House Prices: Two Views 21 comments
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Barry Ritholtz has a really good post which outlines the reasons that he doesn’t think house prices have come anywhere near a bottom. Here is his logic:
• Prices: By just about every measure, home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that...
• Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them.,,
• Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue — Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses — a big source of Real Estate activity. Plus, more unemployment means more . . .
• Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures — which are healthy in the long run but wrenching during the process of dislocation — are very likely. These will pressure prices yet lower. And Loan Mods are not working — they are redefaulting in less than a year between 50-80%, depending upon the mod conditions themselves.
• Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.
• Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which . ..
• Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt.... At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants.,,
Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government...
That’s a pretty well thought out argument for a sustained period of flat or falling home prices. But there’s always a different way of looking at the issue. On voxeu William Wheaton argues that household formations are going to lead the way to higher prices.
Here is the crux of his argument:
As housing is a physical asset, its price must eventually equal or exceed the full cost building or rebuilding it – that is, as long as the market requires the construction of additional housing. So the real questions in the current crisis are a) when and how much future housing will the US need to construct, and b) are prices today so much higher than the cost of construction that they could still fall significantly and have development remain economically viable?
During the last decade, net new household formation averaged approximately 1.4 million per year. Last year, the Census reported that the US added only 544,000 new households – during severe contractions the young stay at home, singles “double up”, and household formation (normally) slows. Even with declining demographics, however, most analysts foresee new household growth resuming to a level of at least 1 million by 2010 and beyond. If we conservatively add 200,000 demolitions per year, the US economy will “need” at least 1.25 million new units yearly in the near future. With today’s currently depressed construction, this generates a yearly deficit of 750,000 units. At that rate, the current excess inventory of units for sale or rent will be back below normal by 2011. Prices historically have a strong relationship with sales “duration” – the ratio of inventory-to-sales. Hence under reasonable conditions, in two years we will have to increase construction considerably and prices will have to justify the cost of that construction.
Wheaton’s point is an excellent one. So long as you have positive demographic trends the problem will be self-correcting and the demographics will largely determine the pace of price recovery.
While it appears as if the two opinions are contradictory, I don’t really think that’s true. One of Barry’s arguments in favor of falling prices is inventory. He calculates a larger supply than, I suspect, does Wheaton. That’s a critical point from a timing standpoint but doesn’t invalidate Wheaton’s argument that population growth will eventually cause prices to begin rising again.
I accept Ritholtz’s other arguments and tend to believe that they will act as a brake on the growth of the housing sector and prices, but demographics is like moving water; it’s a force of nature that cannot be stopped.
The real question isn’t so much when prices begin rising again, but where. Will the sand states get back on their growth curve or has this recession permanently altered the historical dynamic of migration and growth? Figure out the answer to that one and you too can be a millionaire.
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I agree, but how long will it take to clear off the remaining 15% in REAL prices? Long enough to see 15% inflation? People are talking years, and rightfully so since historically as prices get close to the bottom, the rate at which prices drop slows significantly. If so, and if we do see significant inflation over the next several years as many are predicting (myself included) then we are already at a nominal bottom.
then there are your inventory numbers which i think were a tad optimistic. as for demographics, we'll start to fill millions of spare rooms before building more mcmansions. this the result of mass unemployment.
imo, the only thing that will prop up real estate prices is a return to easy money via gs & co and underwritten by the taxpayer. banks which should've entered liquidation, would also need a further bailout or two to stop the mountains of foreclosures making their way to market along with tons of vacant inventory already hiding in their books. even this might only 'prop up' prices. unless we have a serious dose of inflation, i cant envisage 2006 prices for another 20 years
On Jul 20 05:23 PM crewman wrote:
> The best advice for RE investors is to quit looking at national (and
> really regional) stats. Asking how much should housing cost is like
> asking how much should clothes cost. How do you answer that question
> unless you know the particular house in the particular location.
> National stats on foreclosures, jobs, or vacant homes in the U.S.
> will be near irrelevant to how much a home in Martha's Vineyard will
> be worth. To the extent one needs to generalize, the best advice
> I can give is that all pricing is gravitating to 2003 levels (when
> incomes and mortgage products were like they are today). In the lower
> end, prices have hit this 2003 level and in many instances have gone
> beyond (to 1999-2001 levels). This is where serious money can be
> made in the right locations. Be sure to avoid the super tertiary
> areas like Victorville in California. It will take a decade for this
> market to recover. You're best bet is locations just outside of the
> job centers (say less than 30 miles) In the mid-tier market, we're
> at 2004 pricing. If the economy/jobs picture doesn't improve in the
> location where you're looking to buy, then you've got another 5-10%
> downside to go. In many of the the luxury end markets - we're still
> at 2005 pricing. Again, this is the area where many will lose money
> thinking they can get an ocean-view home for cheap. It will get cheaper!
