Falling home prices

[haha]

The economy is 70% consumer based, and was funded by home equity withdrawal the last 7 years. Consumers have increased spending, over income, steadily by 1-2%/year for the last 25. Incomes have been down since 2000 due to global wage arbritrage (one reason corp profits got so high), and so they have spent the house equity to make up the difference. I have a study of what funds consumers, in aggregate, have left to spend, and the only thing left is pension type money, which is hard or impossible to raid.

This is absolutely correct. I had a drink with a woman nearing normal retirement age. She lives in a nice house in an expensive neighborhood which she and her husband bought many years ago when it was cheaper by at least 20 x. She wound up with the house in her divorce. She was saying how bad she felt that she would have to leave the neighborhood when she quits work. I asked if the taxes and upkeep were too high: she said no, I have refinanced many times and I can't afford the payments without a job.

I have known her for years- the re-financing wasn't for home repairs or even for luxuries. It was to keep up a semblance of the life she was accustomed to as an upper-middle class married woman.

I have to think that she is not alone, and that this source of cash drying up is going to make a big difference to the economy. The only thing that could possibly put it off would be to somehow re-blow the bubble.

Ha

 

[danm]

The whole thing is tragic. My sister and BIL bought before the peak, then proceeded to pour everything into the house. When funds ran out they turned to HEW, and are still doubling down, and fixing up a deflating asset. She finally admitted that I was right in selling my house and my other investment decisions (and not rebuying), but god it kills me. A friend of mine pulled money out so he could afford kindergarden for the kids (twins - parents both worked). A friend at work's ex-husband took it all out and bought power tools and a boat, she got left the house - small thanks.

Unfortunately you can't tell people anything; they just won't listen.

But as CalculatedRisk says - 'We're all subprime now'. Be careful folks.

This is absolutely correct. I had a drink with a woman nearing normal retirement age. She lives in a nice house in an expensive neighborhood which she and her husband bought many years ago when it was cheaper by at least 20 x. She wound up with the house in her divorce. She was saying how bad she felt that she would have to leave the neighborhood when she quits work. I asked if the taxes and upkeep were too high: she said no, I have refinanced many times and I can't afford the payments without a job.

I have known her for years- the re-financing wasn't for home repairs or even for luxuries. It was to keep up a semblance of the life she was accustomed to as an upper-middle class married woman.

I have to think that she is not alone, and that this source of cash drying up is going to make a big difference to the economy. The only thing that could possibly put it off would be to somehow re-blow the bubble.

Ha

 

[UncleHoney]

Unfortunately you can't tell people anything; they just won't listen.

That's for sure.

Four years ago when my mom died my sister wanted to buy mom's house, appraised at $210K. With her part of the inheritance and the sale of her old house she was just $25k away from owning the house outright. Within 30 days of taking possession she refinanced and grabbed the the whole $210k. Seven month later she refinanced again and grabbed another $10k from the house and got a $20K HELOC.

I just shook my head after seeing what she did. I guess her thinking was she could have the house and the money too. I don't talk to her much but from what I hear from my other sister things are getting a little tight these days.

As for the money I think she used it to bankroll a new business she is starting. With her track record in high finance, it's only a matter of time before the wolves are howling at the door.

 

[Texas Proud]

Sorry, but I'd have to call it very small, with no basis and highly unlikely.

If prices were to drop past the median and "overshoot" it, existing homes would cost less then construction cost of the home alone, with negative value for the land.

Never seen that happen, in any housing market in the US, ever.

And I dont think the nasdaq dropped below its reasonable value either. At 1200 it was fairly valued by historic measures. At 5000 and PE's in the triple digits, it was pretty stupid.

So were homes priced at $600k that cost $250k to build and sat on $50k lots.

You need to review the Houston market back in the mid 80s.... houses were selling for less than construction costs... and is a few bad areas, you could buy a house for $5 to $10K... some neighborhoods had 50% of their houses repoed and sold... some people made a killing in the S&L mess...

