans, the borrowing power is going down for most people and the values are following.
But, yeh, I think we're on the same page here.

Dave Phillips said...

Also posted un the the Fed in Crisis Post...

Sorry for the delayed respone. I was hiding out in rural Vermont with a bad/no Internet connection.

You said, "Perhaps, as the head of a local housing trade association, Dave has access to or have compiled hard numbers on occupancy permits and household formation? Care to share Dave?"

Unfortunately I do not have access to this data locally. If I did I would share - sorry.