How low will real estate go?

msnbc.com ^ | 9-11-06 | Lacey Rose

[2 Kool 2 Be 4-Gotten]

A minor housing downturn is a threat to the real estate market (by definition) and the larger economy as a whole (maybe worth a percent or so shaved off of GDP estimates).

The biggest danger I see is a major housing downturn posing a threat to the entire financial system such as the 80's S & L situation, or the Japanese situation in the 90's, just made worse by the leverage and the use of exotic deriviatives and hedging strategies. Don't know how likely such a scenario is but that is the one that probably keeps Bernanke awake at nights.

[theBuckwheat]

>>
...why do supposed conservatives on FR join in and cheer for a crash?
<<

Everyone likes their own expectations of the way the market is going to behave to be validated.

The difference is that a conservative knows that there are timeless principles at work (even if they are not always clear), and the liberal prefers his own alternate reality, where only good intentions matter, feelings prevail over logic and where events are always foreseeable,

Both parties could, on occasion, arrive at similar expectations from their different directions. This may be the case with the housing market.

The factor that neither party seems to consider is the role of the Federal Reserve (a private corporation chartered by the US government). The Fed flooded the banking system with "liquidity" immediately after 9/11 to preclude that event from tripping the economy into a recession.

Whenever the Fed injects money, it must go somewhere. It never just sits. The last time they injected money was in the months prior to December 31, 1999 in an effort to guarantee that the financial system would not seize up in the event the worries of the Y2K Alarmists came true. Even though the Fed turned the spigot off just a few months later, that "liquidity" (ocean of US Dollars in electronic form), washed into the stock market.

As the economist Ludwig vonMises warned, when the central bank puts more money into the economy than it otherwise needs, the excess helps give people the *appearance of prosperity*, and this leads to them making unwise investments, and borrowing money for unwise purchases.

Then, as now, this "mal-investment" shows up as a bubble in some market that is large enough to absorb it, and as the realization of the true value is made by more and more participants, they stop spending. Now they have to make the mal-invested money pay off or they cannot service the loans they took out.

This is all classic business cycle theory from Mises and the Austrian school. (They have some wonderful seminars and lectures in free podcast, MP3, form and free, downloadable books at www.mises.org)

So, the housing market will eventually come back to true value in areas of the country where easy money has financed too many unwise buyers. The rise in interest rates makes this a natural event that will come, just as surely as the rising of the sun.

The best thing that government can do is to not pump more money into the than the economy otherwise needs. The second best thing that government can do is to allow the market to clear the excess prices naturally. This will mean some pain, but it is far more healthy than if government tries to protect malinvestors from themselves.

[Eagles Talon IV]

Yes of course. MSNBC as the epitome of prognosticators has deemed the Real Estate market has gone into a decline from which it will never emerge. In fact, home prices will get to a level where the seller will have to give is home to a "taker". not a buyer because the only cash transaction that will take place will be what the seller has to pay the "taker" to own his property. You can't make this stuff up.

[Eagles Talon IV]

Yun was speaking broadly while you are talking about one specific area that may have seen extraordinary appreciation in the past few years.

[Mariner]

"Not happening in Indiana"

It's happening in Phoenix.

While the official numbers show a flat market...unsold homes have increased to 50,000...approx 8 months of inventory. MANY of those homes are owned by investors...or even people who have to move. Another bunch are new homes built on spec.

All will eventually have to be sold at some price but NOBODY is buying, including myself.

I'm RENTING a new home of 1700 sqft at $1000/month. There are 3 other rentals on the same block and another 5 homes for sale. Overall about 10-15% of the subdivision is for sale or rent or both. About 1/2 of those are not occupied.

As the inventory mounts people are getting desperate...those who HAVE to sell. Prices are beginning to move down and homes are beginning to move...very slowly...

The correction is in process here. Subdivisions where homes sold for $350k in early 2005 are moving homes at $290...angering the buyers from 2005.

Why ANYONE bought a home in a frenzied market is beyond my level of comprehension. It's clear prices will continue to fall with this level of inventory and interest rates inching up.