Now... I have been told by someone at the rating agency that this was the worst housing market ever in the US... don't know if true, but...

 

[haha]

As for the money I think she used it to bankroll a new business she is starting. With her track record in high finance, it's only a matter of time before the wolves are howling at the door.

Maybe not. Most small business success depends more on practical and social skills, not high fianance or unusual analytical ability.

Ha

 

[toofrugalformycat]

You need to review the Houston market back in the mid 80s.... houses were selling for less than construction costs... and is a few bad areas, you could buy a house for $5 to $10K... some neighborhoods had 50% of their houses repoed and sold... some people made a killing in the S&L mess...

Now... I have been told by someone at the rating agency that this was the worst housing market ever in the US... don't know if true, but...

I lived through the Anchorage tanking of real estate, about the same time as Houston. It was at least as bad as Houston, IMHO. So many people were turning in their keys and walking away, they didn't even have to declare bankruptcy or anything. There were several banks that failed. We had lots of practice with FDIC making good on their guarantees, as my checking account changed to a different bank three times as each bank failed and was absorbed by another, and we had a CD at a S&L that failed. DH and I hung on but it was many years before our house value recovered to what we paid for it.
That's not to say it'll happen all over again, but it HAS happened and in not too recent history. But if you can afford to sit tight for a decade or so, it really doesn't matter, unless you're counting on making a killing in real estate!

 

[SteveR]

I survived the housing purge in Texas in the mid 1980's. I was lucky enough to transfer into Austin at the peak and get transfered out two years later in the trough. I had to get a loan to pay off the difference between my mortgage and the assessed value. That sucked up 10 years of equity gains and left me house poor for a year until we saved enough cash for a down payment on a new house.

The home values here are actually up about 12% from a year ago. But the market is slowing and prices are flat to down a bit in the less favored areas. The local inventory is high but has dropped over the past couple of months. The low end is still very active as there are still more job openings than people to fill them so we are continuing our multi-year period of job expansion in the state. The middle to low-high end houses are where the glut is now and where the biggest percent price erosion is happening. (Houses under $700k.)

We are still getting the house ready to market by March. After it sells in a few months we plan on moving South to a warmer and drier area to avoid the snow and ice. The market down there is off by 10% so we hope to get what we want with the equity from the house here.

 

[clifp]

I survived the housing purge in Texas in the mid 1980's. I was lucky enough to transfer into Austin at the peak and get transfered out two years later in the trough. I had to get a loan to pay off the difference between my mortgage and the assessed value. That sucked up 10 years of equity gains and left me house poor for a year until we saved enough cash for a down payment on a new house.

Wow how old fashion paying back what you owe. For future reference.
The correct approach is to refi one more time perferable at 100% with a teaser ARM. Take the proceeds and make a down payment on a second home in Texas. Wait for Washington to bail you out so that you can continue pay 3% interest only loan for five years while renting the 1st house. Failing that mail the keys back to the lender along with a Tootsie Roll, or other form of sucker.

 

[FinallyRetired]

Immature? Odd statement. But you misunderstand, I wasn't comparing it to the GD - but was correcting CFB's err - he said house prices never have dropped below construction value, which they have.

Sorry, I meant "premature." Senior moment.

About stocks vs homes, I still say they are apples and oranges except for the investor or speculator. You can't get much shelter in your pets.com. And land has intrinsic value, it doesn't go away. So, 50% stock ownership vs 70% home ownership only says that, well, that 50% own stocks and 70% own homes.

Further, if a $50 stock drops to say $20, the average stock owner sells on the way down or (in my case) at the bottom. If a $500k home drops to $200k, the homeowner has to stay put unless they lose their job or have to move for some other reason. So we see the flurry of "at the bottom" sales from those transactions, but for the majority, the homes just sit there, lived in, and eventually regress to whatever their reasonable price is. Are people hurt? Of course, those who overpayed, house flippers, those who used their homes as a piggy bank, etc. But this is not like the dot com crash where companies at the top of the market one year are out of business the next, stock options became worthless, and stocks became wallpaper.

