Despite positive numbers, the slide will likely continue!

Yes, we are seeing more first-time homebuyers purchasing the American Dream. Yes, the discounted prices that foreclosures offer are attractive. We are, however, far from the point where prices and capacity to purchase are at equilibrium.

At the peak of the housing market (Q2/3 2005) no more than 11-15% of people had the ability to buy homes in all of the major metropolitan areas. The "Affordability Indices", community-specific measurements of those who could afford to buy a home, were ridiculously low, despite the availability of exotic loan products designed to keep payments reasonable. The prices of homes soared to completely unsustainable levels. Based on these indices, 85-90% of the population would be condemned to a life of renting. Of course, this trend was both economically unhealthy and totally unsustainable. We all know what happened since.

Home prices have now seen some pretty serious declines in some areas. Based on the CNN article, we have seen prices fall as much as 59.1% (Cape Coral-Ft. Meyers FL), year over year! The serious declines in value, combined with tax credits, FHA lending, and the perception that we are close to "the bottom" has enticed many buyers into the world of homeownership.The good news is that first-time homebuyers are getting financing and buying homes. The mortgages people are qualifying for are, for the most part, sound products with little controllable risk. Given that most buyers (investors/flipper excluded) will remain in their homes for at least five years, these new buyers are likely to be making sound, long-term investments. It is my contention, however, that these low priced opportunities are far from the bottom, pricewise.

Despite the contentions of NAR's Chief Economist, Lawrence Yun, that this is a lull before the upturn, I believe that we are still at unsustainable price levels and that the existing "A" paper and "Alt-A" paper loan portfolios are conspiring to drive values down another 10-20%. If you look at the WFB/NAHB Index of Opportunity for 231 cities, from May 18, 2009, you will note that many of Electoral Colleges "Big Six" states (CA, NY, TX, FL, IL, PA), and their respective large cities, are represented in the lowest quartile (32 of 57). The suggestion being that a huge portion of the population lives in areas where homes are least affordable.

It is a fairly reasonable contention that either incomes need to increase significantly (not likely), mortgages need to be made more affordable (possible, with caution), or that values still need to be brought in line with incomes. We have seen some laudable efforts to drive rates down and have witnessed the resulting run in loan originations. The likelihood of continued low rates, for the short-term, is pretty strong. I believe that the government will do what is necessary to keep rates down…even if it has to buy the bonds itself to keep yields low. But rates can only go so low; prices still need to come down. The latter is the path of least resistance given the amount of inventory and the pending "A" paper crisis.

The Subprime crisis is winding down. We still have a tremendously large amount of "A" paper loans that will be adjusting and a really, really dangerous inventory of Pay-Option ARM's which have started to re-cast as I type. The details and mechanics of these loans make them nearly impossible to “modify" and will necessarily create a tremendous amount of foreclosures in areas ranging from the lower economic strata to the highest. The subprime loans were the tip of the iceberg.

So, yes, we are seeing a dramatic increase in some areas that were hit the hardest. Yes, there is more optimism on the streets regarding housing opportunity. We are even seeing some lending happening! We still need, however, for prices to adjust to reasonable levels. I am not an economist, nor do I know what levels of homeownership and affordability that are necessary for a healthy economy (I have heard figures in the 70% area), but I do know that given current income levels, home prices need to still come down to a point where an average American family can buy a home.

Although I believe we have some serious pain ahead regarding home values, I also believe that the resulting opportunities will be a welcome relief to an American middle-class that needs relief from the high cost of home ownership.

Joe Chatham