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Real estate can only fall 10% to 20%, right? Right?
You've probably read this before: Even when housing prices slump, they don't fall all that much, at least compared to stocks and other risky investments. I've passed on this bit of "wisdom" myself. And it it's not a totally ridiculous thing to say: Even in the big California bust of the mid-1990s, prices in the L.A.-Orange County metro area fell only 20%
Below is a chart I made from data in a 2005 FDIC report. It shows the worst  It's easy enough to dismiss the evidence from the oil patch, if you want to. Prices there were forced down by an unusual, and very local, economic shock. The economies of L.A. and Boston are better diversified. Then again, if the oil boom-and-bust of the 1980s was an anomaly, what should we call the easy-credit-driven housing inflation of the early 2000s? Liar loans, interest-onlys, option ARMs, and aggressive subprime lending have changed the rules. History wouldn't seem to be a very reliable guide right now.One reason real estate prices tend to be less volatile than stocks is what housing economist Karl Case calls "downward stickiness." When prices fall, many people just decide to stay in their houses rather than cut their price low enough to make an easy sale. But that also means there's a lot human pain behind a housing decline of "just" 10%. People get stuck in their houses, and that can change their lives. There's a good story in today's USA Today about workers who can't relocate to find better jobs: The silver lining here, I guess, is that companies are complaining about real-estate job lock, and they're shelling out a little bit to help entice reluctant workers. That means the job market is still reasonably tight, which should help the economy. If it holds. If. Update 3/15: For the record, the chart has been corrected since the initial post. (I added "5-year" to the label.) Update 3/16: Lots of good points in the comments below about the true cost of real estate losses. They should be drilled into the head of every Realtor. A few things worth expanding upon: I only have data for nominal (that is, before inflation) losses on real estate. Losses after accounting for inflation are much, much more common: The FDIC report found that since 1978, some 142 metro areas have seen real losses of over 15% over a five year period. That's compared to just the 21 cities in the chart with 15% or greater nominal declines. Even a nominal loss of 20% looks pretty small compared to nearly 60% (also nominal) for the Nasdaq in the five years after the crash. And while some houses in the LA market may have fallen more like 40%, some Nasdaq stocks went to zero. The big difference, though, is that most people have a lot more in their house than they do in the Nasdaq. And most people aren't diversified in real estate, whereas that's very easy to do with stocks. Bottom line: It's difficult to make apples-to-apples comparisons of the returns on real estate to the returns on stocks. In real life--that is, in the lives of non-professionals with a limited ability to diversify and a primary goal of purchasing shelter--equities and housing are very different assets. Beware of people in the real-estate industry who use simple average-returns comparisons to convince you that a house is an easy money machine. Finally, leverage adds to the risk of real estate. But don't forget about imputed rent. You have to live somewhere. The fact that some of your investment pays for a necessary consumption good dampens your risk exposure. When calculating investment declines, one cannot forget to factor in inflation. This will amplify losses.
Will, comparing percentage losses make inflation irrelevant.
I'm from Las Vegas. Prices here went up 100% + in the last 5 years. Prices continue to stay high and haven't went down. It's got to be only a matter of time because the average Joe can't afford these prices. It's ridiculous!
location...location...location
In some places this can be good news, as "reaches" to upgrades can effectively cost less, as the different "levels" of housing in "intra-local" markets, tends to become more compressed. Considering what prices were in 2001, I would expect housing to readjust again to normal levels a little above those prices back then.