The MLS has home that have been on the market for over 6 months and gone through 5-6 price reductions. Once they finally sell, we'll see some SHOCKING numbers in the next NAR quarterly reports.

[2 Kool 2 Be 4-Gotten]

Most excellent post.

[NYC Republican]

Nothing's coming down in MA. Ditto in the nortern NYC suburbs - the number of sales is flat or down, but the prices are up 8% this year.

Same story in Fairfield County, Ct.

[stockstrader]

That's because the Indiana market has been absolutely pathetic over the last several years. Real estate appreciation has been near the bottom of all 50 states--with better appreciation almost EVERYWHERE.

[who_would_fardels_bear]

"The game is to figure out where the bottom is and get in before it goes back up."

There's a place near hear called 'Bare Elegance' where you will find a number of fine bottoms. And yes, you do have to get to them before they go back up ...
... on stage.

P.S.: As far as whether or not we had/have a real estate bubble imagine a group of tightly clustered single family homes located just around the corner from a strip bar, off a major secondary route, and located under a freeway flyover. This may not be a bubble, but someone has been smokin' some strange stuff lately.

[caver]

"That's because the Indiana market has been absolutely pathetic over the last several years. Real estate appreciation has been near the bottom of all 50 states--with better appreciation almost EVERYWHERE."

That may be true averaged over the whole state but south central Indiana has by my guess, higher than avearge home prices. I have watched certain neighborhoods go higher and higher. Of course, these are the most desirable neighborhoods.

It sounds like a good thing for Hoosiers that their houses are not over inflated. Why by something that is worth less only a couple of years later? People have to be responsible for their own buying decisions.

[freedumb2003]

Ping.

[river rat]

In the desirable locations, here in Kalifornicate -- the ONLY change we've seen it that it takes more than a few weeks to get a pre-qualified offer....

The prices haven't dropped enough to notice, and certainly not significantly.. Most of the nearby homes remain in the $900K to $1.5M range -- making it difficult for more young famlies to move in. I'm missing the children.

The only thing noticeable in this neighborhood and nearby - is that the "For Sale" signs don't turn into "Sold" signs as quickly as before...

Location, Location, Location..... Lots of truth to that old line.
The market was long overdue for a "pause" and reality check.

Semper Fi

[stockstrader]

You said, "It sounds like a good thing for Hoosiers that their houses are not over inflated. "

I can't even believe you said that. There are literally thousands of middle class people that have become millionaires simply because they lived somewhere where real estate went through the roof (no pun intended). Hoosiers can't say that.

Those that made HUGE capital gains (tax free in most cases) in other states, have options that Hoosiers could only dream about--like moving somewhere where they can now buy a much bigger home or even pay a new home off (if they moved TO Indiana now).

The fact remains that Hoosiers are much worse off financially (relative to the rest of the country) because of the poor housing market in Indiana. Hoosiers canNOT move to other parts of the country to take advantage of their huge capital gains--the way that many others can.

[ex-Texan]

I agree with DCPatriot's post # 32. Already, home prices have declined an average of 6% nationally. Condo sales have been hit hardest. For sale signs are peppered with "Price Reduced" notices in bright red letters. Yesterday, I saw a huge complex near downtown Portland. The builder has misguided plans to sell two bedroom units for $ 500,000 plus. 'Nuff said.

There is a brand new condo complex about a mile from where I live. It has sat vacant for about four months now. Earlier this year, I noticed that the project was stalled. Not even Mexicans were working. The owners keep the lights on in a few model homes. No cars are parked in the driveways. The entire project looks abandoned. I suspect the builder may face foreclosure very soon.

Check my FR page for more info.

[caver]

I hear what you're saying, it's not all bad. Hoosiers are on the low end as far as appreciation of homes go, but that also means that those same people won't lose their butt when the home values go down.

These same people who become millionaires because of their home appreciation are probably just waiting for the house values to drop and all their money goes down the tube. I see no gain by playing that, unless you are speculating.

Indiana always loses out on college graduates because the pay is not as high here. That also means the cost of living is not as high. Hoosiers probably get more value for their money than a lot of other states.

