March 28, 2006

Add "house prices never go down" illusion to the dustbin of history

I used to love the trolls (i.e. realtors) who'd post on this site the historical US Median home price numbers, and shout "home prices NEVER have gone down - so thus they'll NEVER go down in the future."

And HPers would respond correctly "past performance does not dictate future returns"

But, their argument was a very important part of the illusion. Buy at any price, your investment can ONLY go up. The housing ladder ONLY allows you to climb upward.

Not.

I love a good illusion too. Your eyes tell you something your mind tells you the opposite. But it just feels soooooo reaaalllll.


FYI - the grey bar is the same color throughout...

The median price of a new home sold last month dropped to $230,400, down by 1.6 percent from January and off 2.9 percent from February 2005.

“The housing market is in a downturn, there’s no doubt about it,” said Scott J. Brown, chief economist at Raymond James & Associates. “It’s just a question of how severe.”

25 comments:

Anonymous said...

Keith,

The same article says:
"While mortgage rates have been rising, they still remain relatively low by historical standards. The increase interests now being orchestrated by the Federal Reserve is gradual rise that should moderate the impact on housing sales, according to Seiders.

“This is not an old-style housing down cycle that’s part of an overall economic recession,” he said. “I think the chances of that are very small.”

What do you make of it?

keith said...

history will tell. my opinion is that expectations (of future gains) inflated this bubble to insane proportions. now that those expectations are gone, inventory has exploded and prices year over year have declined, nowhere to go but back down - to that lovely area called the mean.

moman said...

Agree with Keith. The only reason housing would continue to rise is a permanant upward shift in housing demand. That shift (that didn't happen) had been obscured by herrings such as "Immigration is very high", "they're not making more land", and "boomers needing second homes".

Then about 6 months ago the herrings took a different tack - "Incomes are steadily rising", "rates are still at historical low levels", and "the job market is picking up".

Now we see that there is no economic fundamental shift in demand that supports any of the above arguments thus people are NOW arguing about how far prices may fall.

Anonymous said...

Anonymous said...

"Denial, it’s not just a river in Egypt"

"By Mike Whitney"

"Mar 27, 2006, 01:27"

"A lot of rubbish has been written lately about 'religious faith.' The fact is, there’s a force that’s more powerful than faith; the power of denial. America is drowning in denial. Most people would rather keep their heads stuck in the sand than face the disaster right before their eyes.

"Congress just voted to spend another $92 billion for a war that no one supports and, yet, there's not a whimper of protest from the American people. They’ve raised the national debt to a whopping $9 trillion, every penny of which will be paid off by our children and their children’s children. Still, not a peep from the public.

"Do the American people care? No way; a few soothing bromides from our lobotomized commander in chief and they’re lulled back to sleep.

"It’s called “denial.” D-E-N-I-A-L.

"Maybe you’ve already figured out that the Bush administration is fudging the numbers to make them look good? You’re right. Walter J. Williams (Dartmouth, BA in Economics and an MBA; economic consultant for Fortune 500 companies) has compiled the data and found that “real unemployment is running at 12 percent, real CPI (Consumer Price Index) is running at 8 percent, and real GDP (Gross Domestic Product) is in contraction. The country is already in a recession and headed for much worse.

"No one believes this can go on forever. The administration has racked up another $3 trillion in debt in just five years, most of it going to Bush’s well-heeled friends via the “tax cuts.” At the same time, they’ve made the tax cuts “permanent,” knowing it will increase deficits by $400 to 500 billion per year. Deficit spending has become a permanent function of government.

"The only thing that keeps interest rates from skyrocketing is the massive and “unsustainable” trade deficit.

"When Reagan initiated his tax cuts the budget deficits soared to $200 billion the first year. That pushed interest rates up to 9.5 percent, killing the real estate market and causing the deepest recession since the Great Depression. Greenspan bailed him out by raising Social Security payments and then diverting that new revenue into the general fund. (SS has basically been a flat tax ever since) Our Social Security dollars now pay for roads, social programs, and endless war.

"Last year the trade deficit climbed to a new high of $725 billion and is headed for $800 billion this year. Foreign countries now hold so much of our debt that Dubai can afford to buy our ports and China can snatch up Fannie Mae. China alone has an $800 billion account surplus; 75 percent of which is US debt and securities.

"The Bush team likes this arrangement because it fits with their belief that national sovereignty should be transferred to the multinational corporations. As for the rest of us, who think that our ports, public lands, water, and resources should be the sovereign property of the people of the US, well, we’re out of luck, because $3 trillion worth of those assets now belong to China, Japan, and Saudi Arabia.

