Housing in a Funk


“The housing market is in a funk,” the Wall Street Journal writes. “Can the stock market be far behind?”

According to Bloomberg, new homes purchases, 15 percent of the market, dropped 4.3 percent while sales of lived-in homes dropped to the lowest in more than two years.

The National Association of Home Builders’ builder confidence index, which leads the stock market by 12 months, fell to a 15-year low in August.

And Angelo Mozilo, the CEO of Countrywide, a leading mortgage lender warns,

“I’ve never seen a soft-landing in 53 years, so we have a ways to go before this levels out.”

How much of a way? You get an idea from a look at the books of one prominent lending institution — Washington Mutual: At the end of 2003, 1% of its option ARMS were negatively amortized (payments not covering interest charges, so the shortfall is added to principal). In 2004, that figure was 21%. In 2005, 47%. By loan value, it was actually 55%.

And, Washington Mutual isn’t alone. Hundreds of lenders are in the same position. They don’t have to keep the borrowers aware that their debt is soaring, since Neg Am loans do not have strict disclosure rules. And they can even book the loans as earnings.

Shades of junk-bond mania. Remember that, dear reader? Just like the lumpen home-owners today, the takeover kings of the 1980s could use the company they planned to raid as collateral for the loan they used to raid it with. When the companies started folding, the junk kings went belly up…or did the perp walk la Michael Milkin.

So far, of course, the housing fraudsters have managed to stay clear of the plank. Mortgage giant Fannie Mae paid a record $400 million fine this past May, but managed to squeak out of criminal prosecution over prettifying its earnings. Ditto for Freddie Mac, which had its own accounting scandal in 2003.

And the rest of the perps today happen to be thousands of middle-class homeowners who still think the Fed will dive in and give them a get-out-of-jail-free card at the last minute. But our friend, Steve Sjuggerud, thinks they shouldn’t bet on it. Recalling the aftermath of the 80s, Steve says real estate is just about to get much worse:

“It’s looking like 1990 all over again…1990 was the last time homes were unaffordable. The confidence of homebuilders was at a record low (and about to go lower). And the U.S. economy was starting to cool.

“Home prices fell hard. Nationwide, new home prices fell from around $200,000 in 1990 to around $175,000 by 1992 (in inflation-adjusted terms).

“By 1993, home prices were affordable once again. Homebuyers slowly crept back into the market. Prices crept higher, and they didn’t surpass the 1990 highs for over a decade (in inflation-adjusted terms).

“Over a dozen years have passed since new home prices bottomed back then…enough time for people to forget real estate is not always a sure thing. Just ask the Japanese how bad it can get…they just lived through 16 straight years of falling home prices.”

Sixteen years of falling home prices….

But from where ever came the idea that housing would always rise? Whence the delusion that prices always move up and up…and still further up? Looking back over the last century we find that the cost of a house…or of renting…has actually fallen.

Contrary to the lumpen mythology of ever-burgeoning home prices buoyed up by a sea of credit, the reality is that over time housing has at best stayed stock still…or fallen. Although average consumer prices in America have indeed risen 20 times since the beginning of the 20th century, which comes to a mean of about 3% a year, the prices of a number of consumer goods — and that’s all a house is, dear reader — have actually fallen. Yes, fallen.

The Economist explains why this is so:

“Over time, general inflation tends to mask changes in individual prices. Strip out the general rise, and variations are clearer. Thus the cost of a hotel room has risen since 1900 by around 300% in real terms; a telephone call is 99.9% cheaper.

“First, goods or services that have benefited from large productivity gains, thanks to technological improvements and mass production, have seen large price falls in real terms. Telephone calls are the most striking example. But electricity, bicycles, cars, even eggs (thanks to battery hens) also have fallen. In 1900 a car, then hand-made, cost over $1,000. Henry Ford’s original Model-T, introduced in 1908, cost $850, but by 1924 only $265: he was using an assembly line, and, in virtuous circle, was also selling far more cars. Over the century, the real price of a car fell by 50%.”

But while a Ford may have got better over the last hundred years, we doubt that the average suburban plasterboard look-alike has. In fact, we doubt that any of the million-dollar eyesores that have mushroomed over the landscape in the last decade are even going to be standing in a hundred years. Without increases in quality or productivity to sustain growth, the only thing that could keep housing costs afloat would be high labor costs and high demand, which explain why services like medical care, hotel accommodation and domestic help have all soared in the past 10 years.

But we know that soaring house prices have not been driven by fattening wages or real demand. No, globalization has made sure that labor is squeezed by foreign competition. Domestic wages are down. In turn, real demand is low…unless it is artificially primed with credit, which is exactly what has happened for the last 10 years.

But we know that the age of easy credit is coming to an end…bankruptcies are piling up, the consumer is running out of wind, and now, where can housing prices go but down?

Indeed, the 10-year Niagara of credit hasn’t even lifted all boats evenly around the country. In the North and Northeast, in cities like Detroit and Pittsburgh, housing is still cheap and getting cheaper in many areas, as jobs disappear. We wager that as oil prices rise and heating costs become more burdensome, houses in the North will get cheaper yet.

And in the bubble-ridden cities of the East and West Coasts, comes a time when even the densest householder digs in his heels and turns down the chance to enslave himself to an overpriced shack. He looks past San Francisco…and sees Phoenix. Or past Miami…and sees Charlotte. Or casts his eyes to Texas. Or, he decides to rent and wait for prices to come down even more.

And when he does, the crutches get kicked out from under it and the housing market lands on its fanny…hard.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.