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.