"The other reason the American people haven’t felt the pinch of excessive government spending yet, is because of the unique relationship between the greenback and the sale of oil on the global market. Countries are forced to keep stockpiles of US currency in their central banks because oil is only denominated in dollars. This creates a de facto monopoly which ensures that dollars will continue to circulate on a massive scale whether the face value of the greenback goes up or down. (It is estimated that approximately $2.3 trillion are constantly circulated in oil transactions) It is the perfect confidence-game run by the hucksters at the Federal Reserve.

"Most countries would prefer to purchase oil in their own currency (or in the more stable euro) rather than using the greenback which is buckling beneath $9 trillion of debt. Regrettably, any move to the euro is tantamount to a declaration of war against the United States and bound to invite “shock and awe-type” reprisals.

"Washington will defend the “greenback-hegemony” with every weapon in its arsenal. That’s why Iran is in the crosshairs right now. Their threat to open an oil exchange (that would trade in euros) is a direct challenge to the dollar’s dominance as the world’s reserve currency. The Bush administration will never let that happen. An Iran Bourse would allow the central banks around the world to ship boatloads of unwanted dollars back to America and put the greenback into a death-spiral.

"America’s economic future requires that we continue to control this 'global extortion-racket' while producing humongous trade deficits which are mortgaging our country to foreign lenders.

"There’s only one problem with this scheme; the American consumer is broke. Wages have been flat since the 1970s (in fact they have gone down by 2.3 percent since Bush took office) personal savings are at 0 percent, and housing prices (which generated $600 billion in additional spending last year) have flattened out. The American consumer represents 70 percent of GDP and has also been the major engine for growth in the global economy. Unfortunately, he’s “tapped out,” overextended and penniless.

"That explains why so many corporations are packing up and headed for more promising markets in Southeast Asia. Hell, the Bush administration has even created tax incentives for them to leave.

"The corporate exodus from America is not simply about high paying, high tech jobs leaving the country. It is also about the massive flight of capital and the destruction of the manufacturing sector. Right now, the only thing that keeps the US on its precipice is the teetering housing market which is headed for the dumpster. When the bubble bursts, we’ll see why Bush devoted so much time to building his police state apparatus.

"Under Bush, we’ve seen a shocking acceleration of globalization. The major corporations have already loaded the boats, shifted the jobs, and drained every farthing from the public till. The Federal Reserve has cobbled together a dollar-system that allows it to print worthless script in exchange for the wealth and resources of foreign nations. It’s a plan that addresses the needs of America’s plutocrats and bigwigs, but leaves 99 percent of the people to fend for themselves while facing increasing scarcity and hardship.

"This is why we fight; to defend this system of corporate larceny and extortion. This is the “noble cause” for which Casey Sheehan and thousands of others have given their lives.

"Isn’t it time we pulled our heads out of the sand?"


Anonymous II said:

Dear Mr. Whitney:

Maybe you should pull your head out of something else first. "The Bush team?" "Shock and awe-type reprisals?" What asylum did you escape?

Reading a book doesn't make you an economist or an expert in international politics, and your comments concerning Bush certainly don't represent facts. They represent the imaginings of a paranoid schizophrenic.

Were you by any chance marching in Seattle a year or two ago, trowing bricks through store front windows, and screaming about the World Bank?

Cooking the books has been going on in Washington for years. Clinton, who gave us NAFTA, found new ways of defining inflation. Did you complain then? As for Reagan, his tax cuts boosted the amount of tax revenues through the roof, and were simply a repeat of those instituted by John Kennedy. They didn't destroy our economy; they saved it. Carter, the dreariest and most inept president in my lifetime, had pretty much run it into the gutter.

The dot-com bubble was Bill Clinton's crowning achievement, at least according to him and Al Gore. Did you complain about that? When Carter had us lining up for gasoline did you complain?

The government of the U.S. isn't a monarchy. Those monsters you rail against were elected by Americans and can be as easily turned out of office. We give them their power, so if anyone is to blame, we are.

Congress votes to give more money to the war because Congress got us into war in the first place, and cannot now suddenly cut off funds. Talk about a disaster. Do you remember what happened when we pulled out of Vietnam and Cambodia? Do you want that to happen again?

Iran is in the crosshairs right now because Iran is a vicious fundamentalist Muslim country trying to acquire nuclear weapons which it most certainly will use against Israel. It is also a major player in the Iraq insurgency. Iran has wanted to control Iraq for many years. The current president of Iran is one of the kidnappers who held Americans hostage during the Carter administration. Should we ignore him and his bomb project?

The movie "Chicken Little" is something you might want to check out. So is a prescription for Prozac.

