Home Prices: Falling
By Susie Madrak Friday Dec 12, 2008 5:00pmI think home prices may fall by even more than 30%. We're hitting a period of deflation, which will drive wages (and employment) even lower and the value of houses may drop even more:
As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
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yet my property taxes remain at the new high.
/60mi West of downtown D.C.
//'bedroom community'/Metro area by some demographics.
There are way too many houses on the market far cheaper than building. And if you are layed off, you aren't going to build a new house. Far from it.
I built houses for people that in no shape or form could ever afford them. It's come home to roast like a chicken.
I was an estimator for a production residential builder in california. the units the company built are now selling for what the direct costs were to build them.
A person earning less than $20/hour cannot and will never be able to afford a 300,000 dollar home. But that is exactly what's been going on. It was only a matter of time. Both my bosses said that to me over 5 years ago. I hate when they are right.
I agree - and that's why I'm still a renter.
The only engine that would move folks into *real* >$300,000 houses would be two GOOD jobs and I'm afraid they aren't making those anymore. The problem with losing our local manufacturing industries is that now everyone is in the "service" sector where you're lucky to get $10/hour, if you haven't been outsourced completely. Unless these good jobs come back to the US you can kiss the middle-class goodbye.
The new "middle" class is going to be lucky to be able to afford a $200,000 house. Those who think mid-level home prices are going to be any more than that are blissfully optimistic.
If you listen to the "experts" on CNBC, etc., you get a gamut from A to Z.
I am certainly not an economist, but I'd say there are strong deflationary forces (no more easy credit) and strong inflationary forces (can I buy stock in the company that makes the ink used to print money?).
Grab a surfboard, and god bless us every one. Home prices certainly are at the core of this, and both government housing policy and private lending practices were catalyzed by denial (catalyst: facilitates the the process whilst not being consumed thereby).
Policy and practice have changed; denial persists.
Innovative solutions to the foreclosure crissis are in the offing: http://www.latimes.com/news/la-me-edar10-2008...
Than the old Hoovervilles, huh?
I follow a few real-estate markets where, at the peak, home prices increased 300-400% from mid-1990s values. I know increases of this % didn't happen everywhere, but similar enough did happen in a lot of places. For those prices to go down 19%, and then possibly fall 30% more, seems like giving me $5 off the selling price of a new flatscreen TV. If home prices fall another 19%, they are still way overpriced compared to incomes and personal net worth -- things that did not and will not increase 300-400% from 1990s values.
With equities having now fallen back to their late-1990s valuations, should home prices similarly decline? If family incomes are flat or going down and banks reduce their exposure to the home mortgage business, who's going to buy?
going to buy. But, family incomes aren't flat or going down. They've been down for years. They never increased to even keep pace with inflation. The buying power wasn't there in the first place. It was all credit and the credit has dried up. One day the banks and rich woke up and said "what have I done...I better panic"....or so they say.
home improvements.
A lot more kids in the next decade or two are going to experience something that many, if not most, of their parents didn't: sharing a bedroom with a sibling or two.
are going to find out it isn't so easy. Gone will be the days of 16 year olds opening up the mail and getting a credit card with 5000 dollar limit. And gone will be the days of mom and dad encouraging little 19 year old, just out of college, McD's worker children of buying that magnificent brand new house. As Michael Moore says, "Was it really just a dream?"...Yup
This was all planned by the smart people.
Bring America to it's knees so they could bust the unions, make people work for chicken-scratch, deflate everything.
Meanwhile they fed and saved almost $1Trillion from their "Iraq money".
Once we hit bottom, they will have unbelievable buying power.
Into the housing bubble, that is (topic at hand and all that nonsense...). No one put a gun to someone's head and said, "Move! And Pay too much for the new house, and sign on to this shitty loan."
You know what's funny? Remember Greenspan's warning of "irrational exuberance"? Late '90's, early '00's? He was talking about a real estate bubble that had recently burst in Japan. Wouldn't apply it to the US, though. Guess the chairman of the Fed isn't allowed to theorize on where the "invisible hand" that guides markets will point next.
I would expect that home prices would drop, as new manufacturing and building material technologies emerge, anyway. I read how one could drop a chicken wire frame into seawater, slightly charged with electricity, and grow a hard shell, similar to how some sea creatures do.
Perhaps we will see 3D printers combined with robot arms making our customized future homes.
Not technology.
My parents sold my childhood home for roughly $60K in '87. They paid $19K in '69, added a breakfast nook in the '70's and tore out a wall to enlarge the master bedroom (added a bathroom,to that room also). Fast forward 11 years and two owners: the house sold for $100K, with no improvements made.
That wasn't cheap material added from '87 to '98- it was NO material. The price rose because of short supply of existing houses and high demand for the same.
Now you could argue that people would opt to build cheaper houses, lowering the value of existing units, but there would still be demand for land in more attractive locales. It was location that drove the real estate bubble in the tech corridors of the Silicon Valley and New England in the early '90's.
