Tuesday, August 12, 2008

A Few Housing Themes

by Calculated Risk on 8/12/2008 04:09:00 PM

  • Alt-A; the new subprime. Or “We’re all subprime now!”

    There is some evidence that subprime defaults have peaked, but Alt-A defaults are picking up steam (Tanta will have more today). The next wave is here, and these defaults will impact house prices in the mid-to-high range.

  • And on house prices:

    In general – on a national basis - I think nominal house prices have probably fallen more than half way from the peak to the trough. There are some areas where prices are probably closer to the eventual nominal bottom than others; these are low end areas with high foreclosure rates and high demand for housing - or areas that saw little appreciation during the boom years. But in other areas, prices have really just begun to fall.

  • There will be two housing bottoms.

    A bottom for new construction is very different than a bottom for existing home sales. For existing homes, the most important number is price. So the bottom for a particular area would be defined as when housing prices stop declining in that area. Historically, during housing busts, existing home prices fall for 5 to 7 years - so I'd expect to start looking for the bottom in the bubble areas in 2010 to 2012 or so.

    For new construction, we have several possible measures of a bottom. These include Starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. These measures will hit bottom much sooner than for prices for existing home sales, and one or more of these measures might even bottom in the 2nd half of this year. However ...

  • There will be no rapid recovery for housing.

    Usually, following a housing bust, new home sales pick up pretty quickly. However this time, with the huge overhang of excess housing inventory, new home sales and starts will probably not be an engine of recovery for the economy. Without a contribution from housing, I expect the economy will remain sluggish well into 2009 and the effects of the recession will linger.

    These are some housing themes we will be discussing over the next few months.