 

[W2R]

I survived the housing purge in Texas in the mid 1980's. I was lucky enough to transfer into Austin at the peak and get transfered out two years later in the trough. I had to get a loan to pay off the difference between my mortgage and the assessed value. That sucked up 10 years of equity gains and left me house poor for a year until we saved enough cash for a down payment on a new house.

The home values here are actually up about 12% from a year ago. But the market is slowing and prices are flat to down a bit in the less favored areas. The local inventory is high but has dropped over the past couple of months. The low end is still very active as there are still more job openings than people to fill them so we are continuing our multi-year period of job expansion in the state. The middle to low-high end houses are where the glut is now and where the biggest percent price erosion is happening. (Houses under $700k.)

We are still getting the house ready to market by March. After it sells in a few months we plan on moving South to a warmer and drier area to avoid the snow and ice. The market down there is off by 10% so we hope to get what we want with the equity from the house here.

We moved to Texas (College Station) in 1984, and bought our house there in 1987. I don't remember the year but at some point in the 1980's I remember my ex suggesting that we should buy a house down in Sugarland as an investment. So many had been left with the key in the door that we could have bought one for a song. But we decided it was too much hassle for us.

My ex rented out the house after our 1998 divorce and finally sold it in 2006, 19 years after we bought it, and according to the tax assessor records online he got 41% more than we paid for it. Sounds like a lot, but that comes out to only around 2%/year. Definitely not a great investment, but we enjoyed living in it while we were there.

 

[armor99]

I think it is interesting that in fact YES.... there IS a certain benefit to those who did not get caught up in the housing market bubble! If you actually do have some cash available, then you can buy a house fairly cheap now. I think the housing market will continue to drop for a year or so. But after that I plan on putting REIT stocks back in my portfolio. There are always options available to the savy investor if you can see past all the doom and gloom....

 

[cute fuzzy bunny]

Sorry right back, that is wrong. The last time house prices dropped on a national basis was the great depression, when they went around 90% peak to trough. It has happened in the US before, on a national basis no less. Doesn't matter, stocks, houses, whatever, investments can sell for less than book value.

I won't argue it, I've deeply studied this credit and housing bubble for over two years now. I recall a similar discussion to this one a year or two ago. You had just bought a house and were letting us all know what a bargain you got on it. The board consensus thought prices wouldn't drop, and it's was a fools errand to rent versus buy. Well events were otherwise, and will continue. I'll check back in a year from now and see what folks are saying.

I guess if you're expecting another great depression, then you might be onto something. Otherwise, I think you're on something. Although now that you mention it, I think something also might have happened in Lusitania in the mid 1300's that also supports your theory.

Past that, I cant argue with anyone who has spent an entire two years studying something.

And yep, I bought that house with the tax free real estate profits I made over the last 5 years, and its still worth what I paid for it. If the prices dip further I might feel a little bit bad as I call the assessors office to have them reduce my property taxes.

 

[kumquat]

Interesting article

Bloomberg.com: Exclusive

 

[tryan]

You need to review the Houston market back in the mid 80s.... houses were selling for less than construction costs... and is a few bad areas, you could buy a house for $5 to $10K...

Yup, same story north of Boston. Bought half a dozen properties below construction costs (and the copper was still in most of them!).

Save your pennies ... where there's chaos there's opportunity.

 

[Retire Soon]

Cutefuzzybunny is correct, the 2004-2006 were bubble prices, but many were desperate to buy thinking that they would lose out if they didn't.

We sold our house in San Diego in July, 2006 and moved out of state into a home we had purchased a few years earlier. When we returned to the area for Christmas, many people told us how lucky we got out when we did. Houses currently listed in our former neighborhood have asking prices of more than a hundred thousand dollars less than what we sold for and prices are still coming down. We'll never regret our decision to cash out during the bubble as it made our ER possible. Thank you subprime lenders for helping to make our dream come true!

