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3 Housing Markets Poised for a Crash

December 3, 2008 RSS Feed Print

More than two years after housing prices peaked at the national level, most metro areas that were primed for a crash have already done so. But when home prices are “extremely overvalued,” it’s never too late for a bust.

Such is the case with three distinct metro areas: Atlantic City, N.J, St. George, Utah and Bend, Ore., according to IHS Global Insight and National City Corporation’s third-quarter U.S. housing valuation analysis. The report found that home prices in these three metro areas remain “extremely overvalued” and “present a risk of substantial price decline (10 percent, or greater) going forward.”

Still, the report found that the sharp decline in real estate prices has all but eliminated extreme overvaluation in major metro housing markets.

According to our latest analysis, the incidence of extreme overvaluation has become negligible. Only 3 markets met that criteria during the [third] quarter: St. George, Utah; Atlantic City, New Jersey; and Bend, Oregon. That compares to 4 extremely overvalued markets during the second quarter and 5 during the first. Overvaluation was most pervasive during the fourth quarter of 2005, at which time 52 metro areas were considered at risk for major price declines.

The markets that are now overvalued are mainly located in the Pacific Northwest, extending to Utah. Southern metros from Mississippi through Texas remain generally undervalued. Notably, the cumulative declines of the past two years have now pushed a number of California and Florida metros into the undervaluation class as well.

On the whole, the report argues that real estate is in fact undervalued--at least at the national level.

For the country as a whole, the housing market is slightly undervalued.When the 330 metro areas are weighted by market value, the nation is 3.8 percent undervalued. When weighted by housing units, the nation is 5.7 percent undervalued.

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Also, lending for real estate isn't frozen at all. I have to separate friends who bought houses in the last two months. And people bought their houses to enable them to buy the houses they bought. When people say lending is "frozen" they mean FRAUDULENT LENDING IS FROZEN. The problem is that without stated income loans borrowers don't qualify for the mammoth loans they were taking when they were free to lie about their incomes. I knew people who made $40K a year who wrote on their loan applications that they made $180,000 a year. They didn't think of this on their own, their real estate agent and mortgage broker told them that they had to. I was there once and the broker said, "Just write down that you make a lot more than that, everybody does it. They wouldn't have stated income loans if they didn't know people were going to write down that they make more than they do."
It's not hard to get a loan right now if you have a decent credit score (it need not be fantastic or perfect), documented income, and a down payment of 10% or a little more. Now that seems like "frozen" credit because of how INSANE things were during the boom. But credit scores have been repeatedly proven a worthless predictor of willingness to repay under financial distress. Down payments are a highly reliable predictor. Even if someone has an 820 FICO and would have crap credit if he defaults, he's not going to take a loss of a few hundred thousand dollars or more when he's upside down just to save his credit score unless he is an IDIOT. Only a total moron would trade the equivalent of two or four years of after tax full time wages to avoid a severe drop in their credit score.
It is not possible to return to the previous lending standards. The Federal Reserve seems to be pushing to bring back easy lending, but I think that's not really what it's doing. I think the Fed and US Treasury are trying to save the banks. They know people can't or won't pay their mortgages and they are trying to trade real money for worthless mortgage bonds with as many of their friends as possible. This isn't to "pump prime" the securitized lending market. That market will never ever operate smoothly again. It may never operate again at all.
Investors have been positively molested by US investment banks, originating banks and now even the US court system. Servicers can modify unilaterally the mortgages the bondholder has an interest in and the bondholder is almost completely barred from suing because most of the contracts appear to have a requirement that any dispute over servicing must bring together a minimum of 25% of the issue's bondholders. Because that's fairly impossible, the servicers like Countrywide and BofA have settled law suits agreeing to modify mortgages that they don't own. This pushes the entire cost of their settlement onto the mortgage bond investors who are never ever going to buy US mortgage bonds again.

Sean of CA 2:10AM December 09, 2008

Don, my wife has a Ford and I have a German car. I bought my car used. It's a 1994 I bought in 2005 with 87,000 miles on it. The wife's is a 2002 we bought in 2003 with 4,000 miles on it. My car has required fewer repairs, drives smoother, and is eminently more comfortable. It also cost half of what my wife's car cost because of the mileage and vintage differences. If you like American cars, good for you. You are free to purchase them. But the engineering they use for suspension, frames, brakes, major components is inferior to anything made by Japan, Germany or South Korea. It is only third world manufacturers that use the same technology for suspension, brakes etc. Our 2002 Ford has drum rear brakes and it's the "sport" model Taurus - the SRS! It's not a terrible car, but if you drive on the freeway at 70 or more it vibrates a lot. Tire balancing, alignment, nothing helps. It's just the way it is. It's also had a few odd $1,500 repairs for expensive broken parts.
Anyway, I think that American cars are really bad and have been for a long time. They use the same engineering and many of the same parts they have used since the early 1970s. They just put new body panels on the cars to make them look new, but they bounce and lurch and vibrate just like a car made in 1972. Americans will drink Coors and like it, so I suppose they will drive American cars and like it too. But they are a rip off for what you get.
Also, the media didn't cause the housing crisis. Had the media reported on this problem earlier and with greater force, they may have gotten Congress, the Fed, or at least home buyers to fear how large the bubble was becoming. I know a guy who worked as a delivery driver who got a $650,000 zero down loan. He got foreclosed on, but the point is that I know a dozen people like that. Home prices have much further to fall because without loaning $650,000 with zero down to people making $40K a year, there aren't enough buyers at these prices. You'd have to wait for wages to rise 30%, which isn't going to happen even over the next decade because of the longer term structural problems and global labor arbitrage.
If you think housing fell hard in 2008, 2009 is going to make 2008 look like a great year for housing. In 2009 continued delinquencies, investors dumping properties, boomers downsizing and dumping vacation and rental homes, the effect of very high unemployment and other factors will make it a truly terrible year. But federal intervention is only going to make it worse. The idea isn't to get get homeowners to stop defaulting because that's inevitable. The idea is to get them into federally backed loans so that the taxpayer rather than the bank or investors takes the loss on default. That's the goal here and when we get the tax bill for it, the brightest future any of us will have is getting citizenship in a more competently run country.

Sean of CA 1:53AM December 09, 2008

The idea that homes are either over or undervalued needs to be placed in the broader context of the typical transaction. Homes do not normally sell for cash, but instead require loans. The lending market is currently frozen, so even though a buyer may desire a house and have good credit, their ability to purchase is severely restricted. Acquisitions that are occurring are oftentimes by those who are either able to transfer significant equity toward a new purchase (i.e. from the sale of an existing property), or by investors buying properties from former lenders following foreclosures. Those buyers have cash available, and therefore can operate outside of the typical, loan-based transaction framework.
To say homes are still overvalued because transactions aren't occurring is shortsighted. Once our government and the remaining lending institutions find a way to thaw the credit markets, transactions will resume and prices will stabilize. If, however, the thought is that the current credit conditions will persist permanently, then homes may indeed be overvalued - and by a more substantial degree than anyone is forecasting.

Jeffrey Enright of CA 12:14PM December 04, 2008

3 Housing Markets Poised for a Crash

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