Why House Prices Will Resume Their Fall 25 comments
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The above chart shows the inflation-adjusted Case-Shiller Home Price Index as updated monthly. The right end of the chart shows that in April and May 2009, house prices stopped their rapid descent and moved horizontally. This pause in the fall in house prices was purchased by Washington through giveaways to first time home buyers and by the Federal Reserve through huge long-term loans to Fannie Mae and Freddie Mac.
However, Washington and the Fed were ignoring a huge economics truth, illustrated by the annual Shiller chart. The truth is that, over the long-run, house prices tend to go up at the same rate as other prices (i.e., the rate of inflation).
The Shiller charts show the inflation adjusted prices when the same house is sold and then sold again. The chart below shows that house prices tended to stay constant (after adjustment for inflation) from 1951 to 1997, when President Clinton foolishly triggered the 1998-2006 bubble by changing the excellent roll-over capital gains tax treatment, instituted by President Truman:
Shiller even took his chart back to 1890, finding that house prices were quite stable from 1890 to 1997, except for a temporary dip downward to about 75% of their normal value during the Great Depression.
The victory of Bernanke and Obama over the forces of economic nature in April and May will be as short-lived as a sand castle built on a beach near the water line while the tide is coming in.
Historians will look back at it as an illustration of the fact that you can't fight the forces of economic nature. It will be paired in the economic textbooks with President Nixon's failed attempt to fight inflation through wage and price controls.
Disclosure: No positions.
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Obama has the $$ presses going full speed, interest rates are low. It does not take a genius to figure out that the way you stop the slide is to artificially raise the bar by de-valuing the dollar. Has real estate frequently been considered a hedge against inflation? Yes, so why do you all think there are people bidding against each other to buy houses in California. Not just the low end either. It's ok to be bearish. It's ok to be bullish too.
What one really needs to do in these uncertain times is to evaluate what is happening, not what you or someone else thinks should be happening. Thinking, not reacting, is required.
"The victory of Bernanke and Obama over the forces of economic nature in April and May will be as short-lived as a sand castle built on a beach near the water line while the tide is coming in."
Here here.
On the third hand: The chart in the article can be questioned on many levels. I've noticed a dichotomy building this week between the camp that says that real-estate prices have been relatively stable for (fill in your favorite number of years and, of course, we will exempt The Great Depression) vs. a camp that is attempting to demonstrate that real-estate prices fluctuate wildly and both Greenspan and Bernanke should have known that. I'm in the camp that thinks both Greenspan and Bernanke are being honest in saying that they were caught by surprise because they had never experienced real-estate prices going down nationwide (we understand that in localities and some states economic conditions can devastate the local real estate) and after all, hindsight is 20/20.
You can't measure "real-estate prices" or "home prices" over long periods of time. You are comparing Apple County to Orange County. The "homes" of today are larger, more fuel efficient (efficient per square foot), have more amenities, etc. It's a little like comparing "health care" circa 1950 with X-ray machines that could barely pick up a compound fracture, and then state that today's health care has become a "bubble" because we use MRI machines that pick up minute hairline fractures. Of course health care is more costly today--it's a lot better today and you pay for what you get. Real estate is a lot better today and you don't pay for what you can't afford.
Prior to the Federal Reserve we had a 'Capitalistic' economy, now we have a 'Debt' economy with interest obligations sucking the value out of our personal, business and government lives. Consider this, California would have money to spend and a balanced budget if they didn't have huge debt payments to make!
Tony wrote: "You can't measure "real-estate prices" or "home prices" over long periods of time. You are comparing Apple County to Orange County."
That's not true of the Case-Shiller data, which compares exactly the same homes.
You made a very good point. The Case-Shiller index is indeed adjusted for inflation. My argument is that house prices will come down after adjusting for inflation. As you point out, prices can actually fall after adjusting for inflation, but go up in nominal terms.
