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Nationwide Decline in Housing Prices Predicted for 2007:

N.Y. Times:

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

As I noted over a year ago, the idea that a nationwide year over year decline in housing prices was virtually impossible, despite an unprecedented nationwide price bubble--driven by low interest rates and incredibly lax lending standards--was extremely ill-considered (okay, last time I called it "idiotic").

A. Zarkov (mail):
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent …

Who are these economists? Certainly not Robert Shiller who has done extensive research on housing prices. Besides the median is not right thing to look at anyway as I discussed in my prior post on the "mortgage interest" thread. There is no way you can reconcile "modest" price declines with Shiller's graph. Of course the housing market can be extremely illiquid. Sellers can stubbornly cling to their price and just not sell until inflation gives them the nominal price they think they deserve. For this and other reasons prices can take years to correct to the underlying fundamentals. However the sub-prime mortgage crisis might change everything because a lot of people are forced into a short sale or a foreclosure. It's also going to take banks and other financial institutions some time to learn the ropes about real estate. They too are inclined to hold onto property for too long hoping somehow the buyers will appear to give them the price the want.
8.26.2007 1:35am
John Thacker (mail):
<i>Besides the median is not right thing to look at anyway as I discussed in my prior post on the "mortgage interest" thread.</i>

Well, they're going down significantly more than that in many areas-- areas that are concentrated on the top end of the market. The quoted article mentions 14% declines in California. Since the declines are much larger at the top of the market, the median in some sense understates the issue.

And measured over the entire country, there was a price bubble. But it would also be ill-considered to claim that, e.g., Charlotte, NC saw a price bubble at all, as price increases barely beat inflation there despite lots of growth, thanks to loose building regulations. (And Charlotte prices are still going up, as the NYTimes article's graphic mentions.)
8.26.2007 3:23am
whit:
one's value as an economist is roughly equivalent to one's skills at prediction...

and really, how many economists make good TRADERS (which is about prediction married to risk management)?

they have some value in noting general relationships (laffer, etc.) but economists are ACADEMICS. they tend not to live in the real world (like most academics) but in a world where pretty theory rarely needs to be tested with real money and real risk.

of COURSE it's a bubble in real estate, but it is true that the real estate market is varied such that it isn't as true in some areas as in others.

all bubbles burst. period. all bubbles regress to the mean (while first overshooting the mean in panic selling).

that's why good traders can trade almost anything, although they may have markets of preference of course, because the same laws of psychology apply to all markets.

i've said this before, and i'll say it again. a bubble is a bubble and this one is no different than tulip bulbs, stocks, or anything else.

"For this and other reasons prices can take years to correct to the underlying fundamentals"

most bubbles will correct BEYOND the underlying fundamentals fwiw. iow, if this bubble REALLY pops, houses will sell well below what most would consider fair (or even "book value) value. that's because supply and demand are not ruled in the shortterm by fundamentals, as much as they are ruled by psychology.

when there is an overabundance of supply and not much demand, prices can go much lower than the fundamentals predict. i'm not saying it will happen, but it CAN happen. the fact that so many people were saying (not too long ago) that it CAN'T happen reinforces this.

smart money was shorting IYR a long time ago :)

i'm in a market (seattle area) that has also been going up consistently. 10-12% last year iirc. is it a bubble here? ab-so-lutely.
8.26.2007 5:15am
Bottomfish (mail):
Despite all the wailing and gnashing of teeth, Bank of America did buy a big stake in Countrywide Financial. I think B of A knows that the foreclosures are a hot political issue and some kind of government bailout could be on the way.
8.26.2007 9:08am
PersonFromPorlock:
If the 'prudent' amount for a home mortgage is one whose payment is 30% of the borrower's adjusted gross income (it was 25% before banks began whoring for borrowers), then any market where the median mortgage payment exceeds 30% of the market's median borrower's AGI is overpriced. Long-term, prices must fall to the point where the average mortgage payment once more is 30% of the average borrower's AGI.

