2009 November 08 Sunday
Housing Prices Still To Drop Much More?
Mark David White, a mortgage broker in the Chicago area, has used a number of housing price histories to look at how far from trend the recent real estate bubble ran up housing prices. He estimates that depending on the source of pricing data and the length of historical time used that US national housing prices still have between 18% and 44% to fall from today's prices.
The total projected fall from Federal Housing Finance Agency (FHFA) data shows a peak-to-trend fall of 27%. Values on this index have fallen 11% from the high. The index predicts prices will fall an additional 18% from their current levels (please see chart above “Figure 2: Monthly House Price Index for USA”).
The FHFA prediction of a total fall of 27% is far less than the total fall of between 49% and 60% predicted by Case-Shiller. Click here and here to see recent posts with Case-Shiller data on either 22 years or 118 years of prices.
Based upon the three data sets reviewed, we can estimate a total fall of between 27% to 60% from the bubble top to the long-term trend. After averaging the three indexes, we may estimate a total fall of 45% from the bubble high.
Looking ahead from today, property values will fall a total of between 18% to 44%. The average of the three data sets says we still have 27% to fall from current levels.
Why does this matter? I can see a few reasons:
- The bigger the drop the more banks will go under. This costs taxpayers bail-out money. It also suppresses lending to businesses and therefore delays recovery.
- Further price drops will suppress consumer spending by making people feel poorer. They'll spend less. Recovery will be delayed.
- Construction as a source of jobs for recovery will be delayed by falling housing prices.
- But there's good news: future home buyers are going to get great deals. Save your money for a McMansion. They are going to get cheaper.
We will pay more in taxes. We will spend a longer time unemployed or working for reduced wages. Welcome to what some analysts call the New Normal.
Update: Charles Gasparino, author of a new book The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System, says the political attempt to treat all people as worthy of owning a home caused this disaster.
RCM: Who's at the top of your list of people who should be held accountable for the unraveling of the global financial system?
Gasparino: The politically correct answer would list a long line of risk-taking CEOs starting with Stan O'Neal at Merrill, Sandy Weill and Chuck Prince at Citi, Jimmy Cayne at Bear, and of course former Lehman CEO Dick Fuld, as well as various senior traders at these firms. They're all in my book with their contributions to the demise of the financial system.
But what you will also find in my book, which I guarantee is absent from most of the others, is the root cause of the risk taking, which I believe begins and ends with the policy makers. The various heads of HUD, like Henry Cisneros, Andrew Cuomo and those in the Bush Administration who believed owning a home was a right, rather than something that should be earned, led to the disaster at Fannie Mae and Freddie Mac, which spread its guarantees to subprime loans, a place it traditionally stayed away from.
You also can't excuse Alan Greenspan for handing out free money to Wall Street every time the big firms screwed up over the past thirty years. It gave them incentive to double down on their risky bets until of course they double-downed so much the system blew up.
Gasparino thinks the government's policy has caused the crisis to abate only temporarily. I agree. The Peak Oil probably contributed even more. We are going to have a second round financial panic, more financial institution failures, and a second recession.
"The various heads of HUD, like Henry Cisneros, Andrew Cuomo and those in the Bush Administration who believed owning a home was a right, rather than something that should be earned"
I think someone is being naive here ...
The housing prices will probably drop a lot more because unemployment is likely to get worse. The stimulus related jobs will not last forever. Every year, US is getting impoverished by more than 5 % of its GDP, because the foreign trade deficit is 5 % of the GDP. Jobs are lost progressively. If foreign trade deficit stops, then unemployment will also stop, and things will stabilize.
The question in my mind is: What will the interest rate be?
I figure the hangover from all this stimulus will likely be inflation, which will drive up the interest rate. When house prices drop, it will probably have something to do with those higher interest rates. If one can get a low interest rate in an assumable long-term mortgage, now might be a decent time to buy anyway. But the rate has to be low and the mortgage has to be assumable. Oh, and you have to make sure the lender cannot call the loan simply because the equity drops.
Of course, housing prices have further to fall. Housing is still way more expensive relative to income than it was prior to the onset of a bubble. During the bubble we heard the same stupid rationale that we heard during the dotcom bubble, that everyone needs a house to live in and that housing prices can never go down. The reason why housing prices got so far out of hand is because of all of these new financing schemes (no down payment, sub-price, Alt-A, negative interest rate, etc.) that allowed people to get into houses that were way beyond their means to afford via traditional financing.
The feds, because they created the bubble in the first place by trying to get "minorities" into home ownership, is trying desperately to reinflate or at least maintain housing prices at current level so that the NAM lending party can resume. This will create a series of price spikes as the housing prices gradually decline to reasonable levels.
You will also know the sob stories in the legacy media of some disadvantaged black or hispanic family being foreclosed on by the evil, greedy lenders. Funny you never hear about Asian immigrants caught up in the same situation. Funny how that works, huh?
The fact that housing is finally becoming more affordable is actually very welcome news, which should do much to stimulate the economy. Banks are going to get bailed out anyway, and doing it in a transparent way allows us better control over the outcomes.
The negative "wealth effect" on homeowners only matters in the long run, since the average homeowner is not liquidity-constrained (they can get a loan if they really want it); the result will be mostly to increase their savings in other assets (stocks, bonds, commodities), which will provide investment funds to businesses as well as address our economic imbalances. This effect is more than offset by a real rise in disposable income for renters, who tend to be poorer and to face stringent liquidity constraints.
As for construction, let's face the reality here: the construction industry has grown beyond sustainable levels--it needs to shrink. If you want to subsidize these kinds of jobs, do it by relaxing zoning regulations and untaxing the improvements portion of the local property tax.
