Real Estate Bubble Is Only in 4 States: CA, FL, NV, AZ 32 comments
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Tyler Cowen writes in Saturday's NY Times:
A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.
Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.
Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.
The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.
Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.
I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.
Using the Office of Federal Housing Enterprise Oversight (OFHEO) quarterly real estate price indexes for U.S. states through the first quarter of 2008 (data available at the St. Louis Fed), I inspected the graphs for the housing price index in each of the 50 states, and found the following:
For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states (see bottom chart above), or have leveled out.
Bottom Line: To the extent that there has been a real estate bubble in the U.S., and a subsequent crash in home prices, it's been pretty isolated to a small group of states like CA, FL, NV and AZ, and most of the country has seen home prices continue to rise, or flatten out. See graphs of each state below:
STATE/BUBBLE?
- Arizona YES
- California YES
- Florida YES
- Nevada YES
- Hawaii MAYBE
- Maryland MAYBE
- Massachusetts MAYBE
- Michigan MAYBE
- Rhode Island MAYBE
- Virginia MAYBE
- Alabama NO
- Alaska NO
- Arkansas NO
- Colorado NO
- Connecticut NO
- Delaware NO
- Georgia NO
- Idaho NO
- Illinois NO
- Indiana NO
- Iowa NO
- Kansas NO
- Kentucky NO
- Louisiana NO
- Maine NO
- Minnesota NO
- Mississippi NO
- Missouri NO
- Montana NO
- Nebraska NO
- New Hampshire NO
- New Jersey NO
- New Mexico NO
- New York NO
- North Carolina NO
- North Dakota NO
- Ohio NO
- Oklahoma NO
- Oregon NO
- Pennsylvania NO
- South Carolina NO
- South Dakota NO
- Tennessee NO
- Texas NO
- Utah NO
- Vermont NO
- Washington NO
- West Virginia NO
- Wisconsin NO
- Wyoming NO
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And CLH says we haven't been in a bear market, that its just the financials that are bad... I quote him: "The real damage has been in the financials. The overall market has never gone lower then a 20% loss --still not a bear market. The financials may take some time to repair but I think the bottom is in."
That's absolute hogwash and I would suggest Mr CLH ask the RNC and the financial industries for his money back, because his numbers stink to high heaven.
Even my $5 Casio solar calculator can count better than that, and I will round off the numbers to the lower 'tenth in deference to CLH's always specious, politically motivated and poorly researched 20%:
DJIA down 23.7% - High 14198 (Oct 2007) - Low 10827 (July 2008)
NASDAQ Composite down 24.6% - High 2861 (Oct 2007) - Low 2155 (March 2008)
Wilshire 5000 down 23.3% - High 15,938 (Oct 2007) - Low 12219 (July 2008)
S&P 500 down 23.7% - High 1576 (Oct 2007) - Low 1200 (July 2008)
Russell 2000 down 24.3% - High 856 (July 2007) - Low 647 (July 2008)
NYSE Composite down 20.9% - High 10238 (July 2007) - Low 8089 (July 2008)
NASDAQ 100 down 25.5% - High 2239 (Oct 2007) - Low 1668 (March 2008)
So, all the published numbers show that the 7 largest, most liquid and most institutionally owned markets in America were all down between 21 and 25%+, but CLH says the "overall market" was never down 20%...
hmmm, so who yuh gonna believe?
my source for these statistics was Robert New's excellent market technicals site, a site I refer to daily when I want the facts, not the RNC and financial markets' propaganda releases:
stockcharts.com/def/se...
I am a Realtor on the SC coast and also have r.e. interests in the piedmont of NC. We started feeling the effects of the slow down in '07 and it has grown progressively worse. Many states you noted with NO usually are several years behind states like Ca. so the effects are just beginning to get worse in these other areas and will take some time to work itself out.
In the NC mountains, there are a tremendous number of homes on the market. A friend who has substantial r.e. holdings told me many of these homes are owned by Fl. residents (summer vacation holders) who are in some state of duress in Fl.
