Housing Conversation Needs a Dose of Reality

I have to admit that I cringe whenever I hear about a politician, pundit, analyst, etc, talking about a housing market recovery, or protecting home values, because I feel it sets the wrong expectations in the minds of homeowners. More specifically, it seems to come from a place that believes that the housing market gains of the bubble era were indeed legitimate, as opposed to spurious and caused by a combination of over-speculation, bad lending, bad borrowing and nonsensical expectations.

While it may not be what people want to hear, the real conversation needs to be around the housing market stabilizing in terms of prices hitting bottom, in addition to acknowledging that prices were inflated during the boom and the gains weren't real. During the boom prices didn't increase based on valid market fundamentals, they increased due a combination of overspending, bad lending, speculation, exotic loans, etc, etc. Even without an economic downturn, the removal of the aforementioned factors would've put downwards pressure on housing prices for a rather extended time period.

This is especially true when you consider the inventory problem, and the prevalence of empty housing developments that were primarily built in response to demand from speculators than from people in need of a place to live.

The conversation around real estate needs to confront the fact that housing prices simply aren't going to recover any time soon. Because history has shown that it can take over a decade for prices to recover from a crash under normal circumstances, and the factors that caused the most recent bubble were unique, widespread and arguably extreme. The likely scenario is that prices will overshoot pre-bubble levels on the way down, stabilize and then we'll return to a period of appreciation that is more in line with historical norms. As a result it will probably be the decade after next before housing prices recover in many markets, and other markets may not ever see a full-fledged recovery.

In other words: the conversation needs to revolve around helping people adjust to and cope with the new reality they live in, as opposed to providing them with false hopes and / or a skewed sense of reality.

More importantly nothing I've said in this post constitutes something that is new or innovative, it's information that has been readily available on my site and others, multiple financial articles, books, news reports, etc. The problem is that this information isn't readily provided by the mainstream media, nor is it acknowledged by our politicians and policy makers.

It's high time the mainstream media, politicians and policy makers start confronting / presenting the truth around the housing crisis, so that the average person can not only better understand what's going on, but be able to start adjusting to the new reality they now live in.

Comments

[Mad Hedge F...:]

Certainly this has become a political whipping boy. I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven’t even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I’ll go find something else to trade.

Mar 22 10:15 AM

[steve graves:]

Excellent post and comment - but definitely way too sane for the mainstream media! As an Obama supporter I have been sorely disappointed by his Geithnerian approach to resolving this massive mess. During the election Obama spoke often about the need for a reality check; now all he seems to be able to do is tap his little red slippers together and pray for a return to the good ole days. As if encouraging consumers to borrow and spend yet again is the solution to a crisis caused by too much borrowing and spending in the first place. Doesn't exactly inspire confidence.


On Mar 22 10:15 AM The Mad Hedge Fund Trader wrote:

> Certainly this has become a political whipping boy. I am more convinced
> than ever that real estate has another 25% to fall, and best case,
> it is dead money for another five to ten years. The New York Times
> produced some insightful data on inflation adjusted home prices for
> the last 120 years, which baselines at a $100,000 for a single family
> home in 1890. Few people realize how superheated the recent real
> estate bubble really got. Past bubbles very consistently peaked at
> $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000
> in 2005, almost double the previous record highs. And while we have
> dropped 34% since then, to $135,000, we haven’t even fallen to the
> past all time highs yet. If you look at historical lows, my call
> for a further 25% slump looks positively bullish. We saw lows consistently
> around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000
> in 1976, 1983, and 1996. These figures suggest the best case low
> is down a further 28%, and the worst case is down another 51%. I
> think I’ll go find something else to trade.

Mar 22 10:46 AM

[efbdergraf:]

Agree with most points of both articles, concerning the causes and need to let the market adjust without artificial props. In fact over several hundred years and unlike the pushers' hype of the past decade housing in general has never made a good investment (there have been exceptions limited to specific markets and for short periods). Housing should be for giving people shelter - not speculation. Nor should construction outpace demand. It is fairly simple to draw a graph, using ALL elements of inflation rather than only the politically expedient ones of the Greenspan days, and extrapolate the housing prices of a saner era - say 1930s through 1980s. That should give a reasonable estimate of where housing might logically be. The calculation can be refined by local areas, changes in salaries, employment and population,... Or one might simply reset the clock to pre-Greenspan "free money", i.e., say 1999. Prices of ten years ago might be just about the right starting point, adjusted for a "true" annual inflation rate of perhaps 1-2%. That could happen quickly and would also help the mortgage holders write-down assets to realistic levels, i.e., even sub-primes probably are worth 50% of the book prices (not zero) and most mortgages would require no adjustment. That in turn would give relief to all holders of "toxic" assets and liabilities, including the banks and insurers and unclog the credit lines. It's fun to point fingers at rich fools (even though they've also taken enormous hits) but the greed and fraud started with common people being offered (by realtors and brokers) and buying (ineligible purchasers) overpriced housing (built without orders) and being given the mortgages (banks) which were then sliced, diced and leveraged (investment bankers) and incompetently insured (the AIGers). The right price is the one decided by two people only - a buyer and a seller, but there are tools to know about which price is reasonable.