The bottom line is that unless the demand for housing increases (as it will once the recovery gets going), high housing prices indicate an increasingly dysfunctional market.
>the political attempt to treat all people as worthy of owning a home caused this disaster
This is just plain wrong. It's not a question of "worthiness". Making it sound like, if they had had more character, had spent less of their money going out getting plastered on saturday nights that this whole situation would have been A.OK. In reality, these people were given loans that they had no chance in hell of being able to pay off. Basic arithmetic could have prevented most of these mistakes, if anyone in control had any interest in that.
Our monetary system is not only based on debt, but on the long-term guarantee that there will be losers. If you've read some of the stories, they KNEW these people didn't have a chance in the world of being able to pay back their loans. The original creditors absolutely had to know this, so they packaged and re-sold the liabilities to someone else.
One thing I'd agree on is that it was definitely for political reasons that these loans were given, but not the bleeding-heart, misplaced-charity kind of political reasons you've all convinced yourself of. It's not a case of someone losing out on a bad gamble. This is the end result of terrible policies, and borders on an out and out scam. The buyers of those CDOs (or whatever, I've lost track of all the acronyms they use) lost whatever money, transferred to the lenders who were in a position to perpetrate this whole mess, and the home buyers pointlessly lost years of their life transferring their wages into the financial aether.
Ours is a system that needs losers in order to function. This is just our latest crop. Where will we find the next batch of losers to support us? Third world countries? Nah, we're either already taking everything of value they have, or they have nothing to offer.
>The feds, because they created the bubble in the first place by trying to get "minorities" into home ownership, is trying desperately to reinflate or at least maintain housing prices at current level so that the NAM lending party can resume.
I'll agree with this, and further post that the reason for getting these people into the credit market in the first place was to prolong the "lending party".
We are so addicted to debt right now it's not even funny. We need to keep making more and more loans, or else our entire system is going to crash.
I'm sure that everyone here has heard all about our monetary system, the federal reserve ETC... that all money in circulation did not exist until it was loaned out by the federal reserve, (or by another institution, using money either directly or indirectly from the fed as backing) and that if all debts were paid off there would be zero money in circulation. However, interest is charged on this debt (!!!). What this means is that the amount of money in circulation is NEVER enough to pay off all the debt, and for people to continue to pay down their debts, somebody has to take out a loan... Only you hope it's someone taking out a loan to pay you and not you yourself to pay your creditors.
This is unsustainable. I just hope that in the end, we're not so brainwashed by the myths of the financial system that we can't recover (and put the people in charge of this scam in their place).
The buyers of those CDOs (or whatever, I've lost track of all the acronyms they use) lost whatever money, transferred to the lenders
That's completely wrong. The people who won out from this financial crisis were those who bought housing assets at low prices and sold them at high prices when the bubble was inflating. No doubt this includes some institutional investors, but it's just wrong to say that there was a transfer from borrowers to lenders.
... and that if all debts were paid off there would be zero money in circulation. ...
Well duh. The currency in circulation is backed by U.S Treasuries--the Feds prints money by buying these bonds. Effectively, the holders of currency get to make a zero nominal-interest loan to the US government. This is hardly a problem, since the government is going to incur debt anyway.
Frankly Im glad housing prices are falling. I'd love to see some whiz-kid "invent" a way of making good-little houses for $40,000 that had 1500 ft of living space. I know that would knock the daylights out of the resale value of a lot of homes, but it would be the best thing possible for us to be able to be internationally competitive as a producer again. Im old school guys..................I believe factories turn raw materials into real goods that people will pay money for (wealth), and services (and entertainment) alone is not enough to sustain an economy long-term. Its sickening to see starter homes in some places going for $150K for a cheaply-built, jerry-rigged, tree-farmed lumber, 1 1/2 X 3 1/2-framed all-vinyl 1000 sq.foot box with a particle-board joist and leaky crawlspace sold to kids just starting out on 30-year notes. Our young families deserve a better life than that. The investment class really hurts the whole damn economy when they choose to make a housing a bubble because housing is so fundamental. A tech bubble, transportation bubble, vacation real-estate bubble or whatnot does not effect -everyone-, but a housing bubble pretty much does.
It is not clear what would happen faster - correction in housing prices or inflation due to the recent massive increase in monetary base.
(I think we'll see relatively flat prices because of the efforts by feds to stave off riots by keeping people from defaulting on loans by forcing banks to renegotiate loan terms and by pushing towards relaxed loan terms for new buyes, thus allowing homeowners to off-load their properties at a "reasonable" price... which would have the effect of increasing money multiplier ratio, which, in turn, will increase inflation further - until the loans are pretty much washed out by inflation, leaving the banks in the need of another round of bailouts, and feds in the corner).
Miles, maybe the price of an average house is mostly the land, not just the cost of building itself. If it were just for the purpose of living, the housing bubble would not have happened this way. In fact, housing speculation as investment, was a trend for many decades, at least since 1970s. This also had something to do with the fast increase in the population.
What about the costs of "diversity" in making real estate prices go into the stratosphere? Like many Californians I live in a one hundred thousand dollar house on a 700 thousand dollar piece of land. A white-majority upper middle class suburb that lacks crime and other pathologies of "diversity" is gonna cost you an enormous amount of money, especially if it's in a state where that kind of location is increasingly rare. If it weren't for "diversity" and all the pathologies it brings, housing prices in CA never would have taken off like they did. Everyone here is chasing the few areas that are still recognizably American and functional, and where their kids can go to school without being attacked.