Shiller on the housing bubble

[twaddle]

Fairly interesting recent paper from Shiller on the global housing bubble:

pdf link

He thinks it's driven purely by psychology. Expectations of future price increases. But, the twist this time is that expectations are global. We saw home prices rise across the country and the globe, and that set our expectations locally.

He also doesn't agree with the idea that "supercities" like SF should have much of a growth premium. If that premium is more than 1%/year, compounding would send prices beyond the reach of anybody in the long run.

 

[FinanceGeek]

We'll I'd say that with the advent of "many high paid people can work anywhere via the Internet" and the huge ongoing retirement of the baby boomers, the supercity idea is overdone. Yes, there will always be some places which are more glamorous or desireable due to good weather, natural beauty, etc. but I think choosing to live in one of these places should be seen as a consumption decision more than a gambit on future earning power.

 

[Texas Proud]

I remember back in 2000 when I was in London... and people were spending 300,000 pounds on a house... I thought it was WAY to high... I was told that it was going up so fast they had to buy NOW..

Well, guess what... it kept going up.. and has AFAIK still is...

Yes, at some point and time a lot of people will be priced out of the market, but that is just the way it is..

 

[honobob]

Is it a bubble if it never bursts?


The median price of a single-family house on Oahu in August was $650,000, up 2.4 percent over the same month last year, when it was $635,000, the Honolulu Board of Realtors reported Wednesday.
The median price of a condo rose 6.6 percent year over year to $325,000, up from $305,000 in August 2006.
The 381 sales of single-family houses was the highest number in 2007 and the best showing since March 2006, when 392 houses sold, said Berton Hamamoto, president of the Honolulu Board of Realtors. Sales of condos, however, were down 14.7 percent in August, with 495 units sold, compared to 580 units sold in August 2006.

 

[honobob]

could'of, would'of, should'of

Kauai condominium prices soar

Pacific Business News (Honolulu) - 12:26 PM HAST Wednesday, September 5, 2007


The median price of a condominium on Kauai rose more than 30 percent last month despite a more than 30 percent drop in the number of sales, while prices and sales of single-family homes both posted declines.
The median price of a Kauai condo in August was $589,000, a 30.3 percent increase over the same month last year, when the median price was $452,000, according to figures released by Hawaii Information Service Wednesday.
Condo prices for the first eight months of the year are up as well. The median condo price through the end of August was $557,500, a 43.3 percent boost over the same period last year, when the median price was $389,000.

 

[twaddle]

honobob, prices are sticky on the way down. You want to look at sales volume. Volume declines first, followed by price declines about a year later. In the 1990 bust, volume dropped 50%, but prices still went up for about a year, and then dropped about 5% per year for several years.

Somebody buying at the price peak in 1990 didn't see their home reach that peak again until 10 years later. Prices dropped nearly 50% in real terms. Even if prices go sideways in nominal terms, they're still dropping in real terms.

 

[W2R]

Prices dropped nearly 50% in real terms. Even if prices go sideways in nominal terms, they're still dropping in real terms.

(OMG, that's horrifying!)

 

[twaddle]

Well, they only fell 27% in nominal terms, which doesn't sound quite as bad.

Here's LA then and now (from Leamer at UCLA).

 

[tryan]

Somebody buying at the price peak in 1990 didn't see their home reach that peak again until 10 years later. Prices dropped nearly 50% in real terms.

Yup, (as I said on another thread) lived thru that ... bought 1988; prices tanked 50-60%; took 12 years to get out; wrote checks at the closing. Not for the faint heart.

 

[honobob]

honobob, prices are sticky on the way down. You want to look at sales volume. Volume declines first, followed by price declines about a year later. In the 1990 bust, volume dropped 50%, but prices still went up for about a year, and then dropped about 5% per year for several years.

Totally not my experience, but then I don't buy the MARKET, do you? Of course some people do better than others, don't deny their gains because some doofus didn't do his due dilligence. The total drop for my area and product was 9% max after multiple year gains of 10+%.

Didn't you report on volume declines 1-2 maybe 3 years ago? How do you explain the increase in sales price in Hono & SF?

Schiller doesn't seem to touch on changing forms of ownership that will allow supercities to increase at the same rate. Check thru Craigslist and MLS and you'll see fractional sales which will allow everyone to buy a piece of paradise, maybe only a week or two a year, but the demand will be there and the price increases will follow.