If that means a 50% price drop, why not. If it can go up that much without any real reason other then a subprime frenzy, then it is just as possible for it to drop that much. I haven't yet seen any reliable or solid evidence that prices will stabilize. Housing is outpriced well above peoples salaries or possible earnings. Its beyond reasonable. You have to go back to stable/normal times before the frenzy and realize housing was priced with many factors there. The recent 5 year craze was because of mass numbers of buyers on the market who shouldn't have been allowed to purchase in the first place which drove up numbers to record levels. With 2+ million and more each day of inventory onthe market, and no more exotic loans, only "true" buyers will be allowed to purchase homes. It's going to be bad. Really bad. What most people forget is to add the "Inflation Factor" into recovering from a down turns in housing prices. The 20% price drop in LA housing market required the housing prices to climb by approximately 36% to get back to the real value dollar amounts that the housing was worth before the 20% decline. So if you really want to know the true effect of a housing downturn you need to factor in the inflation for the number of years that it takes to get back to the current equivalent value in current Dollar Values that equals the Dollar Value of the House before the market downturn. So Guys & Gals, until we get to that point in the future we will not really know just much this downturn is really going to cost us.
Although LA on average only declined 20% during the implosion following the MUCH SMALLER 1989 bubble, single family home prices neighborhoods with more speculation like Santa Monica 90405 declined a full 40-60% in nominal terms. The amount of speculation this time is far greater and far more widespread.
Additionally, you are not factoring the additional 6% real estate commission off the sellers net for traditional real estate services. So a 20% drop is really a 26% drop to the owner unless they sell fsob and try to save the commission.
The reality is that prices could drop substaintially more than that nationally and here's why: A) When you apply the upcoming qualifying guidelines for exotic mortgages being "fully amortized" and "fully indexed", a borrower making $60,000 a year will qualify for a loan that is 28% less than qualifying at the start rate. This means that the sales price of homes that look at is 28% less than before. b) the above scenario does not factor in the amount of people who use "state income / liar loans" to qualify. When you apply standard debt to income qualifications of 30/40% many people will qualify for even less. I.e. a borrower earning 5K a month qualifies for a $1,500 a month pITI payment assuming his / her monthly bills are less than $500 total. Here is a mortgage calculator to play with some qualifying numbers. People will buy what they can afford to finance... can't finance it within their budget, they don't buy. If leasing a Ferrari was only $475 a month, everyone would have one. c) downward price pressures will only increase from the addition of "must sell" real estate inventory like foreclosures and builder excess. d) public perception of stagnent home prices will cause people to be "sticky" as you mentioned in your article and this will only change when property values get low enough were a mortgage payment would be equal to renting. e) this is my personal view that I think is way under estatimated. The majority of homeowners are baby boomers rapidly approaching retirement. They have been told that their home is the retirement "nest egg". When they watch property values drop 5-10-15-20% and see their equity evaporate, they will panic and sell to salvage the equity that is left. f) we are a nation built on consumer spending which is subsidized by credit card companies and recently the home atm machine. When credit goes away so does consumer spending and in turn our economy suffers dramatically. Look at the impact $3.00 a gallon for gas does.. which for most families this is only $200-$400 a month from their budget. So yes, 20% is very much a possibly... maybe even a guarantee at this point. The real decline may be even worse. Don't forget to include the opportunity costs; after all, your money could have been safely sitting in a money market account earning interest the whole time. So if you could have obtained 5% from a money market account, then the 10% decline in your $100,000 house *actually* cost you $15,000 ($10,000 decline in the value of your house plus an additional $5,000 in interest).
Leverage is great when things go up and a killer when they don't. A 10-30% decline in home value will wipe out 100% of most people's equity. That leverage phenomena was fairly limited in the equity decline of 2000-2002, wheras virtually everyone's home is levered, with those with greatest risk of default typically having the greatest amount of debt.
Agreed. Convert nominal to real and you'll see that even the coast cities have seen 1/3 to 1/2 price drops in real terms.
FYI - AMC Mortgage (Ameriquest) has started laying off employees in their Illinois office. Don't know exact numbers, but it has been only 15 days since Citi invested, they move fast.
The other factor people seem to forget is leverage. Yes, housing prices may only decline by 15-20%, but for a significant portion of the population who have either bought or refinanced recently, this means their equity goes to zero. When you compare that to the stock market (which is an apples-to-apples comparison) housing equity isn't a safe investment at all.
It would help if you included the ski towns of VT like Stowe and Ludlow. You might find some even more "impressive" troughs.