Howard
"You can't measure 'real-estate prices' or 'home prices' over long periods of time. You are comparing Apple County to Orange County. The 'homes' of today are larger, more fuel efficient (efficient per square foot), have more amenities, etc...."
However, the Shiller indexes get around that issue by comparing the price of the same home when it is sold more than once.
Howard
Sorry. I didn't notice that you made the same response to Tony before I did.
Howard
"...house prices tended to stay constant...from 1951 to 1997, when President Clinton foolishly triggered the 1998-2006 bubble by changing the excellent roll-over capital gains tax treatment..."
Q: How did the change to the current tax law with the $500k gain exemption cause the bubble? Under both rules, most people paid no tax on the sale of a primary residence.
Q: Isn't it more correct to say that the 1998-2006 bubble was caused by money supply growth by the Greenspan Fed during this period which caused asset bubbles in both real estate and equities?
Who's inflation are you talking about? The gov inflation, like unemployment is vastly understated.
Inflation from 2000-2008 was around 10%/yr, not the 2-3% offical rate.
Unemployment is now about 17% and probably going to hit 20% before it turns. This will cause many more foreclosures dropping home price even more.
And to top it off as soon as the economy recovers the price of oil is going up until it kills the economy again.
Good luch people, you are going to need it.
Just relax... the ugly buying season of winter is coming and that will be a better time for your buyers. Educating your clients on patience and keeping them away from stupidity of frenzies makes you the best agent around. You will do well. Pretty much, people have had it with the tactics of the last several years that has caused huge losses.
On Jul 31 12:10 PM User 464204 wrote:
> Let me start by saying that I am a real estate broker in Sacramento,
> CA.
> This is what fascinates me.
> I have buyers lined up wanting to buy houses. The problem is little
> inventory. On one hand you have sellers who are trying to sell their
> houses for more than they are worth and on the other you have ignorant
> politicians i.e. Barney Frank doing everything they can to stop foreclosures.
>
> Doesn't it make sense to allow the foreclosures if then you will
> have buyers stepping in, buying, paying city/ county transfer taxes,
> title insurance, and lender fees. Banks lending money for 5-6% that
> they borrowed for next to nothing- good for people in the mortgage/
> title industry- good for unemployment/ income taxes.They will be
> fixing these houses up, good for sales taxes and contractors, buying
> furniture-good for sales taxes.
> In comparison, somebody stuck in house they paid more for than it
> is worth/ can not afford will not spend a dime on that house which
> will in turn not generate any revenue for anybody and only add to
> the problem.
> Let the market run it course and it will correct by itself in less
> time if the gov't will stay out of the way.
Case Shiller Index is no more accurate than publicly released figures on unemployment.
1,000,000 Bankers lying = One investment banker lying,
you tell me, who caused this problem?
On Jul 31 12:58 PM OptimizedPrime wrote:
> @User 464204 -- Finally, an honest real estate agent, or at least
> one that "gets it".
>
> These days there are two kinds of agents:
>
> 1. Agents that will do anything, lie any lie, join any and every
> fantasy of a Seller in order to get the listing. Whereas other agents
> offer the Truth, they offer Hope. They get the listing and the honest/realistic
> agent goes begging.
>
> Then they join the Seller in waiting until hell freezes over for
> somebody to come buy their home at the 2007 price, possibly dropping
> the price by the odd 1-2% to "adjust" to the market.
>
> 2. Agents that are honest and want the sale to CLOSE, not just sit
> on the market for months/years. Agents that show sellers the literature
> that informed people here on the Internet read every day about the
> direction of the market. Agents who will tell sellers that NOW is
> the best time to sell because their losing investment is just going
> to LOSE EVEN MORE if you wait.
>
> In other words, agents who will SCARE THE SHIT out of a seller to
> get them to move.
>
> You don't need to make anything up to scare somebody in this market.
> Just show them the facts and trends and they'll sign whatever you
> want.
