The first thing to consider is the law of supply and demand, basic economics here.  If the supply of houses increase the price should go down and if the supply decreases the price should go up.  So naturally let us first begin by using Trulia to determine the supply.  I realize this is a crude way of determining the supply but I’m looking for something simple.  I don’t feel like logging into ARMLS to pull these numbers.  In the box below if you click on the “Inventory” tab towards to bottom right you can see the trend is going upwards(1/26/2010). 

Tempe Real Estate – Trulia.

If you mouse over the end you’ll see it’s at 689 compared to a year ago at 516.  This tells us that there are more houses on the market now than a year ago.  According to this trulia graph almost 25% more.  Therefore we should conclude that until this supply starts to come down you should not consider buying a house.

Here is a shorter term example.

Next let’s take a look at raw prices of houses over the last year in this area.  This is the same graph as the one before except we’re not going to click on the “Inventory” tab.  Instead we’re going to leave it on the default of “Price”.

Tempe Real Estate – Trulia

You can see from this graph that prices are on a downslide.  Until this graph starts to turn upwards I would not considering buying a house.  Some people argue that if you wait until it starts to turn around then you’ll be too late and have to pay more.  This mentality will do nothing except get you in trouble.  Sure you may be right and call the bottom of the market.  But look at the downside if you’re wrong.  What if the property drops another 25%?  Some “experts” said the market would not move lower when it was still close to its highs in 2007.  Where would you be today if you bought a house then?  Do the right thing and wait for this graph to start an upward turn.

On a brighter note the median house price was up 1.5% in December at $178,300. It appears our lesson of the crash is yet to be learned. 1.5% annualized is 18%. A number that is unsustainable. Albeit this could just be the markets pulling towards their equilibrium. So in November home sales had peaked for the year and prices rose in December. There are two ways to solve this problem, government regulation or raising interest rates. Should the government intervene with the markets? Or let them run their course?

In March the governments program of buying mortgage backed securities is set to expire. This will be an interesting time to watch what happens.  In December we witness the largest slow down of housing sales since 1968.  One thing we know for sure is that our economy rests on government injection of capital.  The question is how long is this sustainable…

If you look at this chart light blue represents AZ and dark blue represents the United States.  It appears as if the US has hit a bottom or slightly starting to curve flat.  I’m not here to discuss whether or not this is the bottom however.  It appears to form a bottom but I’m not speculating.  The reason for this blog entry is to outline the policies that are flawed and that need to be changed.

Let’s start first with the banks.  They refuse to do principle reductions on properties yet they will let them foreclose become REO properties then sell them at 50% off.  Where is the common sense in this.  Why not do a principle reduction of 5-49% you’re going to lose the money regardless right?  Especially for home owners that pay their mortgage every month on time.  This would reward the responsible borrowers.  Instead what happens?  You have to stop paying, start the foreclosure process, then the banks will finally work something out with you.  Worst case scenario again, you foreclose and they pickup a house that is worth 50% of the loan they were carrying.

Next let’s talk about interest rates.  Why is it that a responsible lender who is break even or slightly upside down in there house cannot refinance?  The banks are telling these people to go fly a kite because they already have them roped into a loan and they know they will not stop paying or else face foreclosure.  Yet if someone picks up a new mortgage today they will gladly lend at lower interest rates.

All of this being said why would a responsible person stay in their house at this point?  If they are slightly underwater, hugely underwater, or if they owe what their house is worth they would be outright stupid to stay there.  Think about this for a second.  You can find foreclosures all over the internet today for 50-75% off of value.  So hypothetically lets say you purchase a $400k house for $200k.  You can take out $50k extra on a 2nd fix the foreclosure up exactly the way you want and your loan to value ratio is somewhere 62%.  Plus the banks will give you super low rates on your new property.  So if your existing house is worth $200k.  You get twice the house for only $50k more.  This includes the costs to make it your dream home!  Or what if you buy your same house foreclosed for around $100k or 50% off?  You cut your payment in half and walk away with the same house.  Surely your credit goes down the drain.  But with some many people with limited credit today are the banks truly going to maintain the same lending standards pre-Bush era?

The reason the housing market is still in the gutter today are simple common sense problems.  Some I’ve outlined above I’m sure there are tons more.  But until the government or the banks give people a reason to keep their houses you can expect a 3rd wave of foreclosures that nobody predicted.  It’s going to be from responsible borrowers.  The reason it will happen is simple.  First wave was ARM loans, second is alt-a, and the one that will hit everyone by surprise is the 3rd phase or “responsible borrower” phase.  I predict when the amount of foreclosures add up to the number of houses purchased from 2004-2009 that is when you’ll see this crisis end.  Some may think that is a staggering number and is outright crazy.  I say common sense always wins in the end.