Will US house prices now actually over-correct - where they end up falling below the historical mean?
March 22, 2008
HousingPANIC Stupid Question of the Day
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27 comments:
Yes, I think so... Most people think it's ridicolous to think of a 75% drop or something (inflation-adjusted - whatever that means now), but if the economy disappears into the abyss...
renting will be the smarter move 4 yyyeeeaaaarrrrssss
Notice that the graph really starts to take off after 1997. That's the year Congress allowed taxpayers to exempt 250,000(500,000 if married) of gain from sale of a personal residence. There were obviously many factors involved in blowing up the housing bubble, but I think this is rarely mentioned.
I think that the "tax gods" at ALL levels of government will move heaven and earth to prop up artifically high house prices for as long as possible. It won't work, in the end, of course, but it keeps those government worker/teachers unions happy. Their sooooo deserved pay raises, benefit packages, and golden pensions, come out of the property taxes.
The bail out of the corporations will pale beside the bailout of the union pension funds when compared nationwide!
I think they will over correct but, it's at least 5 years away and even correcting the over correction will be slow, many will be gun shy, many will be too broke, many will not have the credit, many will be a combination of all three.
It has to over correct, thats just how things work in markets, just as they went too high, sort of like a rubber band, snapping back almost equally as far as it was pulled before settling back in the middle.
It can't happen until we get to the bottom though and thats a ways off. Last week I was looking at a house to rent for $2500. Just for grins I plugged Zillow's price for the house of $682K into Ginniemae's Rent vs. Buy calculator with a 20% down payment, 20 year mortgage at 8% with 1% tax and 1% appreciation (generous I know but they don't allow negative numbers).
Ginniemae told me that over a 5 year period I would save $105K rent vs. buying the same house......
We still have a long way to go to the bottom...
I am with foreclosureboy, I plan on keeping the place I just leased for 5 years, maybe more. I'll save my pennies and not just wait for bottom, I'll wait for the over correct.
In 2003, I think it was, maybe 2005,
Sir John Templeton, well respected investor, said it is possible to correct as much as 90%. Not saying it will, but is possible.
What I get from my reading is it has something to do with the length of the cycle which is correcting.Is this a 20 year or 60 year or even longer cycle which is correcting? You do the math. The mean to which we will revert is the mean of the cycle. Houses selling for 2-300,000 in North Portland were built in the late 40's for 6-8 thousand. Older houses were built in the 20's-30's for 3-6,000. How would you figure newer construction, and which cycle? I know everyone wants reassurance for their own particular situation, but I don't think we can know. We can guess.
pkk
If history is any guide, home prices will over-correct to the downside.
However, stock prices never did over-correct in 2000. I believe that was because Greenscum dropped rates so low and blew another asset bubble that created jobs and growth and gave the economy a reprieve.
Bernanke is doing everything he can to pump money into the system - where will all this money go? The money is being given to financial institutions - what are they going to do with it?
If banks don't do something with this money then we're going to get deflation, deflation in US dollar terms.
In the early 2000s banks pumped money into mortgages - that door is now closed. But what if some other door opens, some other asset bubble is created that creates jobs and grows the economy?
In the end, I don't see anything that will save this economy - I'm feeling very deflationary this morning.
Yes, they will over correct. But like one poster said, it will take a long time, 5 more years, who knows. Many sellers will simply see their house values go down year after year due to inflation, I suppose that they will be able to ignore that to make themselves feel a little better.
It will take time, but the higher costs of food, gas, energy, debt service, etc. will eat away at the money that used to go towards housing.
America also has some HUGE expenses coming. Wars, SS, medicare, the crumbling infrastructure, and on and on. Housing will become what it always was, a roof over ones head, price dictated by what a person or family can afford after they pay all other expenses.
There is nothing within the foundation under housing to hold them up any more.Just like Bear Stearns,one day you wake up,and some dork from CBS will be reporting that homes were auctioned for 90% off.Houses have similar balance sheets.The Values are bloated to keep Mozillo from getting tarred,and feathered.
SHAKSTER
RE: Will US house prices now actually over-correct...
Yes, because the downward correction will end only after prices start to go up again. This seems like an idiotic statement, but only strong sales will push real estate prices up.
The problem will be the reluctance of potential buyers to take a chance on getting burned on a house purchase that may decline in value after they have closed escrow. These future buyers will actually have to make a down payment, so they will have substantial capital at risk.
There will be no more 105%, minimum-payment, teaser-rate flipper-financing. Will Realthwhores, with their 6% extortion fees, have a future in this tight money market?
With the majority of potential buyers waiting for prices to start going up, the downward cycle will just get worse and worse.
This wait and see attitude will cause house prices to drop well below their traditional mean values before prices start going up. It will take years for prices to return to their traditional mean levels and only after this occurs will houses start to appreciate again.
V.L.
" Last week I was looking at a house to rent for $2500. Just for grins I plugged Zillow's price for the house of $682K...."