Great look at a different side of the housing market. People seem to be so myopic when comparing stock and real estate markets. Yes, real estate markets probably wont go down 50% but most people didnt owe 85% on their stocks in 2000.
The best news I've heard in a long time. When houses get cheaper, everyone benefits.
Selling at a major loss isnt an option for most folks - they just cant afford the loss. Absent financial calamity, I suspect most people will hold on to their homes, or rent them, rather than sell at a loss. This is particularly true in desirable areas (for example, Boulder Colorado real estate is notoriously expensive because of the great quality of life, access to good jobs, and building restrictions - these factors wont change).
Two points:
1. When workers can't re-locate, and re-training takes 2-4 years to accomplish, it is difficult for workers to adjust to the quickly globalizing economy. By the time many complete re-training their new career is already on its way out of fashion. 2. The stock-market "bubble" beget the real estate "bubble", and there is no reason a decline similar to the stock market could happen to real estate. Let us remember that - although the nominal Dow gauge is higher than January 2000 - the inflation-adjusted Dow needs to rise another 20% just to match the January 2000 peak. That is assuming it happens in extremely short order and that number will be higher when factoring in more inflation over the longer term it will actually take. Considering inflation in home prices, the median home price after adjusting for inflation floated around $125,000 from 1987 to 2000 in current dollars. Now, the median home price is about $228,000. To return to the historical price level home prices will have to take a 45% plunge. Will it? Probably not. But don't underestimate how dramatically overpriced real estate is, and don't underestimate the ability of a market to take a substantial plunge. 20% in California was in the Past.
The present is a far worse off than any so called guru or economist can predict.. 80's and the ofcourse the late 90's to right before Sept 11th .. People where giving away thier HOmes,lost of jobs and another fake stock boom!!! AFTER SEPT 11 th is when if we all can remember? This is when the government switched gears to pull the trigger and drop rates and realitors started to take advantage as well as homeowners and create a false market..All three parties are to blame. Someone please tell me when the price of wood and a ocean view tripled in value!!!!! This was a wash people and some people made a ton of money .. And others will be homeless and the smart ones who sat back and watched the lies are in the right place to finally buy the Home they wanted three years ago for the correct price.. THIS IS ONLY THE BEGINING OF WHAT LOOKS LIKE THE S&L SCANDAL OF THE PAST BUT KNOW IN THE LENDING GAME.. WATCH THE NEWS FOR MANY WILL BE GOING TO JAIL!!!! Lots of good points here about the real cost of real estate losses. They should be drilled into the head of every Realtor.
A couple things worth expanding upon: Even a nominal loss of 20% is pretty small compared to nearly 60% (also nominal) for the Nasdaq in the five years after the crash. And while some houses in the LA market may have fallen more like 40%, some Nasdaq stocks went to zero. The difference, though, is that most people have a lot more in their house than they do in the Nasdaq. And most people aren't diversified in real estate, whereas that's easy to do with stocks. Bottom line: Apples-to-apples comparisons are tough. I only have data for nominal losses. Real losses are much, much more common: The FDIC report found 142 metro areas with real losses of over 15% over five years. That's compared to just the 21 cities in the chart with 15% or greater nominal declines. Finally, while leverage adds to the risk of real estate, don't forget about imputed rent. You've gotta live somewhere! The fact that some of your investment pays for a necessary consumption good dampens your true risk exposure. Nationally home prices probably will not fall more than 10%, but buyers need to beware in bubble markets.
In the last housing bust, Connecticut was probably hit the hardest and in some areas of that state, prices still have not recovered to there 1989 levels. The northern area of the state- specifically the greater Hartford area - was in a housing recession that protracted throughout the 90's. If you were lucky, you purchased after the crash and picked up a great bargain. Can't forget the effect of speculation as well as subprime. I read that the average home owner in Las Vegas owns something like 1.7 homes. Most of those extra ".7" homes were purchased by individuals as investments to take advantage of the boom. Now they are stuck with unmovable inventory, and all the negative price pressure associated. I'm renting one of those condos now, and I plan to switch locations every 6 months to take advantage of dropping rents.
