The Volokh Conspiracy

Not that I think a year-over-year fall is impossible, but I think those numbers aren't seasonally adjusted, and I believe June is historically the month with the greatest seasonal adjustment.

So, I do think it is a bit premature to make this call.

Why look only at used homes? There's probably a significant sample bias there since one would expect that used homes are the least desirable and thus demand would fall off for them first.

Second, I'm not sure how much water the NASDAQ analogy holds. The market in homes is significantly less liquid than in securities, so it's unlikely to overheat as badly. Further, people derive utility from their homes by living in them; the investment provides significant and constant dividends in that sense, making the analogy to securities even less compelling.

All in all, I'm not convinced the logic is "idiotic."

David,

As someone who is about to put their home on the market in DC (moving away), I really do wish that you would stop talking down the market. I do expect that I won't be able to get as much this summer as I would have last year, but your constant yammering on this issue is not going to help.

What is this "MSM" about which you speak?

Here's a quote from Alan Greenspan that appeared in the notorious MSM quite some time ago, "The housing boom will inevitably simmer down, ... As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease.”

Or maybe it wasn't quoted in the MSM, as clearly they are too "idiotic" to print anything that doesn't serve the conspiracy of a bull market in housing.

I hope David is wrong too since I happen to be "long" real estate, to borrow a term from the securities markets. I also think that's about the only thing we should be borrowing from those markets. I really don't understand the "land/house" example above and I certainly don't see how it is "not unlike what happened to many NASDAQ stock." Where's the analogy there? are we comparing the rapis price increase or is DB saying that NASDAQ stocks had 2 components to their value that is analogous to the house and land example. I am confused.

Home Seller, all I can say is that people get very worked up about investment predictions that go against their interests. Just go into any stock-related chatroom and you'll see pure venom being spewed between short and long investors. Since it sounds like you have no choice in selling anyway, my advice is to just hope David is wrong and wish for the best. Don't worry, he may be right by his mere "yammering" is not go to move the market.

I have come to realize that nobody, absolutely nobody, knows what tomorrow will bring. I have had modest investment success by dollar cost averaging over a period of many years.
I think that buying shares of companies with good fundamentals, at reasonable prices ( there is always a debate over what is reasonable ) is the best you can do . I try to ignore the fad of the moment, If the fundamentals turn bad, get out.

DB: What I really don't understand is why you would compare March 06 to June 05 when we have March 05 numbers in the chart. Year over year the numbers are up. Am I missing something or have you completely cherry picked this chart. Your post should read: "Guess what the 'idiotic' MSM seems to be correct again but I am interested to see what the numbers in June 06 will look like."
I am not saying that we aren't in for a bubble burst (I really hope not but I don't know) but I think your post is intellectually dishonest. And I'll had that it's the first time I have felt that way about one of your real estate posts (which I generally enjoy given the passion they provoke).

What Home Seller has to remember is that all real estate is essentially a local market and that home prices are a function of demand (read: jobs) and supply as well as location, location, location. What happens in D.C. is not usually tied to what happens in Philly,etc,. What those local factors are in his case I don't know and that is what will determine the price, market time,etc for his property. What DB may be referring to is the speculation rampant in the real estate market say in parts of Florida over that last few years is similar to that which took place in the NASDAQ in 1999-2000. Real estate speculators are starting to pull out of many markets, softening demand.

The subject needs to be more closely defined. "Used" houses are often on bigger lots and have landscaping and other amenities that add value. Some older ones have smaller rooms and fewer amenities, especially in bath and kitchen design. Some states like California have limited available land and are unlikely to see long slides. We had a nasty slump in 1991-94 but prices are back up by 300%.

Condos are soft as are second homes. Central states with unlimited land available for development are much more susceptable to long declines. Phoenix is seeing a sharp decline in condo prices even though that is an entry level price range and should hold better. Many are probably second homes. The market is not one big one but lots of small micromarkets. You can't pack up a house and move it.

Here's a very simple test for whether the housing market is over-valued: Figure out the present value of all future costs connected with an "average" house (mortgage payments, insurance, taxes, utilities, maintenance and repairs,...) minus tax deductions for interest omn mortgage. Figure out the return you would get on this amount if you invested it in the market. If this return is more than the rent and associated expenses you would pay for an apartment that is comparable in terms of location, livability, .., then the price of housing is too high. By this criterion, the housing markets around DC are definitely a bubble.