Mar 22 10:59 AM

[D_Virginia:]

OK, sure. But if you're the government, and it's your job to see to the well-being of your citizens, what do you do?

There are a lot of people who bought sorely overpriced houses based on supposedly reputable intel from the real estate and financial industries indicating that the market would keep going up.

Even the "loans they can't afford" notion is a little off. They can't afford them /now/, since the crash, but had the market continued to boom, those borrowers would be refinancing right now and would be fine -- which is the concept that they were sold by realtors and brokers. That concept, of course, turned out to be BS, but the same people selling that BS were also buying it themselves.

Today, however, the people that were selling the BS are getting bailouts and bonuses, or have long since walked away with their realtor and broker fees. Clearly "responsibility" and "blame" haven't factored into their fallout.

But the people that had the BS sold to them are stuck, and are getting...what?

I agree that trying to keep home prices up and trying to keep people in loans that they now can't afford is senseless. But you gotta throw these people a bone. Help them move into rental homes or apartments they can afford. Maybe ease up on the credit hit of a foreclosure for qualifying defaulters.

It's easy to talk about the pure economics when you're a financial writer with a secure job and don't stand to lose your house or your retirement, but there are real people who will really suffer if nothing is done.

The government, bungling as they may be sometimes, has to balance between keeping people afloat without subsidizing actual deadbeats, they can't just paint ever home buyer as an idiot and move on -- like finance folks do.

Mar 22 11:38 AM

[ArnoldCountry:]

Well done... it seems the summary to what all are saying is it is time to avoid blaming the source of the problems but to let the natural course of events to run so we can get back to a normal market. All the interference with market fundamentals is most likely aggravating the situation. Solutions that are more geared on the overall economy, such as creating new jobs and stimulating overall economic actively is more responsible than these targeted bailouts which seem to aggravate the situation further. Housing needs to reset as well as several other industries. Its a mess, no question.

Mar 22 11:38 AM

[TWOfold:]

Residences in the U.S. and worldwide are approaching 15% vacancies. That's a lot of overproduction...excess inventory.

Office space is at 14.4% vacancies...that's pretty bad, too. Are office rents going to increase when 14.4% of office towers are vacant?!

Shopping malls are likewise vastly overbuilt and under-occupied.

And it's not just real-estate. There are too many airlines (many in zombie-like bankruptcy protection mode) and too many car companies. There is vast overcapacity in both.

Worldwide.

What's got to change is the old dialogue where one idiot tells the other idiot that the path to prosperity is building things and moving people.

The world did all of that to excess. Now we've got too much manufacturing capacity globally, and too much carrying capacity for moving people.

And too many homes.

And too many shoppng malls.

And too much office space.

Yet we still hear one idiot telling another idiot that the path to prosperity is building things and moving people...as if overcapacity was impossible...as if overcapacity need not be considered...as if overcapacity wasn't already upon us.

Mar 22 12:01 PM

[BigBearMort...:]

"During the boom prices didn't increase based on valid market fundamentals, they increased due a combination of overspending, bad lending, speculation, exotic loans, etc, etc. Even without an economic downturn, the removal of the aforementioned factors would've put downwards pressure on housing prices for a rather extended time period."

Spot on. And now in the devolution, we are beginning to see the shape of the overshoot to the downside in the most critial factor -- financing. Buyers with minor (by normal standards) credit issues have been removed from the market. Jumbo loans are functionally unavailable. Small business owners who have maximized tax deductions cannot buy homes (stated income/ VERIFIED asset is long gone). And now most all lenders are refusing to lend on condos in Florida. ALL condos, in every part of Florida.

And FHA loans, which have been ~80% of all lending in the past 18 mos. or so, are going into FIRST-PAYMENT defaults in alarming numbers. Three years ago, that was the headline for subprime loans that heralded the nuclear event.

Ask yourself this: what is the value of my home if the universe of buyers consists solely of those who can pay cash?