 

[Texas Proud]

I will tell you that MY house dropped 50% in REAL TERMS when I bought it... from what the guy I bought it from paid for it to what I paid for it... the guy who owned it got lucky and his company transferred him and picked up the difference...

BTW, I have been there 20 years and it is just now getting back to what HE paid for it back in the early 80s.. that is Houston for you...

 

[honobob]

I will tell you that MY house dropped 50% in REAL TERMS when I bought it...

Perhaps he paid above market because his company was so free with relocation money. You don't know if he paid market value at that time. But since you bought in 1987..? has YOUR value dropped 50%? I don't know, I don't deal with Texas real estate except to see how the values there seem to make Nationwide figures not look so good.

 

[twaddle]

How do you explain the increase in sales price in Hono & SF?

The Leamer graph shows prices continuing to increase after volume declines. I don't necessarily agree with Shiller, but his argument is that it's all about expectations (I think it's also about affordability).

If the seller's expectations are set by what his neighbor got last year, he doesn't want to sell for less. If the buyer's expectations are set by nationwide trends of declining prices, he doesn't want to pay last year's price and expects prices to decline if he waits.

So, you have a stalemate. Volume drops. Maybe you still find an ocassional buyer who has expectations of appreciation, and he pays the asking price. As a seller, if your house is sitting on the market too long and buyers are scarce, eventually you'll capitulate and lower your price. It takes a while for that to happen. And if enough sellers do it, there may be a rush for the exit.

But keep the faith. The London market shows that anything can happen. For a while longer, anyway.

 

[honobob]

I don't necessarily agree with Shiller,

So, you have a stalemate. Volume drops. Maybe you still find an ocassional buyer who has expectations of appreciation, and he pays the asking price.

So the Kauai report also directly refutes that, 30% drop in volume of a year ago BUT a 30% increase in sales price.

You only need faith when there are no fact to support. I'm a man of little faith.

 

[twaddle]

So the Kauai report also directly refutes that, 30% drop in volume of a year ago BUT a 30% increase in sales price.

Give us more details. Like you said, the median price in a market doesn't provide a ton of information. If the same house is selling for 30% more than it was last year, I think you should buy that house, honobob. It's obviously going to continue appreciating 30% each year forever.

 

[Texas Proud]

Perhaps he paid above market because his company was so free with relocation money. You don't know if he paid market value at that time. But since you bought in 1987..? has YOUR value dropped 50%? I don't know, I don't deal with Texas real estate except to see how the values there seem to make Nationwide figures not look so good.

Actually, he paid 'market' as he bought new at the time... bought in 86.. No, my value has doubled, but on real terms, don't know about inflation and don't care.. it is where I live. Got to live somewhere.

 

[farmerEd]

How do you explain the increase in sales price in Hono & SF?

Its quite simple...the mortgage problems are mostly at the low-end, at least at first...so more and more low cost houses had a hard time selling/closing.

Wealthier people can more easily qualify for loans, and some pay cash so loans are not an issue. If more expensive houses sell, and less inexpensive houses sell, the average sales price goes up. Throw in a few really expensive houses and it drags the average up even further. Houses are not commodities, its not like arguing about whether or not the price of oil is higher or lower.

 

[twaddle]

farmerEd, I've seen that explanation a lot, but I haven't seen good data to support it.

Here's King County (Seattle):

We can see prices still moving up on the low end, but you're right in that the volume seems to drop off more dramatically in the low end. Not sure how much that moves the overall median, but it should move it up a bit more than if volume dropped more evenly across all segments.

In any case, I suspect Kauai is a somewhat special case. Probably some new condo development came on the market, and that influenced the median for condos. Maybe honobob will give us more details....

 

[W2R]

Perhaps he paid above market because his company was so free with relocation money. You don't know if he paid market value at that time. But since you bought in 1987..? has YOUR value dropped 50%? I don't know, I don't deal with Texas real estate except to see how the values there seem to make Nationwide figures not look so good.

Houston real estate experienced a drastic local downturn at the time that TexasProud was buying, due to the oil crisis. I was in College Station at the time. Investors were buying up homes in Sugarland for almost nothing. New Orleans experienced the same thing, and times were very tough back then. TexasProud's timing in buying his home was very good and probably contributed to the good deal that he got.