> Why... because the foundations that enabled the luxury market to
> skyrocket has completely gone away for awhile. There were SO many
> who really didn't belong in this space but got into it anyway because
> of easy money. These people still have decent bank accounts and are
> able to avoid foreclosure (unlike their brethren at the lower end).
> However, none of these guys thought the downturn would last this
> long. They're running out of money and will soon turn into distressed
> sellers. This market will likely continue to correct by 15-20% over
> the next 2-4 years.
About the same amount of time it took for people to forget about 9/11....
Incomes constrain households ability to spend on housing, regardless of 'construction costs', regardless of how many households there are.
Home prices are still too high relative to household incomes.
Really? Who are these Most Analysts? What are BOTH of their names? Did Most Analysts do the study in--I don't know--2006 maybe? I bet Most Analysts are rethinking Most of their assumptions around now.
With 10's of millions of empty houses, I think our country has shown that we can move in with each other and not suffer a breakdown of social order. What if people are ok with living in an apartment or closer together? What if this is a long-term trend? Then what?
Also, have Most Analysts re-run the numbers wherein immigrants stop coming to the US / go back home? US population growth is ZERO without immigrants.
Next, even if we might craft a scenario with an increasing demand on a unit basis, don't you think the lack of leverage is going to drive the price of the construction down? Maybe families can squeeze into 2000 square feet instead of the 8000 square foot monster they were looking at during the Bubble when they could afford a $1m loan based on their steady income at Starbucks?
Finally, there's land. Remember land? That near-infinite resource we enjoy here in the US? That resource that the telecom revolution multiplies by allowing people and their jobs locate anywhere? There are parts of the country where an acre of land cost around $1000, room enough for four good-sized family houses. Baby boomers want to move there because they don't need to be next to work anymore.
Go out West and you are (were) paying for Land, not the house. Land's price floor is, effectively, zero.
And yeah, the cost of building/buying/whatever an asset has absolutely nothing to do with its value. Anybody who has bought a computer in the last decade knows this.
OP
www.msnbc.msn.com/id/3...
This is a great time to be a buyer, if you know the local market, and are a shrewd bargainer. If you are a seller, then you need to hold out if you think you can beat the odds (carrying costs vs. price appreciation). It takes guts of steel or a suicidal complex if housing prices are still eroding where you live. Big game. Real estate poker!
Thank you for writing down so many bullshit Realtor lines in one posting. Let's take them apart one by one, shall we?
> No one view is correct, whether that of Ritholtz or Wheaton.
> Those with skin in the game, either investment property or a
> home they need to sell, can tell you a thousand different stories
> based on the microcosmic market they happen to be in.
Bullshit line #1: "Ignore what you read in the press, from experts, from economists, from statistics, from anything: they lie. They don't apply to you. Listen to what the REALTOR or the SELLER has to say. They would NEVER lie to you! It's not like they have any interest in doing so (except for making a lot of money off of your life savings)".
Reality: in today's environment you MUST learn about economics and keep track of what is happening in the world--and believe that it applies to you too (because it DOES).
There are many sources on the web to find sales prices (sold inventory in the last MONTH), foreclosures, etc. Some of these services cost money. They are worth their weight in gold. Don't be stupid. Do your homework. And most of all, DO NOT TRUST SELLERS AND REALTORS they do not have your best interest in mind. They have been lying for years and getting away with it because the markets had been going up. They are used to lying. They don't know what the truth is anymore.
> What has always been true will always be true. The three most
> important things about a property are neighborhood,
> neighborhood, neighborhood. [...]
Bullshit line #2: "THIS area is a HIGHLY DESIRABLE area. It's special. Bla bla bla bla. Therefore it will cost more".
Reality: Yes, desirable areas cost more than less desirable areas. Big surprise. This tells you nothing about the ABSOLUTE values in the area in which you want to buy. It tells you NOTHING about whether the price is going up or down. Right now the most expensive real estate in the US--the Upper East Side of Manhattan--is plummeting in value. Is your area more "special" than that?
> [... ] Therefore, land has a value and a well-built house has value.
And that value depends on the market conditions for the given property. That value is 15 times annual rent. Period. Whether it a shack in the desert or the Playboy Mansion, rent is rent is rent is rent. It reflects the REAL demand for the asset.
> Statistics, be damned.
Logic be damned. Thinking be damned. Just do what the Realtor says and everything will be alright.
> Savvy investors know what will sell a few years from now. They
> are diving into distressed properties, which they feel strongly
> they can flip for a profit.
