What is wrong with falling housing prices?

[Gpond]

Really? If the goal is home ownership for all wouldn't it just make sense if housing prices were lower more people could afford the American Dream?

We are throwing trillions of tax payer dollars to prop up housing. I been renting since 2005 waiting for housing prices to fall. Now I am not going to get a bailout for not being a consumption machine and will be stuck subsidizing those that were.

 

[MasterBlaster]

The more general question shouldn't just concern housing but everything. If I may expand your question it would be ... What is wrong with deflation ?

That's great for people who want to buy things (including housing). The problem comes with banks that have loaned money based on last years asset prices that go under. Then there is no lending to support business. The economy suffers, profits and wages suffer. Debt service becomes an ever unbearable burden. The downward spiral gets worse and worse.

Don't confuse deflation with lower prices due to productivity gains.

In general deflation is a real problem. The conventional view is that a small inflationary trend is best.

regarding your "It's not fair rant" I concur. It truly is not fair. However we don't want to have the economy go really to pot just to prove a point. That's the moral hazard dilemma.

It really is in everyone's best interest to solve the economic problems regardless of who comes out somewhat ahead of the others.

 

[Frugality_of_Apathy]

The conventional wisdom is what's been crashing our economy every ten years.

Without the constant inflation businesses wouldn't need to survive off loans. The only reason businesses have started using loans as a general practice is because it's cheaper to spend future money now. If there was no inflation or slight deflation funding yourself would be the wisest option. As the tax codes are written now you don't have to worry about businesses thinking their money will be worth more in the future so they better not spend it, because any money they don't spend on the business is going to get taxed as profits.

Has the electronics industry always been on the verge of collapse because of the deflationary nature of technology? You don't see people out there still using an abbacus because they know know when they buy a computer they could have bought a better computer for the same amount a month later.

The only thing inflation does is help people get into debt, which only benefits the banking industry.

With no inflation a baker could sell the same amount of baked goods for the same price every day and have a decent life. With inflation the only way to have the same amount of wealth is to increase the prices and sell more all the time. If his ingredients go up 3% in a year due to inflation he is going to have to charge more than 3% more a year to cover the additional cost and keep his profits in line with inflation.
But he can't charge more than 3% more a year because his customers only make 3% more a year, so he has to sell to more customers. It causes a vicious expansion cycle that makes everyone's life harder.

If there was 3% deflation, that same baker could could charge 97% or less of what he did the previous year selling just to his same customers and end up with more deflation adjusted profits than he had last year. His customers might only be making 97% of what they were making last year but since his baked goods have come down even more than that they are easier to buy allowing everyone to save more money while still buying more things.

 

[Gpond]

Thank you. I just wanted to rant.

Limbaugh let it slip today (one of main reasons I signed up here was to throw that talisman into the mix). It is all about property tax revenue.

States start defaulting on muni bonds or can't issue more munis it is lights out. When we starting bailing out States it is going to make the car maker quarterly tithe look like chump change.

 

[Gpond]

Do you know why you producers, those of you play by the rules still paying your mortgage even though you're underwater, do you know why you're going to have to bail out the losers and keep 'em in their houses? To maintain the property tax base for government.

The Pulse of Revolution Has Begun

 

[OAG]

IMO Property Taxes are at the apex of this issue. The Government(s) (all levels) know that the majority of funding at the local level (including the schools) are tied to property values. They do not want to see home prices fall since that will mean they have to RAISE the rates on RE Taxes for home owners and in several jurisdictions people are paying a lot more in RE taxes than they are paying on their mortgages. Eventually, in the not to distant future (and even some now), may not be able to afford the RE taxes, much less the taxes AND a mortgage. Remember all the Foreclosures, Walking Away, Mortgages in Default, Squatters, etc., are NOT PAYING RE Taxes now. It would be IMO best to just sell the properties to someone who wants it in any "arms length" level that is market based. At least that way the properties may be owned by someone that will pay for them. Currently, this most recent "rescue plan" is only bringing a lot of confusion and indecision to the market place. If I was in the market now I would surely be very apprehensive buying a home - next week there may be another program that detracts from my purchase. Really this "program of the day" is getting far out of hand.