I fully agree with Peter Schiff. We need to see home prices rolled back to ~1998 prices. This talk of helping people avoid forclosure sounds great, but it is poppycock. It will only delay the bottoming-out process that will help the general economy recover. The sooner we can get to bedrock, the sooner we will see the recovery. Hold on to your money boys and girls. Great deals ahead.
Peter Schiff is an astute observer and his analysis has been keen on a number of central points.
But he is Capitalist, first and foremost.
And in no way, shape, or form, a liberal.
His analysis is of a system that has failed once again, catastrophically.
A system that now allows those who failed so miserably to come begging to the very dysfunctional government that they, the Capitalists have made dysfuntional.
I am for changing the system, so beyond his understanding of what went wrong in system as it is, his observations of remedies, to me, are dead wrong.
He and his fellow libertarian [you must understand USA speak to know how that word is perverted here] lunatics are on the fringe. Ron Paul et al.
He says let the free market work. There is no free market, there never has been a free market.
The powerful gain control of the government and write the laws and regulations that then favor them.
After they run amuck and go bust, they come for a bailout.
They own the government, it bails them out. Stealing from the poor and the soon to be poor to give to the rich.
I am for marching all of the Capitalists off a short pier into a deep sea.
As for citing an 'analysis' by the USA Today, they are the worst.
Housing inflation was not uniform across the country, deflation is not uniform either.
The more the previous inflation, the more the deflation. In other words, the bigger they were, the harder they fell.
The exception is Michigan where property values were not over inflated but have deflated anyway because of the ruinous economy.
Here is Paul Krugman describing the housing bubble in 2005.
Here is Joseph Stiglitz writing recently in lucid manner about the structural history of our present situation.
abarts, taxes can be reassessed and yes, prices of homes should and will come down so that they are relative to incomes. It's like property darwinism. Unfortunately, it's not going to be a very comfortable ride for the next few years. You will not only need to fasten your belt, but put a comfy pillow under your ass before you do.
Property taxes on residential real estate went up when businesses moved out of older communities that used the taxes from business to support schools, roads, services, etc., to unincorporated townships, states or other countries with lower tax rates on businesses.
So if your assessment goes down, so does the amount of revenue raised by the governmental entity to support the schools, roads, services, etc, unless you find a way to lure/incentivize/force businesses back.
From the cited article (USAToday):
"The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families."
Haven't the right wing pundits been slamming the point that all the problems have stemmed from the Community Investment programs to help the poor buy homes? It would seem that this would help contradict that false assertion.
Speaking as someone who started looking at buying my first house after getting married in 2000 and then watching house prices in my area literally triple in the space of four years, I'd like to see a 70% drop in my area before prices are back down to the realm of the reasonable.
Every hit the housing market takes I cheer--I sat quietly, rented, and SAVED MONEY for the past eight years waiting and hoping for this day to come, and now I'm just gonna pray things collapse far enough (and I keep my job) that I can afford a real live house of my own. Yes, it's rather callous (and Republican) given that there are real people with real families at risk of losing their homes, but I saw it coming and I'm not even an economist, so don't come crying to me about your underwater 3-year fixed, 27-year adjustable rate mortgage on a house you bought for three times what it was worth. Quite the contrary, I feel rather like yelling "suck it!"
To be honest I feel like I'm some sort of freak to be an American with zero debt and a reasonable sum of cash in the bank--we seem to be a rarified species these days. Deflation obviously benefits me more than inflation, but it'll be interesting to see where this goes, as another poster said--there are incredibly strong inflationary AND deflationary forces operating right now, so it's anybody's guess what's going to happen.
I just hope I get a house out of it.
There's at least one other freak here too!
I was also trying to get a house but the numbers never added up to me. I was baffled as you'd see janitors buying $450,000 shacks. It sucks to be paying for these yahoos since I had enough sense to avoid the problems but that's the price we pay for living in a society that rewards stupidity and incompetence (viz. BushCo employees...).
Like Marc and others who have commented I could feel worse about this whole thing. I was waiting tables and had coworkers in their 20s who were buying houses and I thought they were out of their minds. And I never bought in to the 'it's a guaranteed winner' mentality. Living in DC at the time and watching housing prices (I resist the term housing value when the only thing that has changed is the price) double in four years and I just couldn't see how this was good for anyone other than the real estate brokers and the greedy sellers. It reminded me very much of a pyramid scheme. It does seem strange that the so-called smart people on the economy (Greenspan et al) didn't see this coming when apparently a number of us on this blog did.
And can I say wow, so far the comments here have been mostly on point, polite and informed.
shane
The sad part that I've noticed, is that since prices rose so drastically in the past 5-10 years, the only homes left for first time buyers are the cheap foreclosures (which usually need a ton of money and work) and the short sales (which take forever to negotiate and close).
I feel bad that so many people are losing their homes but also I have pity on the new buyers who are stuck with the mess from those unfortunate people.
As long as their are no little girls inside named Dorothy attempting a landing.
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