I still don't see all of this as a bad thing for Hoosiers. They can't lose what they never had. People who gained money on paper think they are worth more than they really are. When they lose that paper money, they have to make up for it with hard cash.

[ASOC]

Starting to happen in Anchorage. I am all for dropping housing 'values' - it will reduce my property taxes.

How bad can it get? Well, in the mid-80s the makets bombed here, and over 30,000 folks left Anchorage. Whole complexs sat empty. The market recovered starting in '92 - up to then you could have your pick and name your price.

In the end, I guess time will tell.

YMMV.

[stockstrader]

It's not all bad if you STAY in Indiana forever. However, if you ever move out of Indiana--you are really hurt bad. People move for many reasons--retirement, job promotions, job change, downsizing (loss of job), personal or family reasons, etc.

If you lived in Indiana--you do NOT have options that others do that lived other places do. You are more or less stuck in the Midwest. People who lived in high real estate appreciation areas have MANY options that Hoosiers don't (like moving TO Indiana--it doesn't apply the other way around).

Also, real estate makes up a disproportionate percentage of the financial wealth for most Americans. Hoosiers have not benefitted from the 'wealth effect' (in estate planning) the way that others on both coasts have. Hoosiers' family estates (I am making a generalization here, but one that is accurate) are financially much poorer (relative to those on both coasts) because of it.

[HawaiianGecko]

I personally haven't seem any of this gloom and doom where I live and in fact housing sales haven't fallen a bit. Of course I'm not in Miami, Washington DC or San Francisco.

Prices will tank in areas that are scheduled to 'lose' population, and will rise in areas where the baby boomers will retire. I live on the Lake of the Ozarks in central Missouri and prices are not falling. I do, however, have new neighbors in the last year from each of the aforementioned areas who got incredible deals compared to where they came from and my old neighbors that sold to them were ecstatic about the prices they received.  Boomers are beginning to retire and no amount of "spin" is going to change mother nature. Many in urban areas are simply not going to stay in their home of 20-30 years because of typical urban sprawl and decay. They will head in droves to retirement locations. If you want to speculate don't buy the cheap house in the city, buy the home priced around replacement cost on a lake.

A lot of this is just screeching. A family that determined five years ago that they could afford around $800/month in a house payment could buy a 100K house at a typical 9% for that $800.  When rates fell to 3%, half of them still took the same house they wanted only it's payment became $400 instead of $800. If their ARM raises to 9% they'll wind up paying the $800 they originally were capable of paying. Most likely they will refinance long before their ARM gets to 9%.

The other scenario is that same family decided that since they could afford $800/month, they'd rather buy a $190,000 home at 3% and make that $800 payment. These are the people that are in trouble because their payment will rise to over 1500/month when it hits 9% (and 9% is questionable).

Speculators and the people willing to purchase whatever home they can afford monthly payments on are the guys that drive prices up at an unrealistic rate.  They drop out of the market quickly when the cost of financing goes up as it has. Therefore, one would expect the overpriced homes to fall in price rather quickly too.

All that said a home is still a good investment. It's value will never go to zero, and certainly will never fall below the cost to build a new one the same size, appointed the same way. Rent on the other hand will always be an expense.

I wrote some software for a mortgage banker in the mid '70s that had a simple number that I used when I first hit the home market, and it was that a borrower could afford a home based upon the computation of a "present value" formula where the payment was fixed at 25% of their take home pay, while the interest rate was fixed at the MAXIMUM rate it could possibly become and that result divided by (1 - Downpayment%).  In Excel-speak PV = (interest/12,Months,MonthlyPayment) so the following example would be:

• PV(6%/12,360,$800)/(1-20%) = 113,950
• 6% fixed rate
• Take home pay = 3200
• Down payment = 20%
• 30yr or 360 month note

You can afford a home priced at $166,791 if you used a fixed 6% rate, or a home worth 113,950 if you used an ARM with a cap of 10%. That's a big difference and it's worse because people look at that 3% arm that can go to 10% and think they can afford a home worth $237,189.

OOPS

 

 

[caver]

I understand what you're saying and agree with you.

[HawaiianGecko]

You've hit it right on the nose.  Real estate has always been about 3 things. Location, location, location.