Why are you so obsessed with the housing market? I'm genuinely curious.

Also, in your glee at the supposed drop in prices, you neglected to mention that the median price for the "average" home doesn't really say anything about whether prices have gone down. It seems more likely to me that with higher interest rates, the same pool of buyers can afford houses that cost less. Since houses are available at all price ranges, the drop in purchase price doesn't really tell us whether actual prices of houses have gone down.

And as pointed out above, you appear to have seriously cherry picked here. Looking at the excel doc, why wouldn't you choose the March 05 &06 numbers, which are at the top and bottom of the file? You didn't even choose the 6 month number. Instead, you picked the month in which the most sales for 2005 were predicted.

With regard to the analogy to stocks, there is at least one important difference: companies are essentially a legal fiction, when they lose value, they eventually cease to exist. Land and houses don't, absent fire or other catastrophies.

Bernstein writes: One of the more idiotic things I kept seeing in the MSM last year is quotations from various "experts" that while it's possible that certain "frothy" housing markets will see a correction, home prices never decline (in nominal terms) year over year nationwide, and thus will not do so in the future.

That may be one of the more idiotic things you kept seeing in the MSM last year, but as jallgor points out, you certainly have NOT given any evidence that it is actually untrue.

Sorry, my link didn't show up. It should be:

http://www.realtor.org/Research.nsf/Pages/EHSMeth

I TOO THINK IT IS STRANGE THAT YOU USED THE 6MONTH NUMBERS. AS SOMEONE WHO WORKS IN THE MARKET I WOULD BE SURPRISED NOT TO SEE PRICES GO UP OVER THE SUMMER. THAT IS THE TIME IN WHICH PEOPLE WANT TO BUY HOMES, THEREFORE INCREASING DEMAND. INCREASE DEMAND = INCREASE PRICES. DURING THE WINTER THAT DEMAND DECLINES CREATING A SLOW DOWN IN PRICES. NOTICE HOE VOLUME GOES UP DURING THE SUMMER MONTHS? MAYBE YOU SHOULD TAKE A LOOK AT WHAT REALTORS ARE SAYING:

Sales of previously owned homes edged up slightly in March but not enough to keep the inventory of unsold homes from hitting a record high as the once-booming housing market continued to flash signals of a slowdown.

The National Association of Realtors said Tuesday that sales of existing homes edged up a tiny 0.3 percent last month to a seasonally adjusted annual rate of 6.92 million units.

The March increase followed a bigger 5.1 percent jump in February with the two months representing the first advances since five consecutive monthly declines.

The median price of a new home rose to $218,000 last month, a gain of 7.4 percent from a year ago. That price increase was far slower than the double-digit gains turned in last year as the housing boom was peaking.

LINK

Just to be clear, it's not idiotic because it's happened, it's idiotic because it's a logical fallacy to say, "prices have not declined yoy for the last sixty years, so they won't (can't!) in the future."

Just by way of analogy, it would have been similarly fallacious to say in 2000 "The NASDAQ has never declined by 80% in the past, so it won't (can't!) in the future."

Addendum: Especially idiotic because (a) there's no inherent economic reason why home price can't/won't fall nationwide; (b) they did in the U.S. in the 1930s; (c) they did regionally between 1989 and 1995; (d) they recently did, sharply, in Japan; and (e) the nationwide runup in prices is unprecedented.

Just to toss in my two cents on the "idiocy" issue, I think the first paragraph of David's original post was well-reasoned (although the fallacy he is criticizing is so common in so many areas that it might be a bit too harsh to call it "idiotic").

But I do think his second paragraph does not provide much support for his argument, in light of the problems with projecting March home prices to June. And since the data in the chart is actually still showing a year over year gain, it does seem a little odd to cite this chart as a counterexample to the proposition he discusses in the first paragraph.

One of the more idiotic things I kept seeing in the MSM last year is quotations from various "experts" that while it's possible that certain "frothy" housing markets will see a correction, home prices never decline (in nominal terms) year over year nationwide, and thus will not do so in the future.

