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It appears the Fed is coming to the conclusion that a reversion to the mean in home prices is the only answer and as you can see below, we need to see another 23% drop in housing in order to get there:
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In a nutshell, the Fed shockingly admits that their meddling via HAMP and other programs were ineffective and only juiced housing prices by about 5%. The Fed candidly discussed how poorly the program worked (emphasis added):
A study found that in a best-case outcome, 20 to 25 percent of modifications will become permanent.[5] In 2008, one in three homeowners devoted at least a third of household income to housing; one in eight was burdened with housing costs of 50 percent or more.[6] Failed modifications suggest that, without strong income growth, the bounds of affordability can be stretched only so far. Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply (Chart 3).
As a result, they are dramatically ramping down HAMP modifications:
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As you can see below, the effects of pulling forward demand using the housing tax credit were catastrophic:
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The Fed is basically admitting that housing has been a complete nightmare since the tax credit has expired. The time on the market for homes has surged, prices have continued to fall dramatically, and the number of offers and closed transactions and offers have also collapsed after pulling forward demand.
The Bottom Line
The Fed is basically admitting that the programs they designed to prop up housing was a total failure. 75-80% of the modifications have failed. I have been screaming about this would not work for two years now. One must wonder how many billions could have been saved by just allowing prices to revert to the mean.
As I have said before, you cannot re-inflate bubbles once they burst. Housing prices were simply mathematically unaffordable when they rose 85% from their mean. The only answer in the first place was to just let them fall to levels where buyers could afford them.
That being said, I give the Fed some serious kudos for coming out with this report. It's the first logical thing I have heard from them in a few years. I will always give the Fed credit where credit is due. I am often very hard on them, but I will be the first to admit that I am pulling for them if they decide to do the right thing.
They have a long ways to go yet but hey, it's a start. This will not be good in the short term for the housing or banking industries if the Fed winds down these programs. A 23% drop in housing prices to the reversion of the mean is a long ways down, and we all know that bubbles almost always overshoot the mean when they are in the process of bursting.
Prices are already down 33% so the total peak to trough drop in housing prices according to the Fed would be 56% when it's all said and done. I guess this is possible but it sounds optimistic to me when you consider the fact that housing prices rose 85% in 2006 at the peak of the bubble.
The banking stocks are all down today and I am sure this housing report isn't helping.
The next issue is what to do with people that haven't made a mortgage payment for two years but are still squatting in the property. There are many and there will will be many more.
Not sure where we are or if it depends where you are in the nation. We just bought a home for $310,000. The former owners paid $585,000 in 2005. Similar homes in our neighborhood shot up to $630,000 and higher by the beggining of 2007. By mid 2007 the bubble started deflating here on the coast of California. I would say from what is going on during the past 3 years half the value is gone allready. Then again I use a neighborhood that I grew up in as a reference point. The low point for that neighborhood happened in the early 1990's when you could buy a home for around $150,000. By 2003 they were selling in the $330,000 range. In early 2007 they had hit $580,000. Now you could find homes selling in the $235,000 range, still not the low point that I remember. We bought because to rent a similar home it would cost us more than to buy. Interest rates are low and we found a home that we plan on living in for the remainder of our days.
Not sure where we are or if it depends where you are in the nation. We just bought a home for $310,000. The former owners paid $585,000 in 2005. Similar homes in our neighborhood shot up to $630,000 and higher by the beggining of 2007. By mid 2007 the bubble started deflating here on the coast of California. I would say from what is going on during the past 3 years half the value is gone allready. Then again I use a neighborhood that I grew up in as a reference point. The low point for that neighborhood happened in the early 1990's when you could buy a home for around $150,000. By 2003 they were selling in the $330,000 range. In early 2007 they had hit $580,000. Now you could find homes selling in the $235,000 range, still not the low point that I remember. We bought because to rent a similar home it would cost us more than to buy. Interest rates are low and we found a home that we plan on living in for the remainder of our days.
It does depend. Some areas are probably done correcting, others like mine, are still correcting and will decline more.
It does depend. Some areas are probably done correcting, others like mine, are still correcting and will decline more.
Do you think it matters at all if someone plans on staying in the home that they bought? Our goal is to have a place that the grandkids can come visit, if our kids ever have kids that is. When we bought we had certain goals in mind with the kind of home and the location. Our home met the mark and go low or high in price we plan on paying it off and living in it.
The House we are looking at sold for $688k in 2006.
They are asking four n a quarter for it now on a short sale.
One thing I find interesting is that most of the data sited in this article is from June & July 2010.
We have been watching housing prices here in DC closely and have seen five to ten percent drops since then to now.
Which validates the report and tells me we may be almost half way through the 23 percent drop already.
Why in the world would anybody purchase a home in the USA in the next 2 years? Please explain this to me. With the high risk of a plummeting dollar and soaring inflation/hyperinflation and an additional round or two of "quantitative easing" this seems to me a terrible time to buy.
Why in the world would anybody purchase a home in the USA in the next 2 years? Please explain this to me. With the high risk of a plummeting dollar and soaring inflation/hyperinflation and an additional round or two of "quantitative easing" this seems to me a terrible time to buy.
The simple answer is "to live in it"
I don't see a plummeting dollar effecting home prices much.
After all US real estate is valued in US dollars.
Also seams to me that inflation would discourage holding cash.
US real-estate apparent values might go up with inflation.
Might be a good place to park wealth to preserve purchasing power.
Real estate prices are not in a bubble today.
Is there downside risk. Possibly.
But at the end of the day, I do need someplace to live.
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