Don't look under the bed, because you might find a Leprechaun.

Hang crosses on your windows to keep vampires at bay.

Bury all your money in the back yard.

Keep changing your IP Address.

Don't even THINK about flying saucers, because extraterrestrials CAN read your mind.

Kleenex boxes make excellent footwear.

Yes, people ARE whispering behind your back.

Anon II

cabinbound said...

1) He's right, "This is not an old-style housing down cycle that’s part of an overall economic recession", in exactly the same way that NASDAQ dropping from 5000 to 2000 was not. That said, it's worse IMO because it isn't a result of the normal ebb and flow of supply and demand. We ain't never seeing NASDAQ at 5000 or Amazon at $400 in our lifetimes, and some places will never see inflation-adjusted Summer 2005 prices again either.

2) I believe New Home Median Prices were indeed lower YOY a couple of months ago. I predict that Existing Home Median Prices will be YOY negative in the numbers reported beginning in March or April.

new 200 Mbps BROADBAND over POWER LINES said...

JAPAN had a long years of decline in HOUSING/REAL ESTATE PRICES... and there`s not much land to build houses there...fyi

Anonymous said...

18 of the top 20 overvalued housing markets are in CA and FL......AZ and NV are at their top too.

85% of America will be fine though...

Benvolio Montague said...

This shit spreads. It won't stay in CA and FL. It has in most other housing crashes.

Dominant countries or powers usually get knocked down a notch or two when they overextend (it doesn't mean the end of the world, it just means the end of their uncontested leadership). It's nothing to freak out about. It might be good for the US to have a few bites of humble pie.

Anonymous said...

It is illegal aliens from mexico and guatemala that made this happen. If only we could truck them dirty brown people out of here in cattle cars then all problems would be solved, America would be great again, and Osama bin Bushco would surrender.

jeffolie said...

THE FED'S PLAN TO LET HOUSING CRASH AND SAVE THE DOLLAR
They will deflate by having the overseas investors taken down while sparing the T-bill market with the "NewBank". In a flight to safety investors will jump on treasuries strengthen the dollar and crashing gold. Searching NewBank, check out
http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG030706.html
Very funny.
The first US bank to go down will be JP Morgan. Over 800 US banks hold derivatives. Check out: http://www.occ.treas.gov/ftp/deriv/dq305.pdf You'll see that the amount of derivatives in "insured" commercial bank portfolios increased by $2.6 trillion in the third quarter of 2005, to a whopping $98.8 trillion. 98% of these are concentrated in 5 banks. Total assets of these top 5 banks is $3.3 trillion if I am reading the chart correctly. Just look at the charts like the year ends 91-2004 chart (Graph 3) and you'll see a chart shooting straight to the moon. Maybe these bankers are smarter then me, but this is a house of cards in my book.


Most of the $570 trillion in derivatives are held by overseas investors. These will collapse from the housing bust causing defaults. The default follow like dominos to mortgage backed securities, then collaterized debt obligations and lastly to derivatives.

Controlled deflation will be the Fed's goal so that the dollar will rise. This will help the US government as investor, institutions and countries buy Treasuries as a safe haven. US Treasuries held as reserves will not be sold off (by China and Japan) avoiding a dollar devaluation. Win -Win for the Feds. Lose-lose for derivatives, MBS (which are explicitly not backed by the US).

Controlled deflation is the Fed best choice among bad choices.

I doubt the deflation can be controlled by lowering Fed rates to zero, but the Fed will try to "mop up".

Anonymous said...

>2)
" I predict that Existing Home Median Prices will be YOY negative in the numbers reported beginning in March or April. "

This will not happen. The NAR controls the Existing Home data. They will never let the number turns negative. Their hordes of economists are very adept at massaging data.

ecobuilder said...

Bernanke admits housing bubble:
From
www.wallst.net/news/

"..In a speech late on Monday, Bernanke said that even an expected drop in the housing sector would not hurt consumption enou
Clearly Canadian Beverage
gh to derail the country's solid economic growth."

peterbob said...

moman said...

Agree with Keith. The only reason housing would continue to rise is a permanant upward shift in housing demand...Now we see that there is no economic fundamental shift in demand that supports any of the above arguments thus people are NOW arguing about how far prices may fall.


I can think of two potential shifts in demand that may linger. First, there's a whole industry of RE "get rich quick" schemes, such as Carlton Sheets, and others, and they seem to have gotten more sophisticated and reached a very wide audience. If people have become more accustomed to trading RE, then there will be permanently more demand from this group.

Second, there have been important innovations in mortgage lending, and while these will be reined in, they will not go away.