That's all well and good, but not all homes and price points will ever cash flow on a rental basis!
The median home price is only 220K.
A comparison of rent vs. own should consider what the middle class could "afford" to buy!
Peace Out
The fireworks are just starting. Unemployment is still at historically low levels. Wait until unemployment starts hitting the general economy, instead of just the Realturds. That will put serious downwards pressure on house prices. And the long term trend is that the baby boomers are going to want to start downsizing their houses.
Yeah, they should. The support for the bubble (the free flowing credit spigot) is gone so the bubble does have to fully deflate. Now that the bubble has screwed the economy, the dollar, the oversupply of homes and we go into a deep recession it has to overcorrect.
Bummer for you home "owners".
You would think they'd overcorrect, if they behaved like normal assets, but every day I read about people trying to "scoop up bargains" these days, when we are nowhere near the bottom yet.
They may "scoop up bargains" all the way down, then when things obviously have turned around, there will be a manic scramble to buy from all quarters. Don't know if the "asset discredit" phase will hit the psyche.
Why? Americans have it ingrained that the ultimate goal in life is to buy a house.
Latest Case-Shiller, Q4 2007, shows a precipitious drop, so things may recover faster than they rose.
Still an *almost* straight-down extrapolation yields about 2 yrs off until reversion to pre-1997 trend......
Gov interference will only distort the graph. And it may not make a straight path back down to the normal trend, but may have fits up and down along the way.
In that case it may take 10 yrs!
BTW, that graph is mis-labeled, nominal should be higher than inflation adjusted.
Hey, all you people believe inflation is "ROARING" at 8+%, so that graph is wrong (uses govt inflation figures), and much flatter, so by now it has already hit and gone below the bottom.
SO YOU ALL BETTER BUY NOW OR BE PRICED OUT FOREVER!!!
if cash holders receiving less than one percent interest compete in biddings with bank borrowers who use the 10 dollars of debt created when that one dollar was deposited in the bank on housings than it does seem that they "could" fall in value in relation to bid prices by 90 percent if the debt economy fails, but no politician in the pay of banksters will let that happen
cause without banks loaning moneys or taxpoayer bailouts, banks will have less profits aside from the nickel and dime shakedowns for their account servicings as checkings
in about 15 years
I agree with Veronica, as well as those who have mentioned boomer downsizing and the rising costs of fuel, food, and taxes to cover wars, social security, etc.
Within five years or so, I think that most of the sunbelt areas will have bottomed out and will start to slowly rise in value due to population growth. To some extent, house prices will be linked to the level of immigration. But the rustbelt areas with population decline will be on a Japanese-style permanent downward trend. The $100 houses in Detroit are probably the start of a real trend.
It is amazing that places like Detroit and Cleveland were building big new neighborhoods of McMansions during the boom. Nobody is going to want those houses.
If the economy really falls apart, the government may actually seal the borders against legal and illegal immigration for a few years, and within high population growth, there won't be high demand for housing.
In measuring financial crashes of this magnitude, prices of the underlying assets 'correct' below the regressed historical mean to the same percentage that they 'overshot' that mean.
If the price rose 50% over the average, then you can look for a 50% decline under the mean in the future. When people can swing a house with 40% down and hold a bona fide job then housing will start its long extended bottom.
Screechingly low demand from the 'boomer' gen will make housing assets a losing proposition for the next 20 years.
There will be 'dead cat' bounces and the media and governmental forces will attempt to convince potential buyers that it's bargain time. But historically again, these are sucker/bear moves in a market yet to find its true bottom.
Some investment pundits are attempting to correlate house assets to business assets (stocks, bonds)and look for commensurate correlation in terms of price movements subsequent to a 'bear' market for such assets.
This is wrong thinking and mostly due to to ignorance as well as the lack of recognition that 'housing assets' are truly depreciating in real terms constantly over time, subject to external tax, insurance, litigation,etc. are extremely costly to 'have and to hold'.
Yes, you can go to zero value in financial assets but houses (leveraged or not) are albatrosses in bear markets, draining every last dime and more so from all of your pockets.
None of the financial 'cures' the 'bankers' are construing can help with the on the ground problem of vacancy, destruction, spreading blight etc.
What percentage of now vacant housing will be declared uninhabitable eventually?
FUNNOMINAL
That graph shows that home prices are forming the classic "head and shoulders" pattern. If this pattern holds true housing could be bearish for some time to come.
Why do I see that graph pointing STRAIGHT DOWN in the next two years. This is gonna be brutal.
It's time to create a bubble to rebuild our infrastructure. Too bad we don't have enough engineers since all the white kids are getting degrees in Womyn's Studies.
over-correct? absta-f$@n-lutely!
No. Smart housing investors are waiting in the wings to buy up houses at 1997 values.
Look I know FOR A FACT homes are overpriced. If it takes making a 100k a year to afford a house payment & that's at 50% (net) of take home pay something is still skewered. I'm NOT paying 50% of my income for a mortgage. That's on a 355k house!
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