This type of 'expert' white-washing is indicative of all bubbles.

The similarity of events, both qualitative and quantitative, of bubbles is staggering; it's almost as if they follow a script.

The 6:34 comment seems to me to provide a much better argument as to why the statement is idiotic than does the 9-month data.

Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down

I wonder when they say something like this, though, whether they are saying (a) that no particular month within a calendar year will show a year-over-year decline, or (b) the median sales price for the entire year will not declince. I'd bet they mean (b). For 2005, the median price was $219,600. I don't think is should be too hard to beat that number, given that the last three months (which, according to the info above, are the slow 3 months, with the lowest prices), are within $1,600 of that target.

Elliott G,

People can not pull their homes off the market when they are forced to sell because their IO mortgage payments jumped 50% and they have zero equity in the home. There will be some real fire sales in CA,FL and someother markets in 2007-2008.

I own a townhouse in a large DC-area development where there are literally hundreds of my model. The assessment and sales information is available online.

The tax assessments have increased significantly in the last four years, with sales prices quickly outstripping them. Except for this year. Most of the sales of the model of home I own have sold below--sometimes significantly below (10% or so, which is several tens of thousands of dollars)--the assessed price. Now perhaps the locality just got extra greedy with the assessments this year (I thought they were a bit ambitious), but the assessments did reflect the end of the year pricing more or less. This year, not at all. Granted not that many sales have been booked this year (slowdown anyone?), but prices have definitely fallen, both as measured against the assessed value and in absolute dollar terms from last year.

FYI, this discussion is lacking economic and mathematical sense. I'd like to inject some:

1. Most of the gain in housing prices over the last 60 years is due to inflation, i.e. it is an illusion caused by the money supply growing, and it doesn't really mean anything. The reason the Great Depression and Japan in the 90's saw extended drops in housing prices is that they both were deflations, i.e. the opposite of an inflation. These examples, therefore, tell us exactly nothing.

2. Likewise, the claim that housing prices have gone up year-over-year for 60 years is meaningless. Of course nominal prices keep going up, that's what inflation does. What matters are real (or inflation-adjusted) prices. THOSE prices show regular dips in housing prices -- i.e. there is a mix of booms and busts.

3. However, the dips do not always come after the booms. In fact, most booms are followed by price stagnation i.e. inflation-adjusted prices remain the same for several years.

4. As long as we have inflation, nominal house prices for the nation as a whole are more likely to go up than to go down. Yes, they can go down, but barring a Great Depression, inflation is going to keep pushing them back up.

5. Inflation is always good for borrowers. So yes, your house isn't always a great investment, but, a mortgage is always a great idea. As long as we have inflation, you will get it pay it back with money that is worth less than the money you borrowed. This is why people in the last 60 years have made lots of money owning houses -- a combination of inflation before 1980 reducing their real debt and falling interest rates after 1980 reducing their interest payments.

6. Yes, demand and supply for housing also make a difference. But in the country as a whole, demand for housing is clearly growing in the long term, for a simple reason: we have a growing population (also unlike Japan in the 90's). As long as we have illegal immigration and/or a higher birth rate than the Europeans and the Japanese, housing demand in the US will continue to grow. Maybe not every year, but on average over the decades it will grow.

David, if you want to make bets that the market's going to tank then there are apparently contracts available at a variety of places. I think DK's comments above are spot on except I think he is overly discounting the real gain in housing prices since the change in CPI in 1936 vs. now is about 15X and I expect that real prices have doubled or tripled over the same time period. I have no data to back this up, but I would guess that the percentage of income spent on housing has dropped considerably since then as well.

USA Today article on housing future contracts

I don't have a substantial opinion on the broader question of market performance, but I did think I'd take a peek at the question of whether there's seasonal variability in the median prices, or not.

The NAR doesn't make it easy to pull this data together, but I found some stuff in Google's cache.

Here's monthly data from 01/04 - 01/05

Here's 05/04 to 05/05

And, the current page has

03/05 to 03/06

Between these, you can put together a comprehensive picture of prices from 01/04 to 03/06 to try to find out if prices fluctuate seasonally.

I realize this is hardly 30 years of data, but, from this run, it looks to me like:

The lowest annual median price is in February (169k in 02/04, 189k in 02/05 and 218k in 02/06, so far)
The highest annual median price is in June (191k and 229k).

