The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.
The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
As I noted over a year ago, the idea that a nationwide year over year decline in housing prices was virtually impossible, despite an unprecedented nationwide price bubble--driven by low interest rates and incredibly lax lending standards--was extremely ill-considered (okay, last time I called it "idiotic").
Who are these economists? Certainly not Robert Shiller who has done extensive research on housing prices. Besides the median is not right thing to look at anyway as I discussed in my prior post on the “mortgage interest” thread. There is no way you can reconcile “modest” price declines with Shiller’s graph. Of course the housing market can be extremely illiquid. Sellers can stubbornly cling to their price and just not sell until inflation gives them the nominal price they think they deserve. For this and other reasons prices can take years to correct to the underlying fundamentals. However the sub-prime mortgage crisis might change everything because a lot of people are forced into a short sale or a foreclosure. It’s also going to take banks and other financial institutions some time to learn the ropes about real estate. They too are inclined to hold onto property for too long hoping somehow the buyers will appear to give them the price the want.
Well, they're going down significantly more than that in many areas-- areas that are concentrated on the top end of the market. The quoted article mentions 14% declines in California. Since the declines are much larger at the top of the market, the median in some sense understates the issue.
And measured over the entire country, there was a price bubble. But it would also be ill-considered to claim that, e.g., Charlotte, NC saw a price bubble at all, as price increases barely beat inflation there despite lots of growth, thanks to loose building regulations. (And Charlotte prices are still going up, as the NYTimes article's graphic mentions.)
and really, how many economists make good TRADERS (which is about prediction married to risk management)?
they have some value in noting general relationships (laffer, etc.) but economists are ACADEMICS. they tend not to live in the real world (like most academics) but in a world where pretty theory rarely needs to be tested with real money and real risk.
of COURSE it's a bubble in real estate, but it is true that the real estate market is varied such that it isn't as true in some areas as in others.
all bubbles burst. period. all bubbles regress to the mean (while first overshooting the mean in panic selling).
that's why good traders can trade almost anything, although they may have markets of preference of course, because the same laws of psychology apply to all markets.
i've said this before, and i'll say it again. a bubble is a bubble and this one is no different than tulip bulbs, stocks, or anything else.
"For this and other reasons prices can take years to correct to the underlying fundamentals"
most bubbles will correct BEYOND the underlying fundamentals fwiw. iow, if this bubble REALLY pops, houses will sell well below what most would consider fair (or even "book value) value. that's because supply and demand are not ruled in the shortterm by fundamentals, as much as they are ruled by psychology.
when there is an overabundance of supply and not much demand, prices can go much lower than the fundamentals predict. i'm not saying it will happen, but it CAN happen. the fact that so many people were saying (not too long ago) that it CAN'T happen reinforces this.
smart money was shorting IYR a long time ago :)
i'm in a market (seattle area) that has also been going up consistently. 10-12% last year iirc. is it a bubble here? ab-so-lutely.
Of course, the 30% figure could easily be wrong... but it is, by now, the conventional wisdom.
We need to stop thinking of housing as tulip bulbs whose value needs to be artifically propped up by government controls and restrictions on supply. Tulip bulbs are not a necessity, but housing is.
Good idea. Let's start with market-distorting land use regulation.
Also, I think it is noteworthy that the areas with the greatest "bubbles" in real estate markets are also generally the areas with the greatest restrictions on development. It is not a coincidence that the ready availability of developable land in North Texas, the governmental environment conducive to development, and the resulting active competition from new building, have held down the price increases that "anti-development" areas like San Francisco, L.A., San Diego, &South Florida have seen.
the problem is not deregulation.
the problem is (like all bubbles) greed and personal decisions based on greed.
people chose (and to some extent STILL choose) to buy way more house than they can afford or need because "it's a no lose investment. it HAS to go up" (lol).
and then, like in every bubble, they become bagholders near a top.
in any free market, the market participants set the prices. as long as human nature doesn't change (and it won't) we will continue to have asset bubbles. in this case, we have had first and foremost a liquidity bubble.
bubbles are GOOD. they offer trading and investment opp's when you go against conventional wisdom, etc.
when i bought my last house (which i sold 2 months ago and bought about 9 years ago), my realtor told me i should buy a much bigger house, since the bank had pre-approved me, and it HAD to go up, etc. etc. etc.
buy-side and sell-side analysts will always have the same biases and vested interests no matter what asset we are talking about.
already i am reading comments in the seattle area, that OUR market is healthy and won't pop. these people NEVER learn.
one person's crisis is another person's opportunity.
i remember in 1998 when everybody loved stocks and hated gold. guess what. great time to sell stocks and buy gold.
being a contrarian is the way to be. sure, you can ride a trend, but make sure you don't get on near the END in an illiquid asset like real estate.
there are some very nice 500k houses i would love to look at for under 400k.
considering the difficulty many are having getting jumbo loans, well... do the math
that's how i look at it. where others see despair. i see opportunity.