Of course, the 30% figure could easily be wrong... but it is, by now, the conventional wisdom.
8.26.2007 9:49am
slogg (mail):
I suspect that the "economists" cited were really the usual business representatives, such as David Lereah, "economist" for the housing associations. They were probably not academics doing research in mainstream economics departments.
8.26.2007 9:58am
Gaius Marius:
The Titanic was once deemed unsinkable until it hit an iceberg. This nationwide decline of housing prices needs to happen. First, there are way too many developers still building new houses hoping that the real estate market has already bottomed out. Second, there are still way too many greedy local officials handing out building permits so that real property can be developed thereby increasing their property tax base. Third, there are still too many homeowners who refuse to cut the sales price of their home now to below cost when in fact the market is going to eventually dictate the sales of these homes at a 25% to 30% loss.
8.26.2007 10:03am
SirBillsalot (mail):
I'm a homeowner with a vested interest in a high value for my house. Nevertheless, I am amazed at the selfish attitudes displayed here. Affordable housing is not a disaster. Everyone needs a place to live and it is a good thing if the market returns to the point where people other than doctors and lawyers can also afford to buy.

We need to stop thinking of housing as tulip bulbs whose value needs to be artifically propped up by government controls and restrictions on supply. Tulip bulbs are not a necessity, but housing is.
8.26.2007 11:45am
guest:
I've got a great idea, let's deregulate some more. That'll solve everything.
8.26.2007 12:06pm
SirBillsalot (mail):
"I've got a great idea, let's deregulate some more. That'll solve everything."

Good idea. Let's start with market-distorting land use regulation.
8.26.2007 12:09pm
DiverDan (mail):
The one thing nobody here has noted here is that, just as there is not a single standard for "health care", there is not a single "housing market", even in a fairly compact geographic area. Here in the Dallas Metroplex (basically, all of Dallas &Tarrant Counties, where Dallas &Fort Worth are located, as well as parts of several surrounding counties), the market for owner-occupied housing can be segmented into at least 5 or more separate (but marginally overlapping) strata - (1)the low-income, very low price segment where prices are from $20K (or even lower) to about $55-60K [yes, you can find a house in Dallas for less that $20K - I'm foreclosing week after next on a house, about 800 s.f., frame on slab, 2 BR, 1 Bath, 50+ years old, in a bad neighborhood, that would sell for maybe $18K]; (2) middle-class starter homes from $65-70K up to $110K; (3) "Move-up" tract homes, ranging from $120K to maybe $280K; (4) Custom Homes from $300K to $850-900K; and (5) Luxury Homes, $900K-$1 Million and plus. By and large, the real impact of the credit contraction has been on the first two strata, and, to a lesser extent, the low end of the third. Custom &Luxury Home segments are much less reliant upon easy credit conditions, &therefore, less susceptible to downward price pressures caused by tight credit. And every geographic region has, I suspect, its own different housing stratification, dependent upon employment data (i.e., what portion of total employment is blue collar, service, white collar executive, academic, etc.), income data, transportation (with good transportation, either roads &highways or public transport, residents can search a wider area for housing within acceptable commute distance to employment), etc., etc.

Also, I think it is noteworthy that the areas with the greatest "bubbles" in real estate markets are also generally the areas with the greatest restrictions on development. It is not a coincidence that the ready availability of developable land in North Texas, the governmental environment conducive to development, and the resulting active competition from new building, have held down the price increases that "anti-development" areas like San Francisco, L.A., San Diego, &South Florida have seen.
8.26.2007 1:54pm
DiverDan (mail):
One last point - comparing "median" house prices year over year is NOT necessarily comparing apples to apples. Just what portion of the increases in median house prices over the last several years were attributable to actual housing price increases, and what portion was attributable to increases in median house size? I do not remember the exact figures, but I seem to recall that the average size of the "median" house has grown by something like 30% (from about 2100 S.F. to about 2700 s.f.) over the last two decades. And, If I recall, I saw a recent article that, with higher energy prices, the "median" house size was now starting to shrink. Seems the only way to filter out home size as a determinant of changing house prices is to adjust all figures to a per S.F. basis.
8.26.2007 2:00pm
whit:
"I've got a great idea, let's deregulate some more. That'll solve everything"

the problem is not deregulation.

the problem is (like all bubbles) greed and personal decisions based on greed.

