They Said Housing Prices Couldn't Fall. They Lied.

Median Home Prices Fall Nationally for the Year

• The median price for a single-family home dropped 1.8 percent to $217,000, in 2007.

Folks, they told us it could never happen. It never happened in history (well since 1968 at least), so therefore it could never happen. This is why you have to ignore these pundits.

They also conveniently forget to mention what else has never happened; the median home price rising at levels they did from 2000-2006. I don't know the figure percentage rise off the top of my head, but I know the median price rise was historic and also "never happened". So when you have a bubble, and something goes up at a rate it has "never done so," a lot of "historical" things can happen on the back end. And I'll place a wager that 2008 will be a repeat - median prices will fall again.

Housing prices are still too high for people to afford. [Analysis - What Should Median Housing Prices Be Today?] Even if we get these long rates down to 5% - it is not about mortgage rates - it's about affordability. If you force people (gasp) to come up with 5% down, and have a (gasp) FICO score of 680+, and (gasp) have documented income ... well you've just reduced the pool of potential buyers by a huge amount from "anyone with a heartbeat" in 2003-2005. So the supply/demand dynamic has shifted. Layer on top of that the fact that lenders now actually might care what happens to the loan once its originated and you have yet another limiting factor.

Current home owners are still being unrealistic about their home prices, and that is the only reason home prices have not fallen further. They are stubborn - meanwhile the home builders are slashing the prices of new homes [Builders Slash Prices]. I keep coming back to the fact, that eventually current home owners are going to wake up to the fact that home shoppers are going to go to the brand new house two neighborhoods over selling for 20% lower than they have their house on the market...

So a lot of people are negative on housing (finally)... except our favorite economist Mr Yun of the National Association of Realtors [ Housing Will be Flat Next Year! Whew!]. In today's story we get more classic Yun "While Yun said he expected sales to start to rebound this spring"... the guy is always good for a laugh... eventually he is going to be correct, I mean he has been calling for the housing rebound since fall 2006 right?

• Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades. (folks its only 4 decades since that's as far back as record keeping goes)
• For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982.
• That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors' chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.
• For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.
• The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market. (yes, one of the bright spots as we have been mentioning)
• While Yun said he expected sales to start to rebound this spring, other analysts said housing is likely to remain in the doldrums throughout most of 2008, reflecting in part the credit crunch, which has caused lenders to tighten their standards, making it harder for prospective buyers to qualify for loans

Now for another myth - housing is only 4.5% of the economy so we shouldn't worry about it...

• The biggest increase (in unemployment claims) occurred in California, up 27,194, an upsurge blamed on higher layoffs in construction and service industries, and Florida, with an increase in layoffs of 8,496, which was attributed in part to higher layoffs in construction. California and Florida have been particularly hard hit by the housing slump.

Again, it's a ripple in a much larger pool. By the time the ripple hits the shore two miles away its quite the large sized wave. And with many illegal aliens working in construction, the destruction of jobs is far worse than it appears - but of course they cannot apply for unemployment so it doesn't show. But they are consuming just like regular people so their loss of wages hurts shops, restaurants and service industries just the same.

Some people are still holding out for some sort of miracle this spring and a return to good times in the housing market. I say overlay the tech bubble of 98-00 over housing bubble of 02-06. Then realize how long it took to rebound and what a "rebound" actually means... again, not perfect parallels but when the market does come back, we are not going back to bubble levels. Not unless real wages start spiking up 7-10% annually.

Comments

[Carl leason:]

Regarding Mr. Yun,...You have to remember that he is paid by NAR to say "upbeat" things,...but in fact, in FL the average Realtor has had only ONE,..repeat,...ONE sale this past year, and only one Realtor in 300 has even a pending sale !!! To say the market is bad,..is still a huge understatement ! Florida has considerably higher than average prices and considerably lower wages,..The home Builders used to say that the high prices were caused by increasing high costs for all building materials, labor, land, etc. but now,..the cost of materials is way down and yet the prices are still very high,...higher than the national average ! So,..the builders are trying to have it both ways,...trying to keep prices high and increasing the profit margins. New homes are now priced way higher than resale homes so don't pity the builders,..they were making very big bucks between 2001 -2005 and they got used to living high off the hog ! Now they are selling off land, offering Realtors really high commissions, but the real problem is the glut of unsold older homes that are affordable to the average resident of
the states where they live. Every buyer wants a NEW home !
If you want a real comedy show,..just watch HGTV and see these young kids 25-35 years negotiating to buy million dollar homes in CA.
Obviously most of that programming was done a couple years ago, but now what does that young kid do when his adjustable rate mortgage really does adjust ? And,..he has lost his job to boot ! LC

2008 Jan 25 02:03 PM

[Sing Expat:]

Lots of people really, truly, honestly believed that the market was different and not because they are all idiots. Even smart and experienced people get sucked into these bubbles; there are strong psychological and biological factors at work. They drank the kool-aid and want more.

We know we have created a monstrous generation of consumers. That is what America has become. Not the Bastion of Democracy. Not the Breadbasket of the World. Not the World's Manufacturer. And, finally, no longer the Global Leader in Finance. Heck, Americans no longer exist; they are now "the American Consumer".

This would be tragic and derisable if it were not so dangerous. American now produces debt and consumes crap. We have gone from building cars to building equity in houses. Unfortunately, the bubble is so huge (trillions upon trillions of dollars, numbers which no one but astrophysicists can even begin to comprehend) that it's popping would probably spell the demise of the entire Western Financial system.

So, we put a band-aid on the boo-boo, drop Fed funds by two to three percent, pump a few hundred billion into the economy and pray to God we can keep the thing gong until it's an SEP.

SEP=somebody else's problem. Which means, we really hate our children.

2008 Jan 26 01:42 AM

[Channon:]

"Affordability" does tie into interest rates. Sure down payment affordability matters, but beyond that, it's all about dollars per month. This is America.

If we believe that there was a structural change to long term rates "today" versus 25 years ago, that supports a one-time upward shift in the sale price of a house because that house really is more affordable in terms of monthly payment on a 30-year fixed mortgage. During the early run-up in the housing bubble, before all the speculators got in and Greenspan started cheering on the ARMs, one could watch the median price of a single family home in San Francisco County rise in parallel with real wages -- if the price were calculated in terms of monthly P&I on a 30-year fixed (prime). All was fine until 30-year rates stopped falling, at which point prices probably would have stabilized if the banks hadn't gone exotic in an attempt to keep Wall St happy on the top-line number continuing to grow.

2008 Jan 28 02:52 PM

[tradeking13:]

The NAR is a bunch of con artists. I saw a commercial of theirs this weekend that stated that on average home prices double every 10 years. I almost fell out of my chair.

2008 Jan 28 03:38 PM