Prices in general seem to peak in June, and then be flat and declining through February of the next year, and begin to rise again in March to the next peak.

Now, in defense of David's assessment, prices from June '04 to March '05 were up 6.28%, in the same period from '05 to '06, they're down 4.8%. This is also the only period in which the price compared to nine months previously has declined.

But, that said, June to February seems to be the worst period performance for the data we have. Given that June is the seasonal peak, June to June seems much fairer.

Also, I suspect, when you have people talking about year-to-year resale, they're talking about the yearly median number, which we don't have the data to even make a stab at for '06, yet. For '04 and '05, the median price in March was well below the yearly median price.

It looks to me as though there is a substantial seasonal fluctuation in home prices. But, it is interesting to note, from March to June, in '04 and '05 we saw substantial gains (13.02% and 21.16%, respectively). Those who think the housing market is in decline should now be predicting that we won't see gains between now and then, or may even see losses.

Should be interesting to see, but I'd say it's a bit early to crow about yearly numbers being down. There does seem to be a significant seasonal component, here, and it may just be that whatevever that seasonal variation is caused by has slipped an extra month out, this year. Be interesting to see what next month brings.

Here's the raw data:

01/04 $171,000
02/04 $169,000
03/04 $175,000
04/04 $179,000
05/04 $184,000
06/04 $191,000
07/04 $191,000
08/04 $190,000
09/04 $187,000
10/04 $187,000
11/04 $190,000
12/04 $191,000
01/05 $189,000
02/05 $189,000
03/05 $203,000
04/05 $214,000
05/05 $217,000
06/05 $229,000
07/05 $228,000
08/05 $229,000
09/05 $225,000
10/05 $229,000
11/05 $225,000
12/05 $222,000
01/06 $220,000
02/06 $218,000
03/06 $218,000

A real estate agent friend of mine is seeing larger numbers of very questionable loans these days...she is certain that these lenders will never see a profit on many of these loans. Too many lenders don't have experience in the housing real estate market. She compares it to the Savings and Loan problems of the 1980s.

My wife and I are both buyer and seller in the north Chicago market right now. It will be interesting to see how the next couple of months pan out for us...

Not sure if anybody cares, but I thought a recent post over at Dean Baker's blog on the housing bubble might be of some interest.

Here where winters are cold and miserable, nobody (relatively) buys houses in the winter. I bought last winter, because I had to, and found the selection poor and prices (mercifully) depressed.

This is true in Boise as well. Ordinarily, demand for housing (and consequent increase in prices) starts here in April--but we have had several very wet and miserable weekends. My realtor says that the normal spring housing rush has been dampened by the wet weather. My builder tells me that a friend who is trying to FSBO his house had several disappointing weekends with only 2-3 families showing up for an open house. This last weekend (which was pretty nice), he had 16.

I had originally planned to put my current house on the market at the end of April, but I am holding back because there are several houses of similar size (2600-3000 square feet, 1/4 acre parcels) on the market within a mile of me at disappointing prices ($350,000 to $419,000). Some of these need to leave the market to reduce supply, and drive up prices.

Like many others, I listened too much to people like Abby Goldman Cohen (or is it Abby Cohen Goldman?) when she was talking about Dow 20,000. I know that housing prices are certainly capable of dropping, at least for periods of several years. It is certainly true that when all the conventional wisdom says, "This market can never drop!" it is the time to sell. But I see so much discussion of the riskiness of the housing market in the MSM that I don't think we are at that point. Last year, that was certainly the case. But generally, the MSM isn't speaking the "Skies the Limit!" nonsense with one voice anymore.

I will probably be buying another house shortly for my daughter and son-in-law, partly because I think the Boise market (especially in the size of house they need) is likely to continue appreciating modestly for the next several years. But my primary motivation is to provide a place for them to go to grad school. They would be throwing $600 a month down the renthole; that also turns to be close to the payment that I would be making on a small house or duplex for them. If the house appreciates, we both benefit. If it doesn't appreciate, I'm out the interest that I would have earned on the money that I will be putting into a down payment. If it depreciates--not terribly likely, but at least possible--I at least have provided a better housing situation for them for a couple of years.