Savvy investors take my advice and research the local markets, and absolutely look at statistics, facts, comps, foreclosures, trends in the job markets, and so on.
> This is a great time to be a buyer, if you know the local market,
> and are a shrewd bargainer.
In many markets, buying a house now will be like buying CSCO stock at $40 per share because it was $60/share previously: it will seem like quite a bargain until it plummets another 50% to $20 (and then stays there for 10+ years). Just because a market has gone down doesn't mean that it has stopped going down.
> If you are a seller, then you need to hold out if you think you can
> beat the odds (carrying costs vs. price appreciation). It takes
> guts of steel or a suicidal complex if housing prices are still
> eroding where you live. Big game. Real estate poker!
This is as stupid as it gets. The Realtor is essentially telling you to hold on to your CSCO stock because "maybe" you will get "lucky".
If you can sell right now, then sell. Prices are going down. They will NEVER return to the Bubble prices because there will NEVER be another Bubble like this in our lifetimes. Never. Get real. Cut your losses. If you wait, you'll just lose more. If you sell now, you will lose less. It's that simple.
OP
Healthy small and medium US banks never diverged from sound banking practices. All banks are returning to pre-bubble mortgage lending standards. 20% down on a $200k house is $40k. How many potential starter home buyers, or their recently "de-wealthed" parents, has $40k in the bank over and above their credit card debt and student loans and car loan? Remember about the move up market: for every home bought the buyer must sell his/her current house so there is no net increase in housing demand in the move up market. You need a starter home buyer before you can move up.
And now you need a job to get a mortgage. Starter home buyers' parents can no longer afford to retire. Older people are holding their jobs which means less jobs for new workers. A lot of US employment, all that part which contributed to retail as Americans drained their home equity ATM and maxed their credit cards to buy cool shit to put in their McMansions, all that employment is not coming back. Those companies are bankrupt and dissolved and their employee layoffs are permanent. There may be demographic indications of new household formation, but without jobs and money there are no new households formed. Maybe a holiday trailer parked in Dad's driveway.
The housing construction industry will bifurcate. You either build castles for Goldman Sachs employees or you build shacks that formerly middle class serfs can afford. Citi nearly went down. 1 million small businesses depend on Citi for operating lines of credit to make their payroll and keep the lights on while waiting for their receivables to come in. Small business is the private sector's contribution to the 'middle class'. Saint Obama doesn't seem too concerned about bailing out middle class Americans. Now that NINJA loans are history poor people can no longer buy houses. Middle class people are the vast majority of homebuyers. And the middle class is getting hollowed out. Even States and cities, whose employees earn middle class salaries, have to cut costs or go broke. Arnie pays in IOUs. Maybe you can save up enough IOUs for a down payment on a house.
The existing inventory of houses is way too big and luxurious. If you build high cost products and there is no market for them, you have to sell them at low cost where the buyers are, even if you lose money and especially if you go bankrupt and the sales are forced. So just because there is a lot of cost sunk into the existing inventory is no guarantee that builders and owners will ever recover that cost. Bubbles misallocate resources and major misallocation happened when too many expensive houses were built for the easy credit bubble. These will become duplexes and fourplexes and will probably be rentals rather than condos.
On the other hand about 75% of the megatrillion dollar derivatives industry, championed by GS and other powerful banksters, is based on US real estate. So even if the market fundamentals I listed above are true, there may be powerful political forces countering them. If we've learned one thing this past year it's that fundamentals bear little relation to prices and price movements. We are in a highly political economy where decisions made and actions taken by powerful players determine outcomes. We are not in a free market economy where fundamentals that affect millions of people are good indicators of present and future prices.
Welcome to the new normal.
I think the high priced homes that people bought over the last 15 years only made sense if those people could assume the selling price of their home could never go down. Many people were paying 50% of their income for their homes because they thought their home was a sure fire long term investment. Paying 50% of the family income for housing doesn't make sense if the home is likely to drop in price.
From August 1974-June 1975 (10 months) starts fell below a million. The low was 709K. Only three months below 800K.
From June 1981 to June 1982 (12 motnhs) starts fell below a million. The low was 731K. Only four months below 800K.
From Sept 1990 to October 1991 (11 months) Starts fell below a million. The low was 786. Only one month Below 800K
Since the peak in 2005 starts have been falling and then going off the cliff Dember of 2006. They have been under a million since March of 2008(16 months). However, what is important is that they have been at an unbelievable low number (sub 600K since Dec of 2008) for a much longer time than ever experienced before (10 motnths below 800K and 7 months below 600K) with a low of 490K (the lowest number on record- ever).
Interestingly we have 22% more population in this country since the 1990 housing fall.