I wouldn't call anything short of being paid to live in Hartford a 'bargain'.
Hey Pat:
Since when is 1978-2003 a "five year period"? Finally, I'm glad this over-inflated r.e. bubble is making some factual headline news across america. It's been way overdue. The Phoenix metro market has ballooned beyond belief, more than doubled in less than 2 years. Even my 6 figure pharmacist salary can't afford the typical tract home here (about $350 K for anything decent, Scottsdale about $600 K.) Now, you know folks there's something seriously wrong with this picture. The sharp pin can't come fast enough!
I think the "subprime woes" issues are not indicative of anything but what they are which is subprime loans. I find the slang "duh" appropriate for use here. Mr. Greenspan conceded it was "hard to find any such evidence" about spillover from housing yet, but added: "You can't take 10 percent out of mortgage originations without some impact." Now the Dems want to bail everyone out which is a huge mistake.
This too shall pass! The big question remaining is "who is going to pay for the bust"? Will it be those responsible...or Joe Taxpayer (you and me). I hope it is all of those responsible. Or, will this be S&L (Subprime Lender) Bailout Part Deux?
When I bought a forclosure in '97, I remember the appraisal mentioning that the previous owner had paid $186K for it in '86. I paid $94K. This was in Los Angeles. Quite a bit more than 20 percent. These figures between 'peak and low' over only a 5 year span are giving a false hope as I see it. Sorry.
Opportunity cost is HUGE. So is leverage.
Here is what I have done: Sold home(s) and cashed in 750k which is now in bank at 5.5 percent CDs. FDIC protection. In 2 years it will be 1 million(i'm adding to it monthly at a huge huge rate because i rent cheap) Now If I had kept the 2 homes I would possibly see in two years ALL of that 750K disspear with a mere 20% correction in housing. I would thus have ZERO vs my 'guaranteed' 1 million in bank by selling and moving to CDs. All I have to do is stay employed for the next 2 years and keep earning 5% in CDs) compare that to the risk of real estate where a small 20% dip wipes out 100% of your gains! It was a no brainer to sell and rent. If you are over 40 and 50%+ of your net worth is in real estate your risks are ENOURMOUS you could/will be wiped out in a modest real estate downturn. SELL NOW or never retire. The last downturn in Los Angeles was horrifying. People were wiped out, couldnt rent it out to cover costs and it ruined thousands of lives, marriages and there were suicides. Its called a crash for a reason and its here now. 2007 will be the last chance to cash in your home for near peak price for 15 years. And have we forgotten what happened to the price of office buildings in Boston during the Ninties? Or what happened to all real estate in NYC in the mid Seventies? A 10% drop in price is nothing compared to what has happened before. My Grandfather was born in 1888 in Boston. He sold his parents' large house and stables on Commonwealth Avenue for $10,000 during the Depression, and he know it was a steal then at that price. He never liked real estate for the rest of his life. It is absurd to think that real estate cannot suffer the kind of decline that the stock market has or will. And then there is the death by a thousand cuts when real estate declines in price gradually or barely appreciates over a twenty year period, which is probably a highly likely outcome for housing today.
This 5 year 'high-low' comparison isn't valuable to current owners. For instance, I bought a forclosure in 1997 for $94K. On the appraisal, it shows the original owner bought it new in 1986 for $180K. That's way more than a measly 20 percent! Last year, identical properties there sold for $340K. Sorry... 20 percent isn't even close to the losses coming. At least that means the rest of us who don't currently own will be able to buy again at a sensible price.
This is true there will be pressure to sell as credit once again becomes harder to get. The pressure to sell will indeed drive down prices. I am curious to see if the tax man follows suit. I think that in the long run real estate will hold value. A 1967 dollar would be worth six dollars and thirty two cents today. This is how the banks and government write off bad debts (sub prime and Iraq come to mind). I see a time when the average yearly wage will be $100,000 and the medium price of a home will be $600,000.