This is the start of a correction, not the end.
As unemployment rises more states will be affected.
Who is the culprit? Is it the financial "genius" who developed these products and securitization? Is it Madison Avenue, that induced people to swap equity for silly things made in China? Is it a college faculty, that insists on tenure and small teaching loads, and which inflated the cost of tuition?
It's all of them, and all of us, that are to blame. We lived too high; we must atone. It's much more than a 4 state housing binge.
LordDarley
In our case, our mortgage payment is 13K a year and our propery tax is 15K.
A lot of people are being squeezed by the tax because inflation rises but incomes don't. It is getting more difficult to sell houses. Prices are down by about 5%. Adjusted for inflation it is 10%.
We might be in the eye of the storm, this is why it so quiet. Consumers are tapped out. We are about to fall of the cliff.
The 'bubble' is only part real estate, as it's the result of financial engineering run amuck. The banks are scared and know what is about to happen in the commercial markets. They react the only way they can by over-tightening credit. It will take a lot of bank failures and consolidations before things become 'normal' again.
At some point lending standards will have to loosen. As many people have lost their credit - no one will be left to qualify for that F-150, much less a mortgage. Who has 20% down anymore?
I cannot even sell the last starter home I have even though I am offering 20% seller financing for 3% interest and will quarantee to take over the buyer's obligation if they default. The total monthly cost to own is $700, but no one can qualify. So now we are going to rent - they will gladly pay $850! Last house we sold was $101,900 and no takers at $97,900. These are not inflated prices and thus illustrate the real problems. I have no bank financing, but am a victim of a distressed market.
Yes, this article is way off-base, just as our astute government officials a year ago 'swore' that things were confined to sub-prime and it would not infect other areas.
Sub-prime is small compared to when commercial loans start to collapse. Drive around your area and see how much is on the market. Strip centers, malls, freestanding businesses. When malls had to offer free rent just to get businesses to open a store to create foot-traffic and give the appearance of a healthy mall - the end was here. Sam Zell got it right, he sold - everything!
We are about to face a major deflatoionary period as cash becomes king. Be careful of how you interpret the numbers, too many will 'pick' a bottom before it occurs.
My argument is that the floor expectation prices are too high.
Here is my rational:
There is a lot of buying at today's prices by those that saw the bubble and put money aside to take advantage of the expected drop in prices.
However, these buyers do not have an unlimited amount of capital to buy all of those foreclosed properties. Therefore, we can expect another down-leg in housing prices.
Okay, where does the money come from to buy on the next down-leg? The answer is: those that are saving up to buy a house.
So, here is the catch regarding house prices. Try saving money to put, say 20% down. The interest rates available for longer term CDs is, say 3%. You get 3% on your savings. You have to pay taxes on the interest, which knocks the effect rate to 2 1/2%.
But there is more. The inflation rate is over 3%.
This translates to, effectively, a saver is not saving anything!
To make up the necessary cash to purchase and support a house means that the prices are going to really drop more because the next go-around buyers don't have enough money to support the houses at today's foreclose prices.
How much more of a drop???
Guess, BIG guess. 25%
It is error to judge future market prices by past performance (a phrase you may recall reading elsewhere and often). This is particularly true of markets highly leveraged with borrowed money (e.g. mortgages) when the likelihood is great the availability of that borrowed money will be substantially reduced going forward, with leveraged prices dropping in proportion. Think 1929 in stocks and bonds. Or 2007 in real estate.
The real bottom will be "in" only when everyone has finally given up looking for it. Until then, we're still in the "hope" stage of a bear market, which will endure until final capitulation -- when blood is in the streets and virtually nobody wants to buy real estate ever, ever again.
What are your leading indicators in the NO states? Here in GA, foreclosures are up, builders are desperate, regional banks are full of non-performing assets (residential and commercial development loans), there is a 4 year supply of homes > $1 million north of Atlanta. Are you familiar with the law of supply and demand? You should be ashamed of yourself.