Wednesday, May 7, 2008

The Housing Crisis Is Over! Or Is It?

I read an interesting opinion piece in The Wall Street Journal yesterday by Cyril Moulle-Berteaux, a hedge fund manager, which said the housing crisis was over, and that it bottomed out in April. I couldn’t help but respond to such claims, as I’m not sure how he can be so confident in his stance. You can read the whole article for yourself; I’m not going to get into all the particulars here, but I wanted to add a couple points.

The stats that Mr. Moulle-Berteaux used in his article sound great, but how much can we rely on such data? The answer is we can’t. Just as he says the data being used by the housing naysayers is inaccurate, so too must we be skeptical of his. Statistics can be found to back up just about any point you want to make, and beyond that you can analyze data sets in many different ways and skew them as need be.

The main point that he makes is that housing is now affordable to the masses again, so we should expect people to start buying. Typically, when the cost of renting nears the cost of owning, people will choose to buy. That argument makes sense to me. However, many people couldn’t buy now even if they wanted to. Lenders have tightened their standards to the point that, unless you are looking at getting a conforming loan, you are pretty much out of luck. That means that people need to be able to put up 20 percent in order to buy a home, and I’m not sure as many people have that kind of money as he thinks. During the housing boom we experienced the highest proportion of homeownership in U.S. history, and this was in large part because of the increased number people who were able to qualify for home loans. Now that these people can no longer qualify for home loans, the percentage of homeowners has to drop. As more and more people go into foreclosure and lose their homes, the percentage of homeowners is going to drop. Considering how the number of foreclosures is continuing to increase, I think it might be a bit premature to call a bottom.

In addition, we have to consider the mob mentality. Even if prices have dropped to an equilibrium, in boom and bust cycles, both the boom and bust typically go further on their perspective ends than they statistically should. The reason for this is that people follow a mob mentality; we are natural followers and we don’t want to be the first ones to the party, so to speak. Therefore, even if April marked the statistical bottom, the market is probably still in for some additional correction before people are ready to jump back in. When they do, though, it will likely be a nice little surge of activity.

Many of Mr. Moulle-Berteaux’s points are valid, and who knows--maybe he will turn out to be right. But from my experience, trying to time the market is just a practice in futility. There are so many factors that go into determining these things that chances are you are going to be wrong when you try to time a market. In my mind, the factors that investors need to keep an eye on are property yield or cash flow. Cash flow is an age-old indicator of property value, and it rarely lets us down. Steep losses are realized when people panic and leave the market all at once. If a property owner is seeing cash flow, they have no need to panic. So my advice to you is to not bother trying to time the market. Be smart, and if you are going to buy, buy on cash flow rather than trying to use your--or anyone else's--crystal ball.

1 comment:

Anonymous said...

"...The main point that he makes is that housing is now affordable to the masses again".

Are you kidding? No (or low) down payment, interest-only, and adjustable teaser rates are gone. Few can afford the banks tightened and newly conservative terms.

To the masses? Hardly...with Banks freezing and lowering equity credit lines and credit card limits, crippling gasoline prices, rising unemployment, tapped out consumers and rising defaults and bankruptcies?

The only people now who can and will buy are the "investors" (or bottom-feeding bargain-hunters like me) who are not going to buy in a decreasing market. I'll buy in six months to a year or maybe later. The bargain market will be around throughout 2009.