I am thankful yet another buble has popped (what is the next one going to be?)
I bought in a townhome community in 2003 after relocating to Jacksonville, FL. Bought at a fair price, but was dismayed at the number of 'investors' who bought in here to rent out, and the number of people that were very young and seemed to be in here with the 'no money down / no-interest' loans. There are tons of for-sale signs up now, I figure some will become foreclosures, I am just glad that my unit is paid-off and hopefully 'real' buyers will start trickling in at some point. Mr.Clinton's disasterous policies of free trade, left our piggy banks empty; recession was in the air. The Bush administration with Greenspan its collaborator, pulled wool over our eyes. They dare not treat the cause but offered a snail sauce for cure.They reduced interest and the mirage of affordability and wealth, soon appeared in the air. People borrowed money because they could repay it, if they kept their weel paying job, but the security on the loans was imaginary, the value was not there to support them. Do not be surprised if within the next five years myriad of people will lose their homes and affordable rent would be the theme of the day. But affordable rent is not enough to make payments on monies borrowed by a Landlord. Except in arears when Government is the main employer, as in DC, expect devastation, devaluation, foreclosures and bankruptcies galore. The deficit was the cannary in the mine whose song we did not hear. It keept the politicians afloat. Tt will bankrupt those who have elected them. So sell your home even at a loss because down the road you will be able to buy it back for half your present reduced sale price. Greenspan kept silent during his watch but now for his usual fee on a speaking spree is telling you the truth about the problems of subprime and everevaluation. Take this precocious ecomonist to the bank and see how much you get for integrity.
Gold. Gold. Gold. Gold.
If you want your family to have any food at all through the coming calamity, make sure you stay away from fiat "money" and get into *real* hard assets. Here is what we have been doing: 1. Sold the house and moved into a much smaller place that we own outright. It's pretty far from any major city but it's cheap and away from potential harm. 2. Stock piled food (mostly canned goods, but also plenty of wheat and other grains.) 3. Installed a large underground water cistern and rain water collectors. 4. Setup solar cells for once the grid goes down. 5. Started to learn Chinese for when this becomes a requirement. If you want to protect you and your family from the coming chaos, consider these changes. Stop what you're doing and start saving hard assets and foodstuffs. And get out of your house while it's still worth something. Home prices have also been over-stated because refinancing appraisals are included in the government indexes, even though the house never sold. High appraisals are very easy to get.
Fear is once again being fueled by the press - including CNN MONEY. Having lived in Europe for 10 years everytime real-estate hit a press induced panic "High" - they still went higher and today they are still rising. The upper limit to real estate is a great deal higher than is being communicated. There may be an issue in new construction area - as a camparison to US car manufacturers may be valid - in that they build not to market requirements - but to what they are capable of building which like US car compoanies is too much with the same consequences - overcapacity and rebates!
We cashed-out from our Sacramento, CA suburb (Roseville) at the peak in summer of 2005. Today's motivated sellers have dropped prices $100K (15%) in our same subdivision. There simply isn't the high-wage job base there to cover prices that were run-up by junk loans, buy-now-or-never hysteria, and unbridled lust for luxury homes. Game over, man.
Doesn't help when CNN, particularly your housing correspondent Chris Isidore, keeps crying wolf 2-3X a week. No other business site spends more time on "gloom and doom" theories about housing than CNN. Look, let's be real -- After years of double-digit growth nationally, things were bound to slow down. Like everything else, it's cyclical. Let it go and stop getting everyone in a panic -- just to grab attention and click-through rates.
A 20% drop in real estate wipes out your entire down payment. That is a 100% loss to the homeowner, and possibly more to the lender. Also stocks can be sold in seconds; real estate can take months while you're paying the mortgage payments. It's more than straight numbers.
When trying to calculate your true equity position gain or loss on a house or property you may want to factor in inflation and the total interest paid over the life of the mortgage as well as capital improvements. Unless you were borrowing at zero percent the interest paid must be deducted from the equity gain or loss or you are only fooling yourself. When you factor inflation, cost of borrowing and capital improvements and upkeep you had better hope the values in your area have gone way up or you are way behind.