The effect of both is to have a somewhat permanently higher demand for housing. That said, I certainly believe that the "bubble" effect will dominate and prices will fall substantially.

Anonymous said...

The coming bird flu pandemic will wipe out even more would-be home buyers, pushing home prices down even further. In the aftermath, condo prices will continue to plummet as more and more urban dwellers seek to retreat to rural communities out of fear of continued illness and terrorism.

Pete said...

I'd like to make a call for submissions, I invite everyone to contribute:

I want this to be a one-stop shop for the hard facts relating to the bubble. If you have some interesting info, links, ideas, anything - please share them and they will form part of this page.

Please bookmark and check back often.

Housing Bubble Facts and Figures

http://globalhouseprices.blogspot.com/

Dorinne said...

I totally agree with you that this elevator has hit the top floor (for now).

I've heard from countless people that, "Another agent told me that the price will always go up so I don't need to worry about selling now". I always tell them that the market *has* slowed down and you simply cannot predict what is going to happen. Right now, I'm telling people that if they have been thinking of selling this is the right time to do it. Wait another year and they may not get as much as they will today. It's bad enough I'm already seeing some areas where people want $300,000 for their house because their neighbor got that a year ago...and I have to try to get them to understand that that was a year ago and today they can get $280,000. I refuse to say, "Oh, OK, they got $300,000 so we'll list yours at that!" just to get a listing. I'd rather be honest with people up-front so they know what to expect and will be happy with me in the end.

moman said...

peterbob -


I can think of two potential shifts in demand that may linger. First, there's a whole industry of RE "get rich quick" schemes, such as Carlton Sheets, and others, and they seem to have gotten more sophisticated and reached a very wide audience. If people have become more accustomed to trading RE, then there will be permanently more demand from this group.

Second, there have been important innovations in mortgage lending, and while these will be reined in, they will not go away.

The effect of both is to have a somewhat permanently higher demand for housing. That said, I certainly believe that the "bubble" effect will dominate and prices will fall substantially.


Interesting points.

1)Flippers and get-rich-quick opportunists will move onto the next big thing....thus there has been a temporary uptick in demand but it's not permanant. it's possible many will be so scarred the opposite may occur and no one will bet on housing again lowering demand a touch.

2)The mortgage industry changes could certainly lead to an upward shift in demand IF and ONLY IF incomes catch up to prices OR prices fall relative to incomes. With easy money drying up by the day it's not going to be possible to loan a $50,000 a year income household $700,000 for a home, thus I believe this increase in quantity demanded (housing) will be a transitive phase.

Awaiting Bubble Rubble said...

I hope some of the Realtor(tm) and mortgage broker types who were posting on this blog a while back with the intent of creating the impression that all renters are low income folks with no savings were watching Power Lunch on CNBC today. Peter Thiel, the multimillionaire fund manager who sold PayPal to Ebay was on. Background on him is at http://www.businessweek.com/magazine/content/04_45/b3907132_mz020.htm

He said he is now a renter and is advising all his friends to sell their homes before the drastic correction occurs. This guy is worth at least $100M folks. A 50% drop in his home price wouldn't hurt him. He just doesn't want to feel stupid when the obviously imminent crash happens.

It's really funny to see the "home owner" crowd thinking they are somehow different than the "renter" crowd. Basically, they are renting a pot of money from a mortgage bank that owns their home while I am renting an apartment while investing the half million $ I got from selling my home to a mortgage bank who got another "owner" on the line. However, I think the nouveau riche (sur papier!) "home owners" will start to adjust their perspective about a year from now and the NAR and mortgage brokers will be back working at jamba juice and starbucks, where I'll offer them only a small tip (stay away from real estate until 2011)!

Anonymous said...

Anon6:30:

Loved your post- "bird flu pandemic will wipe out potential buyers"

Sounds like you want house prices to crash as much as I do- WHATEVER it takes! LOL!

Virginian said...

I believe that home prices will go down eventually. Many speculators who own several homes will be forced to sell their houses, because they would be unable to rent it or get positive cash flow from their property. How many of them will be head above bankruptcy, while paying for property taxes, insurance, maintenance, and mortgage and unable to rent their property? They don’t realize that personal income does not catch up with the housing cost. Wage growth is nonexistent; immigrants usually don’t earn much money either. Many people believe that the housing prices will go only up. They would have a rude awaking, when they will be forced to sale. The same time they will have to compete with many speculative buyers who will be in the similar position.

Grinch34 said...

Prices will decline drastically due to I/O and adjustable rate mortgages coming due at the end of this year and excelerating into 2007. This will be the major factor.

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