Housing Bubble Has Almost Completely Burst! But No Recovery In Sight

Here are the conclusions from Deutsche Bank Securitization Head Karen Weaver’s latest look at the housing market:

  • The “bubble” has almost completely burst.  In many markets, prices are now almost back to 2000-2003 levels on an affordability basis.  However…
  • Rising unemployment, rising delinquencies, tight credit, and over-supply will keep pressure on house prices for a good long while.  Prices will probably significantly overshoot fair value on the downside and they’ll stay down.  This would be in keeping with the aftermath of every other bubble we’ve ever studied.
  • Nationally, prices will likely fall another 17%, for a peak-to-trough decline of 40%.
  • There’s no recovery in sight.

Here are some highlights of a recent Weaver presentation.  We’ve also included some of the charts below.

  • Price declines have happened sooner and deeper than we originally expected, and for all intents and purposes the housing bubble has been burst according to our affordability calculation (which is a relationship between local income, mortgage rates, and home prices).
  • Of the top 100 MSA’s, 82 markets have fully mean-reverted back to our base ’00-’03 affordability mean. Only 12 markets need to fall more than 5% to mean revert – NY/NJ, Allentown, Edison, Baltimore, Virginia Beach, Orlando, West Palm, New Orleans, Honolulu, Portland, and Seattle.
  • Despite the affordability readings, serious delinquencies are rising at an increasing rate…which will become tomorrow’s foreclosures 18 months from now.
  • We are in the over-correction phase, which could last for a long time – assuming 3.5mn units of excess supply and that a depressed household formation number of 800k persists, we may need 3-5 years to cure the supply problem. Until that happens, will be difficult for a meaningful recovery to take hold.

Karen Weaver’s exhibits:

First, the peak-to-trough price declines by city:


The good news: The declines have been so severe that in many markets prices are now back to fair value.


Thus, Weaver concludes we’re in a new phase of the cycle, one in which macro economic factors rather then inflated prices will put pressure on housing.


Just because prices get to fair value doesn’t mean they’ll stop falling or start going up soon.


Is there anything that will stop prices from falling?  No.


Today’s deliquencies will become tomorrow’s foreclosures:


And there’s still too much supply.  First, because homeownership as a percentage of the population will likely shrink:


The supply overhang will also be exacerbated by more people living in the same houses again:


Will mortgage-modications really help?  In a word, no.  At least not based on the history so far.  Just look at those re-default rates!


The bottom line?  A long way (and/or a long while) to go:

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