 

[Independent]

I think RE taxes are a side issue.

People with mortgages want house prices to stay up so they can move when they want/need to. If you get transferred, and need to sell, you've got to come up with cash equal to the amount you're underwater. Most people know they can't do that.

Other people, with paid-up houses, were thinking their equity would be a big chunk of their retirement emergency fund. It just disappeared.

 

[kyounge1956]

The conventional wisdom is what's been crashing our economy every ten years. (snip)
With no inflation a baker could sell the same amount of baked goods for the same price every day and have a decent life. With inflation the only way to have the same amount of wealth is to increase the prices and sell more all the time. If his ingredients go up 3% in a year due to inflation he is going to have to charge more than 3% more a year to cover the additional cost and keep his profits in line with inflation.
But he can't charge more than 3% more a year because his customers only make 3% more a year, so he has to sell to more customers. It causes a vicious expansion cycle that makes everyone's life harder.

If there was 3% deflation, that same baker could could charge 97% or less of what he did the previous year selling just to his same customers and end up with more deflation adjusted profits than he had last year. His customers might only be making 97% of what they were making last year but since his baked goods have come down even more than that they are easier to buy allowing everyone to save more money while still buying more things.

I read somewhere an estimate that in the next fifty years or so, the population of the U.S. is expected to level off and then start coming down. If this projection is accurate, economic models based on constant expansion will no longer be valid. I find it difficult to imagine how an economy based on sustainability and a stable or declining population would function, but ISTM this is something that we as a society need to figure out, or the transition between expansion-based and stability-based economies is likely to be a painful one.

 

[SarahW]

Hmmmm, I have read that the reason the govt isn't working too hard to defeat illegal immigration is exactly that: declining US population growth.

 

[ziggy29]

I think it's partly a desire to prop up the tax base and partly because the economy has many moving parts, and if one of them doesn't function in an expected or orderly manner, the entire machine can malfunction.

 

[dex]

Deflation is bad for those in debt - paying off debts with more valuable dollars.

Deflation is not an endless process. People can not put off purchases indefinitely.

If, after a deflationary period there is price stability - then no problem with it - except for those who had debts before the deflation cycle and are paying it off with more valuable dollars - who is the biggest debtor? - we are - USA.
Governments don't like deflation.

 

[harley]

Personally, I'm with Rush. I think the economy has refused to take it's meds in order to look more pathetic on TV. And it probably doesn't have Parkinson's anyway. And anybody that does drugs illegally should be thrown in prison (except me and Rush, of course).

 

[OAG]

Deflation is gone; Inflation is back. CPI UP .3 today. Let the good times roll.

 

[ziggy29]

Deflation is gone; Inflation is back. CPI UP .3 today. Let the good times roll.

Other than the (now deceased) drop in gas prices, frankly, I hadn't seen any of the "deflation" everyone was talking about. I've seen almost nothing but price increases everywhere else. That might be worse than deflation for working stiffs, because I don't think many of us are going to get a raise this year, not even a COLA.

 

[deepc]

And gas is up 45 cents in six weeks here. If I believed in conspiracies...

 

[Bimmerbill]

I refinanced a couple of weeks ago and am planning to apply for a property tax abatement using the current appraisal.

I called the town offices and they basically said that it would be denied, since everyones house if "overvalued" so its all fair.

I said then "everyone" should apply for an abatement. Of course, the town would increase the tax rate so the total generated was the same as before...

 

[OAG]

I wonder how long it is going to take until there is an ugly incident (or several) over this situation where one owner qualifies and gets a reduction in the interest rate or mortgage balance or term on the mortgage and others in the very same neighborhood do not. I can see where one owner is driving an old car paying all of his home payments, on time, and in full, and the neighbor is driving the new BMW (or whatever) and is "having a difficult" time financially and gets the reduction (based on housing expense percentage of income). Washington is pitting neighbor against neighbor - talk about "unintended consequences".

 

[Gpond]

I rent in a 42 unit high end condo unit development that was built in 2006 around a new golf course and they are near revolt. They were all sold for between $575K-900K. The unit I am renting is 3200 square foot with all the bells and whistles (full size kitchen, mini kitchen, all granite, etc, etc) the owner purchased for $810K.