Sounds like a silly extrapolation -- unless you own a condo in Florida.

Mar 22 12:11 PM

[ebworthen:]

Exactly, excess inventory and getting worse.

If people lose their jobs (675,000 per month) they usually can't stay in their homes.

We've seen the foreclosures of people who were way above their heads with the arm resets last year. To follow is the people who have lost their jobs, along with more arm resets this year.

Home values are still going down, so smart money isn't going to jump in on a deflating market even though rates are 4%. If you buy, pay 4% but the home value loses another 15-25% that is a really bad investment, no?

The next shoe to drop is commercial real estate. Take a walk around your local shopping strip or mall. Not a pretty picture. Even the anchor stores are getting desperate; just watch the ads and specials they are running.

I had my local Edward Jones rep. come to my door on Friday! Yes, he was pounding the pavement, handing out brochures on investment opportunities! Admirable on his part, but a sign of the times for sure.

This ain't over by half.

Cheers!







On Mar 22 12:01 PM TWOfold wrote:

> Residences in the U.S. and worldwide are approaching 15% vacancies.
> That's a lot of overproduction...excess inventory.
>
> Office space is at 14.4% vacancies...that's pretty bad, too. Are
> office rents going to increase when 14.4% of office towers are vacant?!
>
>
> Shopping malls are likewise vastly overbuilt and under-occupied.
>
>
> And it's not just real-estate. There are too many airlines (many
> in zombie-like bankruptcy protection mode) and too many car companies.
> There is vast overcapacity in both.
>
> Worldwide.
>
> What's got to change is the old dialogue where one idiot tells the
> other idiot that the path to prosperity is building things and moving
> people.
>
> The world did all of that to excess. Now we've got too much manufacturing
> capacity globally, and too much carrying capacity for moving people.
>
>
> And too many homes.
>
> And too many shoppng malls.
>
> And too much office space.
>
> Yet we still hear one idiot telling another idiot that the path to
> prosperity is building things and moving people...as if overcapacity
> was impossible...as if overcapacity need not be considered...as if
> overcapacity wasn't already upon us.

Mar 22 02:01 PM

[Rob Viglione:]

Let's not forget that housing stock is fundamentally a consumption item, rather than something we can consider productive. Perverse government incentives and "ingenious" financial engineering effectively channeled the world's savings into the U.S. housing market.

This happened at the expense primarily of U.S. real productive output, but also at the expense of global output. Savings could have been otherwise distributed rationally, part to consumptive items and part to capital investment.

The big shame, as mentioned in the article, is that the over-inflated value of housing stock is looked upon as baseline for public policy goals. Our government, and the Fed, are doing their best to reflate what should not have been inflated in the first place.

Mar 22 03:11 PM

[beautyseer:]

If the average American household has a gross income of $60,000, the maximum mortgage should be 30% of $45,000 annual take home pay. Since that income is generally due to two adults working, a safer number for those trying to keep a decent roof over their heads would be 30% of $30,000. With 20% down, the average American family can actually only reasonably afford a $128,000 mortgage on a $160,000 house with $32,000 down at 5.35% interest on a 30-year mortgage -- less if real estate taxes and insurance are brought into the equation. What is really needed in "the best country in the world" is a higher general level of pay that will actually realistically provide essentials like quality housing, and sustain a consumer economy that can offer a quality of life while not destroying the earth. The old system created by pirate capitalists is in ruins and is not coming back. Time to imagine some else. Some thing better. And thinking low housing prices is a good beginning.

Mar 22 03:24 PM

[I am not a ...:]

All of the Above comments are very good and at this point I'll add that I live in Australia. Where as we haven't experienced the housing led melt down YET, we are due for a big collapse in the housing market. The situation here has seen what were essentially $100,000 homes being sold for $500-600,000 AUD because the buyers have been able to go a money lender and get 110% of the money required to buy or build a new home. Many(previously) high earning mine workers were buying up to 3 houses as "investments".
This was being fueled by the government of the day with much prodding by the leading Australian real estate and building companies.
Great if you are a real estate agent in Australia,most of whom were able to employ young women as typists on $50 per hour etc.
The commisions generally on a house sale are 10% plus all the other little 'fees' they can sneak in. So in the middle of our own 5 year bubble a real estate agent could be raking in $100,000 per week!.
And it's still going on because the present government will pay a first home buyer $20,000 as a bonus to stimulate a flagging building industry. Big problem here of course is that kevin Rudd the primeminister has already given away the nations surplus in the form of handouts last year. ...so Australia is about to hit the worlds money markets and seek loans to prop us up for the coming year.No need for further comment there.
Then there is the problem of these 'entrepreners' who own these investment properties being able to afford the mortgages,so the realestate agents have told most of them they need to receive x amount over 3 years (!) to make money .result? high unaffordable house rents for those who prefer not to buy or cannot afford the mortgage costs to buy a home.
For a microcosm of the USA situation one can do no better than to observe the australian house situation and from here we can see a disaster unfolding.

