State Of The Real Estate Market July 2009: Plenty More Downside

whitney tilson

Whitney Tilson (right) and Glenn Tongue of T2 Partners have updated and expanded their excellent presentation on the housing and mortgage markets.

Here’s the bottom line:

  • We are in the “middle innings” of the mortgage and foreclosure crisis
  • House prices have at least another 15%-20% to fall and won’t bottom until the middle of next year. 
  • The recent signs of stabilisation are the “mother of all head fakes.”

We’ve summarized house-price portion of T2’s presentation in the slides that follow.  The presentation provides an excellent snapshot of the state of the market, as well as the trends that will likely drive prices significantly lower over the next year.  You can download it yourself here (PDF), or scroll through the whole thing here.


Still 5%-10% Above Trend

Even after a 33% nationwide collapse, house prices are still above their long-term trend.

To get back to trend, they need to fall another 5%-10%. After they get there, moreover, they'll likely fall a lot more.


Several reasons. But first let's walk through the good news...

Source: T2 Partners

Price-To-Rent Approaching Normal

The good news is the 'P/E ratio for houses,' price-to-rent, is finally approaching normal levels.

This is why house prices are only a bit above fair value.

Source: T2 Partners

The second piece of good news is that houses are 'more affordable' than they have been since analysts started tracking this measure.


'Affordability' doesn't mean jack when you're already underwater on your current house, or when you're getting fired, or when you already have debt coming out of your ears.

Also, 'affordability' is a moving target, because it is calculated off of interest rates and incomes. Incomes are dropping, and interest rates could skyrocket if inflation ever takes hold.

Source: T2 Partners

Inventories Are Still Very High

And now for the bad news...

First and foremost: House prices are a function of supply and demand, and there is still way too much supply.

As the righthand chart shows, normally there is about 4-months worth of housing inventory on the market. We now have 10-months-worth. And that's without counting all the 'shadow' inventory--the houses owned by banks who don't want to unload at firesale prices...and those owned by homeowners hallucinating that they'll 'just rent for a year until the market comes back.'

Source: T2 Partners

House Vacancies Are At An All-Time High

Here's part of the supply problem... empty houses all over the country.

Source: T2 Partners

10% of Houses Built This Decade Are Empty

The spec-McMansion boom... seemed like a good idea at the time.

Source: T2 Partners

Next Segment To Crash: $1+ Million McMansions

The inventory problem is espcially acute at the high end of the market.

So far, many high-end real-estate markets have held up better than low-end markets, perhaps because rich people have a bigger cash cushion to fall back on (they don't have to sell so quickly). Based on the super-high inventories in some high-end markets, however, this segment will soon come crashing down.

Source: T2 Partners

Home Ownership Still Too High

The price boom was also powered by growing home-ownership (remember the 'ownership society'?).

This will likely also regress to (or below) the mean, as many new strapped homeowners realise that it's a nightmare compared to renting. That will trigger more supply...

Source: T2 Partners

Foreclosure Filings Are Soaring

Another source of supply, obviously, is foreclosures. They're still soaring.

Source: T2 Partners

Nearly One-Quarter Of Mortgage Holders Are Underwater

When you owe more on your house than it's worth, you're more likely to default.

With nearly one-quarter of homeowners-with-a-mortgage now underwater, the foreclosure boom is likely to continue.

Source: T2 Partners

Nearly 10% Of Single Family Homes Are Now Delinquent Or In Foreclosure

More impending supply...

Source: T2 Partners

Meanwhile, On The Demand Side...

The supply-demand equation has two sides.

As we've seen, supply is vastly larger than normal, and it's likely to stay that way. Meanwhile, the demand side is getting weaker, too.

For example, one of the factors that drove the boom was the increasing ability to borrow pots of money at low cost with little income. That is now reversing. But it has a long way to go to get back to normal.

Source: T2 Partners

Lenders Are Still Tightening

Burned lenders are frantically tightening their lending terms.

This makes it harder to borrow...and borrowing by Americans has plummeted. This is hurting demand, even among consumers who haven't been fired, aren't underwater on an existing house, and are willing to buy into a declining housing market.

Source: T2 Partners

6.5 Million Would-Be Homebuyers Have Been Fired

More than 6 million jobs have been lost since the start of this downturn.

Getting sacked tends to dissuade people from leaping into the market for a house.

Source: T2 Partners

Savings Are Soaring

Meanwhile, those who still have disposable income are starting to save it again.

The savings rate has lept upwards in the past few quarters...and every dime that Americans save is a dime they won't be spending on current mortgage payments.

The savings rate still has a long way to rise to get back to normal, by the way.

Source: T2 Partners

So, Will Prices Fall Below Trend?

So, to reiterate, prices are still above trend. They will almost certainly fall back to trend...and then below it.


First, because the supply and demand trends we've just outlined have the power to carry prices down a lot more than 10%.

Second, because that's just what happens when bubbles burst...prices crash back to or below trend.

Source: T2 Partners

Bursting Bubbles Always Fall Back To Trend (Or Below)

See? Here are 12 bubbles tracked by GMO. Every one of them regressed to, or below, trend.

Source: T2 Partners

Prices In California Are ALREADY Below Trend

And most analysts think they still have further to fall.

Source: T2 Partners

The Housing Chart Worth 1000 Words

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