David Leonhardt of the New York Times reports that official figures on housing prices understate the extent of the recent housing price drops. An auction of houses in Naples Florida showed a 25% decline in housing prices in the last year.
The highest bid on one three-bedroom ranch house with a pool was $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, received a high bid of $880,000, compared with $1.35 million a year earlier. On average, the bids suggested that the houses at the auction had lost about 25 percent of their value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the results.
After tripling since 2000 the 25% decline still leaves Naples with very expensive housing.
Many sellers hold off from selling when prices decline. Auctions show what prices are at when sellers are committed to selling. Though perhaps auctions draw lower prices because they only bring in buyers who are on the market looking on the day of the sale.
The US government thinks Boston area prices rose by 1% in the last year. But industry sources put the price drop at anywhere from 10% to 20%.
In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. The auction in Naples may have exaggerated the downturn in the market there, but not by much. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall.
In the Boston area, prices have fallen about 10 to 15 percent since the middle of 2005, estimated Chobee Hoy, who owns a real estate brokerage firm in Brookline. Jerome J. Manning, who runs the Massachusetts-based auction company that conducted the Naples sale, told me he thought that values had dropped about 20 percent around Boston. (The government, meanwhile, says the average price rose 1 percent from last summer to this summer. But here’s all you need to know about how well the government tracks the Boston market: the index excludes any mortgage larger than $417,000.)
People pulled so much money out of their homes with mortgage refinancings that the average home owner in the Boston area has no more paid equity in their home than they did in 2000. What else has changed since 2000? The nation as a whole has sold huge amounts of government debt to foreigners as we've run increasingly larger trade deficits.
Are we looking at a asset bubble burst recession in 2007? I can think of one way for the US government to economize as tax revenues decline: Pull out of Iraq.
But it has three big weaknesses that end up making it much less useful than it could be. First, it excludes any mortgage over $417,000, because Fannie Mae and Freddie Mac — the two big mortgage buyers — don't own loans so large. Obviously, many mortgages on the coasts are bigger than that.
Second, the data for individual metropolitan areas includes not just house sales but also appraisals done for a mortgage refinancing. Appraisal values, as many people know, tend to be inflated.
Finally — and by necessity — the index includes only houses that have actually sold lately. In a falling market, with an enormous number of properties for sale, the houses that are selling tend to be more appealing than the average house.
What I wonder: When the baby boomers start retiring will there be a big bust in housing prices?
Paul L. Kasriel, Senior VP and Director of Economic Research at the Northern Trust Company, has written a great article arguing that the real estate bust has quite a ways to go to hit bottom: The "Carry" Trade in U.S. Housing Looks to be Over.
Former Fed Chairman Greenspan has recently commented to the effect that the worst of the housing recession is behind us. History is not on the side of this view. Chart 3 shows the peak-to-trough percentage declines in the GDP line item, real residential investment. In the prior nine housing cycles, the average peak-to-trough decline is 24.6%; the median is 22.6%. The peak-to-trough decline to date in the current housing recession is 7.9%. Unless this turns out to be a more moderate than usual housing recession, unlikely given the amount of speculation and leverage involved in the boom, then we have "miles to go" before we can put this housing recession "to sleep." Thus, don't look for the carry trade in housing to turn profitable any time soon.
Prices are down. Prices will probably fall further. But will the affordability of housing return to what it was, say, 10 years ago?
|Share |||By Randall Parker at 2006 December 09 08:12 PM Economics Housing|