Mar 22 05:43 PM

[TeresaE:]

I have heard no less than 4 Obama Administration officials state that we have to increase housing costs.

Thus, the administration firmly believes that it wasn't a bubble and that this downturn is an abnormality.

If you refuse to recognize a problem you have no chance at solving it.

Our wages are declining, our prices for necessities skyrocketing, banks are shutting down credit and the government is the only borrower getting any cash.

We survived for 20 years on credit and bubbles, now those things have been yanked away.

What is left is our jobs have been off shored, our wages driven down by cheap foreign, imported labor and our burden is doubling every minute thanks to Utopian idealism and spending in Washington.

We are watching the destruction of our nation and the beginnings of the slide into third world status.

Which will happen when China decides it will, and it won't be long now.

Mar 22 08:46 PM

[schlumpf:]

in spain. costa de sol. the price for a 3 bedroom house is now 1.300.000 usd. 2 years before it was aprox 2.400.000 usd. you see the houses in us are verry verry verry cheap.

Mar 23 03:32 PM

[William Cowie:]

Oversupply also stems from the fact that too many houses were bought to stay empty - the flipper houses.. Now that demand has fallen away the truth is becoming clear - too many houses were built for what people need, rental or owned. It's still going to take a while for demand to catch up with supply.

D-Virginia made a point above: what about people who bought the hype and paid too much? First look at the reverse: if they bought when prices were artificially low, would anybody think of taking back the excess profit from them? I know it sounds harsh, but if you're going to want to keep the benefit when you underpaid, why should I, the taxpayer, pay when you picked the wrong moment and overpaid? That is life.

Mar 23 03:44 PM

[CJJ:]

This article is correct, but once again a blogger who is better than the common man. Many common men understand the housing bubble was real. Perhaps they didn't know how to profit off of it but they could see it.
As William points out the gains were real as anyone who sold their house at the top is loving life right now. Why no one brings these winners up is a bit alarming and part of the one sided editorialism of the day.
House prices will go down either A)Price or B)rates/length of loan.

Basically people need to start to be resigned to the fact that buying a house is not an investment. People aren't hermit crabs who just roll to a bigger and more expensive house every two-three years.

People who are the losers also need to take the medicine. So sorry. Again, I'm a renter and I hear how the renters are the losers in all this. Show me some proof of that. I have no house I can't afford...prices are falling...rates are falling? Where is the proof that backs up the whining?

Hey, I understand I'm going to pay for people who specualted but again I DON'T HAVE A HOUSE I CAN'T AFFORD. Look at the bright side.

Take care of your own business. Look to the bigger cause. And as always a global economy can be a ponzi scheme in perpetitude as long as people are creative and trusting and hardworking...Put that in your petri dish economic pipes and smoke it.

Mar 23 05:31 PM

[Randy_H:]

"As William points out the gains were real as anyone who sold their house at the top is loving life right now. Why no one brings these winners up is a bit alarming and part of the one sided editorialism of the day."

I have been blogging about this for years now. And I am one who sold my home in 2005 after a decade of ridiculous gains (and one trade up).

Let me tell you why, exactly, I and those like me are loathe to talk too much about what "winners" we are: People don't like us.

I've been told that I'm the "other side of the coin" from flippers who exploited on the way up. I've heard from Obama's press secretary that people who are trying to profit off of the troubles in housing will not be rewarded. I've been called a "housing market short seller". I've been told that I also need to be taxed at 90% on any gains I made selling my house, since I didn't buy another one in a reasonable period of time.

The fact is, there is a large mass-feeling that people who bought homes all along, naive of the bubble, consciously or not, were the wholesome folks just doing the right thing -- living the American Dream(tm). Meanwhile, folks like me broke from the herd. While we ended up being right, we were wrong to go it alone. To try to pull a fast one. To bail out on everyone else. ...

You get the point. The main thing is that those feelings are real, and people are pissed. They are pissed at realtors(tm). They are pissed at mortgage brokers. They are pissed at bankers bankers. They are pissed at Congress. And, they are pissed at anyone who made money in the bubble, whether that be flippers or peak-sellers.

Mar 24 09:11 AM