Any thoughts on the short-term prospects of the NYC real estate market? This is obviously a different animal as the only direction to build is up. It seemed like prices were about to stabilize in late '06, but this year has been off to a roaring start. We have already lost one bidding war and are expecting to lose another. We received 3 offers on our place the first hour it was on the market, and it went for 5% above asking. I can't figure out if there is any upside to getting back in, or if I should sit out for a year and watch. I'm worried that the market will go up another 10% in that time. Weak dollar emboldens the international buyers, who are here in droves. Additionally, the prevalence of co-ops penalizes (or flat out disallows) speculators and flippers, either through onerous flip taxes or by screening out potential investors in favor of actual residents. Would love to hear thoughts from others.
While there are definite tax benefits for home ownership, one issue people don�t mention that much is property taxes. In the Bay Area where million dollar homes are common place, home buyers are facing ongoing annual taxes in the $10,000 to $15,000 range. Ouch! Lets not even mention the inevitable future increase in income taxes required to balance the massive government overspend in the past 5 years.
The fortunate thing, (or unfortunate depending on your perspective), is that real estate is not a liquid asset so the market cannot collapse overnight. But we are going to be in for a slow downward grind. One final point; people need to change their expectations. Home ownership should not be a path chosen because of the opportunity to reap large profits. If that happens then that�s a great by-product but sometimes breaking even is OK. You do after all have to live somewhere! I've been looking to buy, but it just pays to rent. I was considering a brand new, never lived in condo which is renting for $2200 and the buyer bought for probably $670K. Factoring property taxes and HOA fees, the owner will be lucky to net $1200 a month to pay his mortgage. So I would be borrowing his money at 2% to live there while he is paying at least 6% interest on his mortgage. Another way to look at it is that it would cost over $5000 a month to pay interest, taxes and HOA. Why not rent and keep the money in the bank!
Good thinking Will! Not true I live in Las Vegas as well and I've seen the value of my home go from $380K last year to $325K and prices are still falling as builders keep building in a market where there is no demand.
While there are many valid points here, people tend to get in a panic mode very easily. Yes, things could get ugly, but dont underestimate the size and resiliency of the US economy. Whatever happens, there is still a huge pool of cash that needs to find a home. Corporate portfolio managers need to get their portfolios invested, and 4.691% for a 30 year bond (todays tresury rate)is just not enough return. Corporations are still willing to take on risk to increase earings, and because of that, riskier investments will ays be around. If its not in the arena of sub prime loans, then it will be somewhere else. This is all the result of a prolonged abundance of very cheap money; a problem in our economy that has to be dealt with, reguardless of the real estate debacle. But again, dont underestimate the resilance of the entire US economy.
SELL NOW OR BE PRICED IN FOREVER! The Ponzi scheme of the last five years is coming to an end. Enjoy the show.
This is a great thread, thanks for all of your great comments.
I am going to be a first time home buyer in next month of so (NOT VERY LIKELY THOUGH AFTER LOOKING AT ALL YOUR COMMENTS). Last year when i decided to build a house with a builder i was seeing the sign of Housing market slow down but, i was hoping that it will go towards stablization in 2007 but it doesn't look that way. The funny thing is these days when i see national trends i see big downfalls and when i see local trends in our Dayton/Cincinnati local market it still shows price increase by around 5% as compare to the last year. This doesn't make much sense. I am sure even if this local market is not seeing down fall yet, it will join rest of the country fairly soon. I purchased my house in 1993 for $130,000 putting $7000 down. I just sold it for $390,000 that much. Not bad for a $7000 investment. People told me then that I would lose money. While they paid rent for 14 years and never seeing a dime back, I made back every penny and more that I paid. Now I am buying a house on the water. In 14 years my renting friends will still be living in apartments while my house will appreciate.
