A new report says that housing prices having fallen nationally by 2.1% since last year. That’s not a crash or even much of a correction, and hardly seems to verify predictions of an exploding bubble. Or am I missing something?
Source link: http://blog.mises.org/6777/no-housing-calamity-yet/
No housing calamity yet
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Everything is fine. Refinance on that “lazy equity” and build yourself a hottub!
Jeff,
The article indicated that the median price fell 2.1% from last year. But, sales volume is off, and unsold inventory is rising.
My interpretation (supported by this article) is that real estate sellers have not been willing so far to cut prices enough to adjust to current demand based on the higher interest rates. The only reason we have not seen larger price declines is that people are holding on, hoping for improvement. Sooner or later they will have to sell.
Of course, in some high-demand markets, such as where I live in San Jose, CA, prices are still rising. That is likely to change.
Median price can be misleading. For example, I have heard that in some California markets, only the high-end homes are still selling, while more modest ones are all sitting unsold. This actually causes the median sale price to go higher, temporarily.
When people hear “crash” they imagine a sudden, dramatic event like on the stock markets. But real estate moves much more slowly. My bet is that prices keep sliding downward for several years — or nominal prices stagnate while inflation runs rampant.
Look to Japan for an example of a real estate slump.
Price follows value. Values decline before prices do in this kind of market.
Crash is not the right term. Depression is. The media driven world which describes everything into two groups “CRISIS” and “Not CRISIS”. Of course Not Crisis does not get attention. So the media have to overstate slow moving behavior to turn something into a crisis.
Now there is not realestate crisis or crash. There is a depression in realestate. Of course the media and government do not want to describe this in terms of long term depression because their “help” in this matter was actually the primary cause.
Also median is not a good measurement of local home inventory and sales.
The housing slump is a significant problem for three principal reasons: (1) Housing has been increasingly overvalued relative to increases in incomes, leading to much overconsumption as a result of the “wealth effect.” As home prices decline, so is extraction of equity, leading to reductions in consumption. (2) Rising levels of new and existing homes for sale are creating significant downward pressure on home prices, making it difficult for those with little or no equity to sell their homes (to sell, they would need to bring money to the table) and causing significant declines in homebuilder profits. The price declines and slow sales, combined with negative equity for many homeowners, are creating a massive wave of foreclosures and reduced income for the segment of the economy that is dependent on home sales. (3) The glut of housing has caused a significant reduction in residential investment and a corresponding decline in construction and related employment. These declines will continue for at least the rest of this year and probably for most of 2008.
Home prices are sticky on the way down, and it is likely that we face years of flat or declining nominal prices.
For a much better education on the state of the housing market and its impact on the economy, I would suggest that you visit calculatedrisk.blogspot.com.
My post above did not mention the significant loan losses faced by lending institutions, the shutdowns of lenders (see mlimplode.com), and the even more significant losses faced by holders of collateralized debt obligations (CDOs), evidenced by the ongoing Bear Stearns hedge fund meltdown. We have seen only a hint of the financial and employment losses to be realized over the next several years. Again, the Calculated Risk blog is a great resource for staying abreast of developments.
If you put 10% down, a decline of 2.1% wipes out 21% of your equity, so short term it’s bad. But if you plan on staying in the home for 15 or more years, it’s nothing.
It is only a true crisis for infantile/stupid investors who expect an asset with historical price increases in the 2% range to suddenly increase 8% or more every year. In order for prices to correct, they must fall by a significant amount or they will not rise at all for the better part of a decade.
That said, some areas are still cheap and will go up this year. Location, location, location. i.e. avoid Detroit.
Japan is not a good case study to look for a comparison, since its central bank kept credit inflation to the floor for all of its “slump”, thus preventing prices from falling.
National stats can also be misleading. It may be +3% in many markets and -20% in a few former bubble areas, for all we know.
Real Estate slump? Sorry to hear that. I’m fine. My real estate assessment is going up 10% a year. That must mean that the price of my house is going up since the county would never lie, right?
In any case, even after owning the house for four years, the price of the house would have to essentially remain flat for me to come out even versus renting my old apartment. And I like my house a lot more than the apartment (it’s twice as big and the mortgage payment stays the same each year). You need to be really overextended on your mortgage for a flat market to hurt you (but perhaps this is a big problem in some unfortunate parts of the country?) And most people who are forced with a flat or falling market can simply keep living in their home — the mortgage isn’t affected by changes in the value of the home.
If we are in an otherwise inflationary environment where the general buying power of money is going down, a drop of 2.1% in house prices translates effectively into a much larger drop. If you were to compare the cost of a house to the cost of a four year college education a year ago and then today, the drop would seem more dramatic.
As noted by another post, median doesn’t really reflect the underlying weakness because a greater volume of higher prices houses selling relative to the total volume of sales (even if the absolute volume falls off!) indicates a pretty severe correction; which I still think has some time to go. Example: Before, 100,000 units selling with median at 300K. Now 50,000 homes selling with median at 350K. All that happened was the “higher priced homes” have spilled onto the market, and their values may have fallen, yet pulled up the median because they are now dominating the statistic.
It is necessary to compare the same or a very similar home in the same area to see if prices have fallen. When that is done, it is usual to find that there has already been a hit of 10-20% almost across the board, and a hit of 20-40% for some specific regions.
Jeff,
You’re right. However, the article itself shows that underlying factors (mortgage rates, the subprime issue, unsold inventory) will change things in the coming year. The fed is still inflating away but it doesn’t look good.
So which is it, is the Fed still inflating and I should purchase hard assets (a home) or is their a boom in real estate taht is about to go bust?
I think the Japaneses set up is a correct analogy where the real estate market has plenty of bad investments that, regardless of the level of single digit inflation, prices will still fall.
Real Estate values are falling in most regions of the country, as, for example, in Orange County, California, where a recent auction of foreclosed homes produced bids 30% to 50% below previously prevailing prices.
Meanwhile, the Fed is not inflating as usual. In fact, the monetary base–the only aggregate over which the Fed has direct control–has increased by only 1.7% over the past 12 months. Its increase the year before was at approximately the same sub-2% rate, and over 3 preceeding years, the rate of base growth had fallen, year after year.
This is a prescription for recession, and soon. Cracks are beginning to appear at the base of the great Leaning Tower of mortgage and junk corporate debt. A recession will, of course, greatly exacerbate the overdue downdraft of real estate prices. After all, a doubling in mortgage debt and house prices over about 5 years is hardly free market normalcy. In the meantime, inventories of languishing homes for sale continue to grow.
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