They just got their property tax revaluation today.

$105,000 higher each on average.

They are spitting bullets. That equals $130 a month increase in property tax starting on March 1st. They just had to increase the maintenance fee 8% because we went over the contract for snow plow days and are getting 5-7 inches tonight which will put us over the new contract limit.

You could not sell this sucker for $350K now. Of the 42, 9 are in foreclosure, 2 have been for sale for over 2 year, 5 have been for sale for over 1 year and 3 of them are vacate and are for rent.

Just got from the emergency condo board meeting. WOW, it was tense.

 

[Koolau]

You could not sell this sucker for $350K now. Of the 42, 9 are in foreclosure, 2 have been for sale for over 2 year, 5 have been for sale for over 1 year and 3 of them are vacate and are for rent.

Just got from the emergency condo board meeting. WOW, it was tense.

Gpond, this could be your big chance to "own" rather than rent! The old lemons/lemonade situation. Heh, heh. Why not offer the landlord $375K and then wait out the market? Of course, YMMV.

 

[Gpond]

Gpond, this could be your big chance to "own" rather than rent! The old lemons/lemonade situation. Heh, heh. Why not offer the landlord $375K and then wait out the market? Of course, YMMV.

I'm moving overseas for 2 years in about 3 weeks.

But I think we still got another 20% to go on housing prices.

 

[FUEGO]

Gpond, this could be your big chance to "own" rather than rent! The old lemons/lemonade situation. Heh, heh. Why not offer the landlord $375K and then wait out the market? Of course, YMMV.

Caveat Emptor BIG TIME here. Unless they have a Ft. Knox sized reserve fund, watch out!

"Of the 42, 9 are in foreclosure, 2 have been for sale for over 2 year, 5 have been for sale for over 1 year and 3 of them are vacate and are for rent." = soon to be a low collection rate of HOA dues if not already.

 

[Pilm]

Local governments in big trouble

The problem with falling home values is that all the local governments (as well as the state governments) kept increasing their spending as the prices of homes inflated from 2000-2006. Now that home prices are deflating they are faced with either cutting spending or increasing assessments and taxes to maintain status quo. Of course the former option of reducing spending just isn't in the vocab of many politicians, so get ready for higher taxes. Still quite amazed how these folks were able to spend all that extra money they were getting in taxes and assessments and still weren't able to save virtually a single dime of it for a rainy day! Seems these folks are truly clueless wrt to economics.

 

[FUEGO]

The problem with falling home values is that all the local governments (as well as the state governments) kept increasing their spending as the prices of homes inflated from 2000-2006. Now that home prices are deflating they are faced with either cutting spending or increasing assessments and taxes to maintain status quo. Of course the former option of reducing spending just isn't in the vocab of many politicians, so get ready for higher taxes. Still quite amazed how these folks were able to spend all that extra money they were getting in taxes and assessments and still weren't able to save virtually a single dime of it for a rainy day! Seems these folks are truly clueless wrt to economics.

Is this really true? Obviously the tax rate per $100 value will have to increase if values drop. However, the average tax imposed per residence, all else being equal, will remain the same. If my house value gets cut in half and the tax rate doubles, then I'm still paying the same amount of tax. At least in my local jurisdiction.

 

[Frugality_of_Apathy]

Is this really true? Obviously the tax rate per $100 value will have to increase if values drop. However, the average tax imposed per residence, all else being equal, will remain the same. If my house value gets cut in half and the tax rate doubles, then I'm still paying the same amount of tax. At least in my local jurisdiction.

And do you imagine your tax rate will be cut in half once your house value goes back to its original level?

Would you accept a 100% tax if your house value dropped to the percentage you are being taxed now?

 

[ERD50]

And do you imagine your tax rate will be cut in half once your house value goes back to its original level?

That is exactly how it works in my County.

The total tax amount is set by formulas (CPI and referendums are part of it). Those formulas have nothing, nada, ZERO, to do with the price of anyones real estate.

The assessed value of your property determines how the tax amount is *divided* up across tax payers.

Really.


-ERD50