While I don’t share your apparent nostalgia for a poorer past, I do agree that many people live beyond their means, or at least spend more than I would.
My concern is who that, like you said, many aren’t saving for retirement, social security will probably be insolvent, and we’ll have a bunch of poor elderly folks. As one who is trying to save for retirement, I won’t be surprised when the my Roth IRA is determined to be taxable after all, my social security benefits will be means tested away, and my withdrawals from my 401k will be taxed at 50%+.
I think the over-spenders may be on to something. Everyone is going to tell me I should feel sorry 21st century Ma and Pa Joad, and I won’t be able to drive around in my new SUV and lord the relative comfort of my golden years over them. In fact, I’ll probably be shamed into giving to charities that support them. At least I’ll that tax deduction, unless Bernstein succeeds in taking it away, too.
As for the rent v. buy…
Does everyone reading this live in a large city, where the rental properties are close substitutes for properties you could own? I see condos in high rises and apartments in high rises as close substitutes, but in a town of about 200,000, are the rental market really a close substitute for buying a single family home? Granted, things have probably changed a little with the downturn in the housing market. There may be more suburban houses available for rent, but when I was looking four to five years ago, there were close to ZERO single family homes for rent in desirable suburbs. And mortgage rates were really low. You could finance $200,000 at just over 5% for 30 years, and pay under around $1,500 per month, including PMI, property taxes, and insurance. The tax deductions would save you around $250 a month. That means that your mortgage costs you $1,250 per month, and adding maintenance/depreciation of $500 per month, and your housing costs $1,750 per month (and you own the house in thirty years and your costs drop to ~$750 per month).
If you were trying to rent something for $1,500 - $1,750, I don’t think you could have found a substitute. The townhouse I rented immediately before buying a house was around than half the size, didn’t have a private yard or a deck, used inferior materials, didn’t have covered parking (let alone an attached 2-stall garage), and was in the inner-city school district. It cost about $900 per month. When I bought my house, I was twenty-four, so I probably needed a place to live for sixty years. Assuming rent, insurance, housing prices, and property taxes all increase at the rate of inflation, buying a house seemed like an easy decision.
Using a discount rate of zero, I’d need to find a substitute rental property for $1,100 per month. Using a discount rate of 7%, I could rent for $1,700 and break even. (Higher discount rates favor renting since the costs of financed home ownership are higher for the first thirty years). For $1,700 I probably could find something as nice as my house. For $1,100, there’s no way. A quick check of Craig’s list revealed one house for rent in the suburbs, for $1,495/month, that’s probably a the closest substitute.
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Fishbane, if you're going to finance the bulk of your purchase, you still may have been better off before. Rates now are 1.5% higher than when I bought. If I bought my house today, I'd need to get around about a 12% discount to have the same payment, after taxes. I don't think my house has gone down 12% over four years, so I'm happy I bought then.
What do you mean by "bubbles" in this context? There are some places people find more desirable to live than DFW, and the homes are priced accordingly. I don't think that the price of a prewar six in Manhattan will tumble down to $100K any time soon.
SF and SD are both surrounded by ocean and mountains, and are completely built out. Building codes are not onerous. Some hillsides are prudently left undeveloped, because homes built there are subject to wildfires (summer and fall), landslides (winter and spring), and earthquakes (whenever). "Pro-development" forces there want to tear down single-family and low density multifamily housing, and replace with high density "transit villages". As you point out, the supply of land in DFW is essentially infinite in all directions. I would also point out that the demand to live in DFW is relatively small.
Regarding Seattle: The RE market there used to move in lockstep with the demand for new airliners, because Boeing was swift to adjust its number of employees. I imagine Microsoft employees must provide a huge buffering effect on the price of housing, but this is just a guess.
you are totally right about MSFT and BA. some really bad news out of either of these companies will SIGNIFICANTLY impact our real estate market (one can only hope) :)
especially in the case of MSFT, a lot of people snarfing up ridiculous priced bellevue, redmond, kirkland etc. properties at ludicrous valuations work for microsoft.
In some (most) cases these restrictions are created by geography. How much more housing can you fit on Manhattan island, on the San Francisco peninsula, or on buildable land in S Florida (which is sandwiched between the ocean and the Everglades)?