 

[TBPu]

danm, it took me 2 years to get my PhD and so I respect that your 2 years of studying this subject gives you a solid claim to understanding this issue.

I live in Michigan and anyone claiming housing has never gone below the building cost is definitely misinformed. And as several posters above have attested it happened in many places in the 80's.

I bought here in 2003 and could have sold in 2005 at a moderate gain but it appears that if I desire to move I will take a significant hit. Your information and insight is much appreciated as I ponder a good selling strategy.

And yes, if someone is living in their home and has no intent to sell this whole issue is irrelevant. But I do hear less owners bragging these days or at least their success stories get even less believeable.

 

[REWahoo]

I live in Michigan...

Lord Howe Island is now in Michigan!?

Damn global warming...

 

[FinallyRetired]

danm, it took me 2 years to get my PhD and so I respect that your 2 years of studying this subject gives you a solid claim to understanding this issue.

I spent two years studying piano, still can't play a lick.

 

[calmloki]

I spent two years studying piano, still can't play a lick.

And to be fair, degrees do not assure infallibility just as lack of a degree does not guaranty lack of understanding.

 

[TBPu]

Actually Lord Howe Island is where I live. A 38 ft. lake boat 5280 ft from Pt. Betsie Light at the moment. My house is rented. I'm making a killing, YEAH RIGHT.

Too bad about the piano study but didn't you know to quit after the first year?

calmloki, very true but the OPs 2 years of study and the evidence presented do tend to trump a lot of anecdotal chest thumping with little study at all, or maybe not.

 

[FinallyRetired]

Too bad about the piano study but didn't you know to quit after the first year?

I thought I played pretty well after a year, and after two years. It's only with hindsight that I realize I can't play the piano.

Hey, living on a houseboat, many people would think that was pretty cool -- no pun intended. I do.

 

[ziggy29]

What isn't being said is whether this is the exception or the rule, to the extent it's accurate.

 

[cute fuzzy bunny]

Lets get back to that original point, which wasnt whether housing can fall below construction cost. It can and does in small regional areas and severely depressed areas for short periods of time.

The particular point in question was that the markets would "overshoot as much below the mean as they did above it", and that such a condition would happen on a national scale.

Since housing in many areas doubled and tripled, that would mean prices at half to one third what they were at "the mean". US wide.

I think we need another few years of studying on this one if thats the finding.

My thinking, based on 20 years of studying the real estate markets, is that prices will drop to just about what they were in 2000-2002 (nationally), there will be some bad spots and bad properties. I mean, I've been looking at it for 10x longer, so my opinion must be 10x better, right? :

The assertion that we'll see broad based drops to pricing levels not seen since the early 1970's is ridiculous.

 

[honobob]

the OPs 2 years of study and the evidence presented do tend to trump a lot of anecdotal chest thumping with little study at all, or maybe not.

All this talk about years of research and "evidence" , yet in three pages of posts not one confirmed resale at a lower value. I'm sure values are down somewhere but all my confirmed resales in my area have been at 10%+ increase over "bubble years" prior sales.

Just curious why no one posts an actual resale at a lower value when they make their claims.

 

[FinallyRetired]

All this talk about years of research and "evidence" , yet in three pages of posts not one confirmed resale at a lower value.

Can't help you there, but here is my personal Northen Virginia experience, all within 30 miles of downtown DC.

Bought house #1 in 1992 for 295k , walk to metro (bad market)
Sold house #1 in 2001 for 400k (thining the top was here).
Bought house #2 in 2001 for 225k (further away, but on a lake with private dock)
Offered 480k in 2005 (declined it, liked the house)
Neighbor sold similar house for 530k in 2006, nutso.
Sales came to a halt in 2007, last sale (similar houses) around 430k

So I can either say I'm down 50k, or I'm up 205k. I prefer to not say anything, since I'm not in the market to either buy or sell. For my house to decline as a resale, I would have to sell for under 225k. Not gonna happen.