I assume most folks posting comments here are heavily vested in the stock market (as am I). Even Alan Greenspan doesn't think any of your dire real-estate scenarios will pan out. But keep in mind that if they do, the result will be catastrophic lossees in all asset classes -- including the stock market. So while there will be "bargains" in the housing market, you're not likely to have any money to take advantage of them.
I live on Cape Cod where the average price of a home is $350,000. When I say average, I mean a 3 bedroom ranch home in a crowded neighborhood, built in the 70's, hollow core doors, cheap cabinets, maybe a bath and a half, it's kind to say that needs a lot. Even if you could save $35,000 to put 10% down (who can really save $35,000!)you would have payments of $1888.00 plus $225 for real estate taxes and you'd need a ton of money for maintenance. And you wouldn't even want to live in it! At the traditional ratios, you would have to make over $75,000 to qualify (How do you save any money making $75K, especially with kids and college. The only reason to risk your $35,000 is in the hope that the property value goes higher, which until now, that's what has happened. We are going to see a dramatic decrease in the price of housing, this is the tip of the iceberg. Our foreclosure rate is off the charts, our savings rate is in negative numbers and credit card companies nail you with 18-21% rates which escalate with late payments. Strap on your seatbelts, we're going for a ride. Remember the tulip story in the Netherlands 400 years ago?
The sky is falling?!
Markets that are shedding huge value are the same ones that have increased over 100% in the prior 5 years, some increasing as much as 200% as of 2000. The same markets will see a bounce down to about where they were in 2000 and a quick recovery to 2004 levels. High cost homes (top 30% of local market) will stand to lose 15-20%. The rest of the market will shed 5-10% and recover most by 2010. this is like every type of market....the flavors change a little but the cycle is always simmilar. The only real threat to the national housing market is the same as for every other issue in the nation, baby boomers over the next 20 years. This article is a load of BS. Of course there may be a correction but it won't be that bad in most places. There are still plenty of buyers out there with fat wallets. Just because some delusional idiot can't buy a 500K home with a 50K a year income doesn't mean anything. Working in fixed income, I've heard the rumors related to future real estate blow up for about four years now and all that's happened is a slight slowdown. Nothing but hype!
A funny thing happened on the way to your financial web site -- I encountered two ads for what were obviously "sub-prime" type loans, offering refinancing at rates of less than 2% APR and "interest only" payments. So I decided to have some fun. I went to several other financial websites, many of which had stories on the demise of the subprime industry, and, in the course of less than 20 minutes, found 14 ads for such loans. It appears, then, that one of the causes of the easy money real estate inflation is the financial news establishment that warns so much against it!
Not only is the Funny Finance loan alive and well, so is the housing market, at least here in Southern California. My wife and I visited several new housing developments over the past month, in Palmdale, Oxnard, and Camarillo, only to find that all the homes have already been sold and that a couple of other developments have all been presold. I guess I should do my future shopping in cyberspace, where home prices are crashing, financing is scarce, and I can get that home in Santa Barbara for a lot less that a million dollars! Dream on -- the biggest mistake people make in real estate is to buy later istead of now! A lot of the doomsday scenarios mentioned above are as likely to happen as the sky falling. But thunderstorms do result in lightning strikes.
needless to say, there will be pain, angst in certain parts simply because home values got out of control, and some people got into houses because tomorrow it might be more costlier and took advantage of teaser loans and low interest rates. For some people just the mere fact that home values will decline over the next year is a shocker and that causes them to burst into state of denial. Although the sub-prime situation is likely to get ugly specially if interest rates dont change and lenders tighten the noose on re-financings which are likely to spurt Now.. but in the end its good for the economy to get this fluff out of it. The last few years have shown that people have started to trade in real estate like trading in stocks, making it a very dangerous game. Until this housing bubble people considered houses as primary place of residence.. but now you have investment clubs spanning all across the country making the housing bubble the last bubble of this decade.. and likely to be one of the most expensive ones Hey Walter in Princeton -
I second your question... I actually went down comment by comment and was amazed that no one raised that issue... NOT ONE person! :) PAT - Have you looked at the Memorial area in Houston? Would die to find a house that sells for 20% less than five years ago! I think the same forces that drove the stock prices up in the late 90's is behind the upswing in housing prices in the early 2000's. To use Alan Greenspan's term; irrational exuberance. People have money that's performing poorly in stocks and when property became the place to invest, they moved their money into that market. It's not just Americans that are driving this. We have lots of money going overseas. They have to do something with that cash and our bond prices are pretty low. Real estate was a better deal. Fixing this is going to take fixing our current account deficit.