>
> Agents, try this with me:
>
> "There have been many better times to sell, but those days are gone
> forever. I'm very sorry you missed the rocket to riches. Now it's
> time to be realistic. NOW is the best time to sell for the next 10
> years and possibly forever. Profits are not going to happen. Cut
> your losses before you lose everything."
>
>
> OP
On Aug 01 05:14 PM WAKEUP wrote:
> Practically everything real estate salespeople write or utter is
> shot through-and-through with absolute self-interest, even when it
> is smoke-screened the way User 464204's comment is. I vividly recall
> the effect of boring and narcissistic recitations from these guys
> (and women RE types) over the years. I have even resorted to trying
> to change the conversation away from square footage, "location-location-loc...
> et. al., to sports (for God's sake), in an effort to prevent falling
> asleep under the blunt trauma of these recitations. All attempts
> to deflect the cumulative bore-factor of these recitations failed.
> No matter how long the recitation went on, and no matter how circuitous
> the route, their "conversations" ALWAYS culminated in a frank attempt
> to get me interested in either selling my house (with THEM as my
> representative, of course), or an attempt to get me to "buy up,"
> to a more expensive house. They always just "happened" to have a
> listing that would be "just perfect," for me. User 464204 is not
> the first real estate poacher to espouse the rush to foreclosures
> in order to rush their return to big commi$$ion dollar$. It gets
> old, and it's transparent. Give it a rest.
On Jul 31 11:16 AM aldol wrote:
> this reality would have been obvious to any one who wanted to recognize
> it.
> as housing cost is a large contributor to the cpi the low published
> cpi data conflicted with the rising housing costs
On Jul 31 11:16 AM aldol wrote:
> this reality would have been obvious to any one who wanted to recognize
> it.
> as housing cost is a large contributor to the cpi the low published
> cpi data conflicted with the rising housing costs
You are one of the few who are active on this site who continually needs the support of profanity to make an argument..why is that?
Anyway, Your blast at RE agents demonstrates a really narrow vision of the free market and rational/responsible behavior.
Bad RE agents are no worse than any "bad" service provider or product perveyor. Attorneys...CPA's....s... owners...taxi cab drivers... all aspects of commerce, have bad apples, who push their product or service for a buck.
Anyone who touts a point of view is shilling for themselves...me and you included.....
Rational are reasonable behavior,on the part of market participants, is the goal of a free market, not the reality of its observed behavior.
Businessmen and market participants do not appear to be striving for sainthood.....so lets keep the bar the same level for all.....and let's keep it clean...
On Jul 31 12:58 PM OptimizedPrime wrote:
> @User 464204 -- Finally, an honest real estate agent, or at least
> one that "gets it".
>
> These days there are two kinds of agents:
>
> 1. Agents that will do anything, lie any lie, join any and every
> fantasy of a Seller in order to get the listing. Whereas other agents
> offer the Truth, they offer Hope. They get the listing and the honest/realistic
> agent goes begging.
>
> Then they join the Seller in waiting until hell freezes over for
> somebody to come buy their home at the 2007 price, possibly dropping
> the price by the odd 1-2% to "adjust" to the market.
>
> 2. Agents that are honest and want the sale to CLOSE, not just sit
> on the market for months/years. Agents that show sellers the literature
> that informed people here on the Internet read every day about the
> direction of the market. Agents who will tell sellers that NOW is
> the best time to sell because their losing investment is just going
> to LOSE EVEN MORE if you wait.
>
> In other words, agents who will SCARE THE SHIT out of a seller to
> get them to move.
>
> You don't need to make anything up to scare somebody in this market.
> Just show them the facts and trends and they'll sign whatever you
> want.
>
> Agents, try this with me:
>
> "There have been many better times to sell, but those days are gone
> forever. I'm very sorry you missed the rocket to riches. Now it's
> time to be realistic. NOW is the best time to sell for the next 10
> years and possibly forever. Profits are not going to happen. Cut
> your losses before you lose everything."
>
>
> OP