The biggest problem with new household formations pulling us out of this mess however is the houses they by- entry level and distressed sales. It will take some real convincing to make the upper end of the market move again- especially since w/o JUMBOs it's very hard to get a $750+ mortgage. That's what needs to move to get ave selling prices up.
WakeUp- good point. We are all tired of people talking their book.
US does not have a zero population. We are in the midst of the largest population growth since the baby boomers! Total and utter non-sense.
What is the "land" comment? Wierd. Sure baby boomers don't need to work or commute to work. But try gettign Sushi in Casper, WY. Or seeing the Opera in Shawno, WI. Or getting to see an Ibsen play in nowheresville, IA. People want to live where their is infrastructure.
You're off your rocker...Your numbers are BS. Your comments are absurd.
Historically, new households do not purchase right away -- they rent until they pay down household formation debts and save for a down payment.
5% chronically credit impaired under any lending guidelines, and an additional 10%?, 15%?, 20%?, 25%? newly credit impaired by the recession for up to 7 years by a foreclosure, and 10 years by a bankruptcy.
Any one have a guess/prediction?
Thanks for giving me a chance to document my facts. Comments below...
> OP- Not sure about your numbers. The 10 million empty home
> number INCLUDES 2nd homes? Come on that's perverting the
> facts a little isn't it. [...]
USA Today: "Open house, anyone? 1 in 9 homes sit empty"
www.usatoday.com/money...
> US does not have a zero population [growth]. We are in the
> midst of the largest population growth since the baby boomers!
> Total and utter non-sense.
My comment was that WITHOUT IMMIGRATION (which economic and social factors is diminishing greatly) the US is approaching break-even population growth.
From one website (just Google the damn term, it's not hard!):
"Thus, post-1990 immigrants and their children accounted for 61 percent of population growth during the last decade."
www.npg.org/popfacts.htm
This trend is accelerating. I can dig some more but you get the idea.
> What is the "land" comment? Wierd. Sure baby boomers don't
> need to work or commute to work. But try gettign Sushi in
> Casper, WY. Or seeing the Opera in Shawno, WI. Or getting to
> see an Ibsen play in nowheresville, IA. People want to live where
> their is infrastructure.
They will surely put Sushi restaurants in desert subdivisions if the market demands them. Not every retiree is Za Za Gabor. Just the ones from New York. And only some of them if that Green Acres show is any indicator.
One thing that takes a little advanced HIGH SCHOOL math to understand is that we're talking TRENDS and FACTORS here, not absolutes. In other words, nobody is talking about cities become deserted or the US population going to zero. We're talking about FACTORS that will put downward pressure on house prices.
Most real estate is bought on leverage (at least 1:5 and in the Bubble times as much as 1:20). Prices move relatively slowly and are subject to macro trends. This all means you should pay careful attention to trends that could move the needle the wrong way a little bit as that "little bit" could be your life savings and/or any and all expected long-term appreciation of your asset.
> You're off your rocker...Your numbers are BS. Your comments
> are absurd.
Have a nice day.
OP
1. You stated that rental rates reflect the true value of a property. B.S. Rents only apply to the rental market. Not all property is up for rent. Rents may reflect the utility value of a home, but not its desirability to a willing buyer.
2. People do not necessarily buy into your theory that property is primarily an "investment." It is not a stock. It is not a bond. I'd agree with your implicit assumption that houses are an impulse or emotional buy. The same, possibly, as fashion, jewelry, or art. People (hopefully) enjoy their homes. They may buy it as a status symbol. Or, for privacy. The reason does not matter, and it certainly does not have to be rational. If I choose to live on a Malibu or Diamond Head oceanfront property, what concern is it of yours? For the use and/or pleasure, the expense is worth it. Thirty years from now, when I pass away, I won't be worrying about the ten million I spent on a prime property. I won't say to myself -- I should have listened to OP and lived in a dump. For what? Don't live your life as a penny-pinching millionaire. If you have relatives who need your money, tell them to earn it, the hard way. Like I did.
3. The link you posted about 1 in 9 homes being vacant is misleading. "This unprecedented glut of vacant homes — one in nine homes across the USA, according to the Census Bureau — will change the real estate landscape for years." Nowhere in the article do you see this statement qualified. All homes or homes for sale? It makes a big difference.
4. The housing depression will end. Too bad, I know you don't want to hear the news.
finance.yahoo.com/news...=
It's a free country, and you're entitled to be anti-real estate. But don't deny the rest of us the right to be enamored of luxury homes, prime office buildings, and oceanfront property. I have had more fun in beautiful surroundings than I ever had in holding stock and option investments. Because, as long as you can make money, you can spend it. Both Bill Gates and Warren Buffett do not live in dumps. Why should they?