Today’s Housing Bubble Post — How Far Will Prices Fall?

I was driving this morning and clicking through the AM radio stations. On one station there was a “financial advice” show, with a guy talking about how to make a “236% return” by buying foreclosed houses and renting them out until prices go back up.
In case you were wondering who is buying houses right now, it’s the people who fall for this stuff.
Where will housing prices fall to? Prices will revert to the mean, and the mean is where prices were before they started going way up, plus a bit for inflation. Another way is to realize that the price of the house, if rented out, should be low enough that you have positive cash flow after all expenses, and that cash flow should be a lot better than you could get from buying bonds because of the work you are putting into it. (In my area that means house prices should be about a third what they still are.)
But before they do that they will fall a bit below the mean. Here is why. There are several factors that will pressure housing prices even when they reach the pre-bubble level.

  • Before prices can normalize people have to stop thinking that prices will go up again, and get rid of property they are “holding on to.” So at the point where they reach the normal level there will be little buying interest. In fact people will understand that buying a house can be a good path to financial ruin.

  • Everyone who wanted a house really, really had a chance to buy a house. If they didn’t buy a house when you could get money without even stating whether you had a job…
  • Next there is the huge buildup of inventory. There are many, many more houses out there than there were before the bubble.
  • There are all the housing developments built way outside of areas where people work, with the expectation that they would buy at as lower price there and when prices went up they could sell and make the down payment for a place closer to the job. Now that gas prices are up no one will want to buy these.
  • Then there is the coming rise in utility prices which means that the McMansions are going to cost too much to heat and cool.
  • The baby boomers are retiring, which means they will want to sell bigger houses and rent or buy smaller houses.

People have no idea how far prices are going to fall.

Today’s Housing Bubble Post – Nowhere Near A Bottom

Hale "Bonddad" Stewart: The Housing Market Is Nowhere Near Bottom.
Go see his chart of housing prices, to see how far prices have yet to fall.
A house near us was offered at $800,000, after several months only one offer came in for $500,000, and they accepted it. But all I can think of is some sucker just spent $500K for a 3 bedroom house that is going to be worth about $300K next year. Another in our area, asking $750K, sold at $450K. Still way too high.

Today’s Housing Bubble Post – “Deepest decline since the Great Depression”

The bloggers were calling it a few years ago, talking about how this was a bubble, and that it would lead to a dramatic collapse. The professionals weren’t seeing it. The lenders were acting like prices alway go up. (Remember the same thinking with the stock collapse?)
And now here we are.
Housing in ‘deepest, most rapid’ decline since Great Depression,

“Housing is in its “deepest, most rapid downswing since the Great Depression,” the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.
The NAHB’s latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago. “

And this is just the beginning. Prices always revert to the mean, and the mean is going to be mean.

Today’s Housing Bubble Post – If Prices Fall Further

Do Reporters Realize that House Prices Can Fall?,

If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision’s proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss.
That’s fine, but what happens if house prices fall further? I didn’t hear this scenario mentioned in Market Place’s discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal.

Answer – if prices fall further, the taxpayers get to hand even more dollars to the banks. Republicans bail out big business and let the rest of us pay for it. Always. The branding is that Republicans are anti-government and fiscally responsible, but it’s just words. Look at what they do, not what they say. They get into office, destroy the government, destroy small businesses, and hand all of our tax dollars to their cronies. Did I leave out the part about getting rid of all oversight (regulation and law enforcement) so the big corporations can rob us blind?
Government buying bad mortgages? Great, just great.

Today’s Housing Bubble Post – New Home Sales Fall by Record Amount

Yahoo: New Home Sales Fall by Record Amount:,

Sales of new homes plunged by a record amount in 2007 while prices posted the weakest showing in 16 years, demonstrating the troubles builders are facing with a huge backlog of unsold homes.

CNN: New home sales: Biggest drop ever,

New home sales posted the biggest drop on record in 2007, according to the government’s latest look at the battered housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet more signs of weakness.
December sales came in at an annual rate of 604,000, the Census Bureau report showed, down from 634,000 in November, which was also revised lower.
The reading was well below the consensus forecast of 645,000, according to economists surveyed by Briefing.com.
. . . No bottom yet Adam York, an economist with Wachovia, said the report confirms fears that the housing market won’t bounce back anytime soon.
“We’re expecting sales to decline into at least mid-2008,” he said. “We think housing still has a long way to go.” [emphasis added.

What is there to add to that? I keep hearing that “we’re at a bottom.” I got yer bottom, right here.

Today’s Housing Bubble Post – What Would A Big Corporation Do?

There is a discussion over at Calculated Risk on whether it is “smart” to just walk away from a house that is worth less than you owe. Many states allow you to do that, without owing the difference. In those states, giving the house back pays the loan in full if it is a first mortgage. (Yes, it ruins your credit rating, but you could save hundreds of thousands of dollars.)
What about the moral question? Aside from whether it is smart or not, is it moral? I wonder if a better question is, when dealing with a big corporation, should you ask what the corporation would do if the shoe was on the other foot? I’m thinking about corporations that use the bankruptcy laws to get rid of union contracts and pension obligations, and that always do the “smart” thing at the expense of the employees, customers, public and even shareholders…
What do you think? Especially our conservative commenters?

