2010 has marked the 4th consecutive year of the downfall of American housing. Millions of families have lost their homes, either because they couldn’t afford the payments anymore, or because they chose not to make the payments. Countless more have lost thousands upon thousands in equity, often this equity represented a large chunk of their net worth. With all that’s gone on with housing in America, it’s easy to see why people continue to be bearish on the sector as a whole.
As a contrarian, I’m attracted to investments that others shun. I’m beginning to wonder whether we’re nearing the bottom of the market. Here are some reasons why:
Housing Starts Are Terrible
Housing starts, while improving lately, are near record lows and have been for the last 2 years. While there was too much supply in the market, we’ve had two years of terrible numbers to help demand catch up. At what point does the tide turn?
Prices Are Very Reasonable
Traditionally, housing prices have been considered fairly valued when they are 3 to 4 times median income.
The average house price in Phoenix is $140,000, while the typical family income is $65,900. This puts housing prices at 2.12 times income. In Boise Idaho, housing is 2.16 times income. In Atlanta, the ratio is 1.48. There are countless other cities in the United States that have similar ratios. Yes, I realize the economy is tough, but housing prices are very cheap in some markets.
Interest Rates Are Low
A quick Google search found me an offer for a 30 year fixed mortgage at 4.69%. If you take a 15 year mortgage, an even better 4.09% rate can be obtained. These rates are ridiculously low, and Americans get the privilege of locking in their mortgage for 30 years, keeping payments constant. Locking in at these low rates will look very attractive 5 years from now when rates are higher.
Prices Are Actually Going Up Stable
2009 wasn’t that bad of a year for the American market. Prices nationally only fell 0.7 percent, at least according to the National Association of Realtors. Yes, some of this can be attributed to the home buyer’s credit, but the market hasn’t performed that bad considering the weakness of the underlying economy.
Everybody Hates The Sector
This reason is hardly scientific, but it seems everywhere I turn these days people are urging their readers or listeners to stay away from U.S. housing. I call this “sentiment bias” and typically I like to take the opposite position to what’s popular.
Saying this, there are reasons why perhaps the American housing market still has room to decline. They are:
The Expiration Of The Buyer’s Credit
While the effectiveness of the Government’s home buyer credit can be debated, there is little doubt that it pushed some buyers into making a decision before it expired. This isn’t good for housing prices.
The Economy Is In The Crapper
With it looking more and more like the recovery is losing steam, a double dip recession is becoming more likely. This does not bode well to housing.
I’m not sure where U.S. housing is going from here. I think that values are attractive, rates are low, and there is a limited amount of new supply coming on the market. While the problems from before aren’t quite behind us, we’re in the later innings of that game. If the U.S. economy doesn’t recover though, values could once again start to go down. If they do, I don’t think they have much more room to go down.
Readers, what’s your opinion on the American housing market?