people chose (and to some extent STILL choose) to buy way more house than they can afford or need because "it's a no lose investment. it HAS to go up" (lol).

and then, like in every bubble, they become bagholders near a top.

in any free market, the market participants set the prices. as long as human nature doesn't change (and it won't) we will continue to have asset bubbles. in this case, we have had first and foremost a liquidity bubble.

bubbles are GOOD. they offer trading and investment opp's when you go against conventional wisdom, etc.

when i bought my last house (which i sold 2 months ago and bought about 9 years ago), my realtor told me i should buy a much bigger house, since the bank had pre-approved me, and it HAD to go up, etc. etc. etc.

buy-side and sell-side analysts will always have the same biases and vested interests no matter what asset we are talking about.

already i am reading comments in the seattle area, that OUR market is healthy and won't pop. these people NEVER learn.
8.26.2007 3:01pm
fishbane (mail):
As someone looking to buy in 2008, I'm probably one of the few who is pleased with this. My income sources as a self-employed person is well distributed throughout the country with two clients in Europe, and business has been good lately. Now I just have to decide between the Bay Area and somewhere in Brooklyn...
8.26.2007 3:13pm
whit:
i'm extremely pleased with this too.

one person's crisis is another person's opportunity.

i remember in 1998 when everybody loved stocks and hated gold. guess what. great time to sell stocks and buy gold.

being a contrarian is the way to be. sure, you can ride a trend, but make sure you don't get on near the END in an illiquid asset like real estate.

there are some very nice 500k houses i would love to look at for under 400k.

considering the difficulty many are having getting jumbo loans, well... do the math

that's how i look at it. where others see despair. i see opportunity.
8.26.2007 3:22pm
DeezRightWingNutz:
Gaius Martin,

While I don't share your apparent nostalgia for a poorer past, I do agree that many people live beyond their means, or at least spend more than I would.

My concern is who that, like you said, many aren't saving for retirement, social security will probably be insolvent, and we'll have a bunch of poor elderly folks. As one who is trying to save for retirement, I won't be surprised when the my Roth IRA is determined to be taxable after all, my social security benefits will be means tested away, and my withdrawals from my 401k will be taxed at 50%+.

I think the over-spenders may be on to something. Everyone is going to tell me I should feel sorry 21st century Ma and Pa Joad, and I won't be able to drive around in my new SUV and lord the relative comfort of my golden years over them. In fact, I'll probably be shamed into giving to charities that support them. At least I'll that tax deduction, unless Bernstein succeeds in taking it away, too.

As for the rent v. buy…

Does everyone reading this live in a large city, where the rental properties are close substitutes for properties you could own? I see condos in high rises and apartments in high rises as close substitutes, but in a town of about 200,000, are the rental market really a close substitute for buying a single family home? Granted, things have probably changed a little with the downturn in the housing market. There may be more suburban houses available for rent, but when I was looking four to five years ago, there were close to ZERO single family homes for rent in desirable suburbs. And mortgage rates were really low. You could finance $200,000 at just over 5% for 30 years, and pay under around $1,500 per month, including PMI, property taxes, and insurance. The tax deductions would save you around $250 a month. That means that your mortgage costs you $1,250 per month, and adding maintenance/depreciation of $500 per month, and your housing costs $1,750 per month (and you own the house in thirty years and your costs drop to ~$750 per month).

If you were trying to rent something for $1,500 - $1,750, I don't think you could have found a substitute. The townhouse I rented immediately before buying a house was around than half the size, didn't have a private yard or a deck, used inferior materials, didn't have covered parking (let alone an attached 2-stall garage), and was in the inner-city school district. It cost about $900 per month. When I bought my house, I was twenty-four, so I probably needed a place to live for sixty years. Assuming rent, insurance, housing prices, and property taxes all increase at the rate of inflation, buying a house seemed like an easy decision.