Today’s Housing Bubble Post – Go Read

Go to The Agonist to read today’s housing bubble post: Most Clueless Banker of the Year Award. It is a comprehensive explanation of that happened, including a timeline.

[. . .]Like the real estate industry in general, banks believe and tell their customers that home values never go down. Their internal models are predicated on this assumption. Everything communicated to the consumer tells them that their home is a piggy bank of ever-increasing value. Withdrawing cash from the piggy bank is made as easy as possible. Consumers are given loans allowing them not to pay any interest at all and build up a balloon balance, which will assuredly be taken care of down the road by market appreciation. These option characteristics allow the banks to charge even higher points up front and stick penalty clauses into mortgages forbidding the homeowner from paying off the loan until the bank receives all fees due them.

Go read.

Today’s Housing Bubble Post – Stocks Plunge Worldwide

The problems of the housing bubble are catching up to us. The real estate crash has started, bringing big losses to the big financial firms — over $100 BILLION in write-downs so far!
And in the past few weeks the stock market has been catching on that things are not so great anymore. But today – with markets closed in the U.S. in honor of Martin Luther King Day – stocks have been plunging around the world. Markets in Asia down as much as 7%, even more. Europe as well. Canada down.
Dow futures are down dramatically – 540 points, more than 4% – which could mean a very bad day tomorrow – or not.
Stocks Plunge Worldwide on Fears of a U.S. Recession – New York Times,

“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”
The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.

Remember what I said about money market funds. Make sure that your money is in FEDERALLY INSURED ACCOUNTS.

Today’s Housing Bubble Post – Cashing In Before Crash

Also titled “I told you so!”
In the LA Times today, How we cashed in before the housing crash,

Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.
We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit — and a sign that the market had been pumped up beyond reason.
. . .But at the time, a lot of people thought we had sold too early. To stay on course, I adopted a personal anthem. It was a Public Enemy song that hit big in 1988 during the previous real estate run-up: “Don’t Believe the Hype.”

Sold too early. And now they’re saying “We’re at the bottom.” Right.

Today’s Housing Bubble Post (II) – Mortgage-Backed Chaos

Following today’s terrible stock market, more mortgage-backed news:
Bear Sterns seizes assets of its High-Grade hedge fund,

Bear Stearns Cos. said late Thursday that it seized assets from its High-Grade Structured Credit Strategies Fund after the hedge fund suffered huge losses in mortgage-backed securities and structured-finance markets.

UPDATE 2-Wells Fargo shuts subprime mortgage unit,cuts jobs|Funds News|Reuters.com

Wells Fargo & Co., the second-largest U.S. mortgage lender, said on Thursday it will close its subprime wholesale lending business, which processes and funds loans for third-party brokers, citing turmoil in the market for riskier home loans.
The company will shut operations in Baton Rouge, Louisiana, causing a loss of 170 jobs, and in Des Moines, Iowa, where it will seek other jobs for 67 workers. Wells Fargo also cut 444 subprime jobs last winter.

Foreclosure rates could soar,

The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis released Thursday by Moody’s Economy.com.
The company predicts that 2.5 million first mortgages will default this year, with little chance for improvement soon – Economy.com expects delinquencies to peak in the summer of 2008 at 3.6 percent of all outstanding mortgage debt, up from 2.9 percent during the first three months of 2007.

Analysts Say Mortgage Woes May Worsen

The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.

m4s0n501

Today’s Housing Bubble Post – New Home Sales Plunge – Prices Update Added

New Home Sales Down Substantially,

Sales of new homes fell in June by the largest amount in five months as the housing industry continued to struggle with its worst downturn in 16 years. The median home price also fell.
… Sales are now 22.3 percent below the level of a year ago.
The median price of a new home sold last month dropped to $237,900, down by 2.2 percent from a year ago.

An important note about that median price – we have a bifurcated economy where the rich are richer. So houses at the top of the market are selling well. This means that the median price reflects that high price point at the top. REGULAR housing prices are falling much more than this indicates.
Prices Update – I want to emphasize what I said about prices. If the only houses selling at all are at the top, this will raise the median price.
Another factor that distorts prices is “incentives.” If a homebuilder is selling a house for $400K but throws in a new $60,000 Mercedes as and “incentive” to buy the house, the sales is reported as a $400K sale. And all across the country homebuilders are offering these incentives.
Prices are falling, it’s just that the reporting methods do not reflect what is happening. We are just coming out of a bubble — just like stocks did. Do not think about the price of a house in relation to where it was priced during the bubble. If you did that with Enron stock, you thought you were getting a bargain. Think about where the price will be, not where it was.
Look at it this way. We have house prices way higher than anyone can afford. We have the highest inventory of unsold houses in a long time – ever? We have the lenders tightening credit so fewer people can buy houses. We know prices are falling. We have a huge number of people falling behind on their payments and huge numbers of houses going into foreclosure. And it is just starting.
Anyone buying a house right now is an idiot. Prices are probably about double where they should be. Like I said earlier, remember Enron stock and think about where the price will be, not where it was.