Housing - You can time the bottom

You are looking at the ARM re-set schedule (source: Credit Suisse).

It has 2 peaks: Dec 2007 and July 2010. Starting now, 14 months of $40B re-setting each month, and 7 months of $50B re-setting. If the average home is $500K, that's ~80K homes up per month. (BTW the median price is closer to $250K).

Now assume that some 20% are in trouble. That's 16,000 homes foreclosing per month.

The clock will really start sometime 6 months later, around May 2008. I'm assuming 6 months of a delay because of the foreclosure process and eventual dumping of properties.

The bottom will be 10 months after that or Spring 2009.

But that leaves open the door to the next wave of re-sets starting 2010. I'm less concerned about that wave because I have a feeling that those can be converted with some but minimal mortgage rate payment impact. After all, the first peak is Subprime. The 2nd peak is all other ARMs. I assuming that all ARMs are riddled with fraud and inability to pay, but folks who needed subprime were more shaky and unquaified.

The bigger concern is where housing prices will be for folks re-financing 2010-2011. Because ability to pay mortgage is one thing but ability to re-finance is harder if the underlying asset value (house) is worth less than the loan amount. I think prices will have crashed hard by then and there will continue to be problems.

Also, by then the banks will have managed their exposure and be in a position to manage the sequel better.

By 2012, the bubble pop is over.

Buying a house in 2009 means riding a 2nd wave of negative housing price pressure. The only advantage is that fire sales are more likely in 2009 - so better deals are likely.

Contained? Falling prices hit all - even homeowners with fixed rates.

If you rent, consider playing hardball with your landlord. No rent increase this year. Maybe a rent drop next year.

The bottom will be reached when housing prices drop to a point that pulls renters into buying. That will be on a cash flow basis and no equity appreciation factored in.

That is the carrying costs of owning a home (taxes, HOA dues, upkeep & maintenance, insurance, repairs, and mortgage).

An example: what is the home price equivalent for $2000.

House price: $400K

Mortgage (fixed 30 year jumbo): $2300 before taxes or ~$1400 after taxes

Taxes (assume 1.5%): $500 per month or $350 after taxes

Insurance: $100 per month

Maintenance (assume $2400 in repairs, pest control, garbage and gardening per year): $200 per month

Total running costs: $1950

In these kinds of comparisons, folks often include asset appreciation on the house and opportunity cost of renting and investing the downpayment. I'm excluding them from this analysis. Over the past few years, housing price appreciation favored the argument of owning, but in an environment where home prices are flat, the equation begins to favor the opportunity cost advantages of renting.

So I exclude them both for now.

I rent a 3 bedroom, 2 bath house for $2000. The homes in my neighborhood run $850K and up. In my example, they would have to run $400K OR LESS to bring me into owning.

That's a 50%+ drop in nominal home price. And the real home price drop is even greater when you factor in inflation