Using a discount rate of zero, I'd need to find a substitute rental property for $1,100 per month. Using a discount rate of 7%, I could rent for $1,700 and break even. (Higher discount rates favor renting since the costs of financed home ownership are higher for the first thirty years). For $1,700 I probably could find something as nice as my house. For $1,100, there's no way. A quick check of Craig's list revealed one house for rent in the suburbs, for $1,495/month, that's probably a the closest substitute.
_______________

Fishbane, if you're going to finance the bulk of your purchase, you still may have been better off before. Rates now are 1.5% higher than when I bought. If I bought my house today, I'd need to get around about a 12% discount to have the same payment, after taxes. I don't think my house has gone down 12% over four years, so I'm happy I bought then.
8.26.2007 3:55pm
DeezRightWingNutz:
As an aside, why anyone would turn down a 5%, tax-deductible, non-recourse loan is beyond me. I know Dave Ramsey has a lot of diciples, but c'mon, it's practically free. It makes even more sense if you're not maxing out retirement contributions, you're young, and you're actually going to put the money you would have spent on a house into tax-sheltered investments. I know many people following the "millionaire next door" advice who pay extra on their 30-year fixed-rate 5.xx% mortgage every month but only contribute enough to their 401(k) to get the match.
8.26.2007 4:04pm
Tony Tutins (mail):
DD writes:
Also, I think it is noteworthy that the areas with the greatest "bubbles" in real estate markets are also generally the areas with the greatest restrictions on development.

What do you mean by "bubbles" in this context? There are some places people find more desirable to live than DFW, and the homes are priced accordingly. I don't think that the price of a prewar six in Manhattan will tumble down to $100K any time soon.

It is not a coincidence that the ready availability of developable land in North Texas, the governmental environment conducive to development, and the resulting active competition from new building, have held down the price increases that "anti-development" areas like San Francisco, L.A., San Diego, &South Florida have seen.

SF and SD are both surrounded by ocean and mountains, and are completely built out. Building codes are not onerous. Some hillsides are prudently left undeveloped, because homes built there are subject to wildfires (summer and fall), landslides (winter and spring), and earthquakes (whenever). "Pro-development" forces there want to tear down single-family and low density multifamily housing, and replace with high density "transit villages". As you point out, the supply of land in DFW is essentially infinite in all directions. I would also point out that the demand to live in DFW is relatively small.

Regarding Seattle: The RE market there used to move in lockstep with the demand for new airliners, because Boeing was swift to adjust its number of employees. I imagine Microsoft employees must provide a huge buffering effect on the price of housing, but this is just a guess.
8.26.2007 5:52pm
whit:
regarding seattle. the (liberal) king county council passed the CAO (critical areas ordinance) that effectively stole 50-66% of rural landowners property by forbidding them to develop it. note that this has applied even to people who purchased their land BEFORE the CAO was passed. when you are taxing people on ALL their land, but changing the rules (after the fact), so 2/3 of the land is now not developable, that is/was a major factor in costs.

you are totally right about MSFT and BA. some really bad news out of either of these companies will SIGNIFICANTLY impact our real estate market (one can only hope) :)

especially in the case of MSFT, a lot of people snarfing up ridiculous priced bellevue, redmond, kirkland etc. properties at ludicrous valuations work for microsoft.
8.26.2007 6:21pm
Gideon Kanner (mail):
Whit has a point. At least two presidential commissions have looked into the problem of housing and have concluded that NIMBY politics and the resulting onerous land-use restrictions provide an obstacle to housing development. The resulting constriction of supply in places where people want to live is implicated in the unreasonable rise in the cost of housing. When THE MEDIAN house starts going for over a half-million (as they do here in Southern California which has plenty of vacant land) things have gone over the top and a correction is inevitable. Greedy lenders loaning money to people with poor or no prospects of repaying their mortgage loans haven't helped either.
8.27.2007 1:08am
Guess (mail) (www):
Yes, It is not a coincidence that the ready availability of developable land in North Texas, the governmental environment conducive to development, and the resulting active competition from new building, have held down the price increases that "anti-development" areas like San Francisco, L.A., San Diego, &South Florida have seen.
8.27.2007 6:13am
Aleks:
Re: Also, I think it is noteworthy that the areas with the greatest "bubbles" in real estate markets are also generally the areas with the greatest restrictions on development.

In some (most) cases these restrictions are created by geography. How much more housing can you fit on Manhattan island, on the San Francisco peninsula, or on buildable land in S Florida (which is sandwiched between the ocean and the Everglades)?
8.27.2007 3:24pm