Let's all remember we pay for the rareness of the commodity, in this case, land and housing. In some areas that are land short and industry healthy, housing is in demand and so prices will reflect that health. Other areas that are short on jobs or have a great deal of housing on the market due to construction or the graying of the community don't sell so quickly, but they still sell, so please keep that in mind. A glut of housing might also happen when a particular factory or industry shuts down and many people are moved or need to move at the same time... look at what happens when the military closes a base, like Long Beach some years ago... Charts and graphs are only indicators to a particular window to a particular scenario and shouldn't be used to scream wolf. Be careful please, you're scaring the general public or at the very least, possibly misleading them. The media has been for a number of years writing about a bubble. Well I'm in the housing industry and I know that life continues to happen... people move because they choose to, they have to or they can. We're healthier than that colorful graph. I'm telling America to not be afraid to live your life. You want to buy a house? Buy a house... it's still an excellent thing to do.
Walter 1978-2003 is a standard forcast period
1979 1980 1981 1982 1983 1978 is used as a base year Owning a house is the American Dream. One of my co-workers whom make about 60k a year, and he bought a house for 480k last month. How does he do it? Yes, it is one of those crazy loans, negative amortization loan. He put down 5%, and his monthly mortgage payment is about $1200. He will most likely loose his house in the next two or three years if the interest rate goes up or the house price doest'n goes up. I think we need to educate our people the word "affordability".
NYC thoughts,
As the RE markets in other areas of the country take a beating, one here should now be thankful of those "pesky" co-op boards. They have collectively keept away the exact reasons for now that other area prices are recieding big time. With 99% of co-op's you could not finance without 20% down or receive the rediculous mortgages that others have. This alone has helped keep and raise NYC housing prices. Another reason, here prices are so high that there is very little room for both the speculator and the second home owner type deals. Mostly never heard of except in very extreme circutances. It will take more than the sub-prime market mess to dent the real estate value here. We have other problems on the horizon to be sure, but not this one. Walter and M. Halmagean,
The chart does not show performance from 1978 through 2003. It highlights the worst five-year performance for each market shown, within the 1978-through-2003 period. For example, the 19% drop for the LA area took place sometime in the mid- to late 1990s. The Grand Junction and Peopria drops took place in the 1980s. Great list! More original ideas here than in all the media put together. it's usually real estate broker 'propaganda', or meaningless drivel that comments on the state of things without any real predication.
That said i am living in the 4th most expensive city in America: Honolulu. ave single family homes (and small) are $700,000. condos around 450,000 unless you move to one of the suburbs 20 miles away. feel my pain...ALoha is evaporating as people feel the stress...i tell you, people are lookin at each other funny these days, and you can feel the frustration of the common man. i make $70,000 a year and can't afford to buy a place, having missed the boat in '03-'05. i hope this correction happens and all the idiots who took out big mortgages get slammed. wheeeeeee! Come on People! I bet most of the people posting comments on this blog listend to CNN during the 2002 - 2006 span and never bought becuase prices were bound to fall! How much did that cost you? I can sun the sun is going to burn out and I will be right someday!
Prices are going to stay flat for awhile but no drasitc drops are going to take place. We may see 5-10% dips in certain areas. And then the investors will jump back into the market and steal all of those foreclosure homes! O Yeah one last thing! The banks are going to come up with even more interesting financing such as 40 (already in place) or 50 year loans. 2010 prices will be well above todays prices! Since I never bought a home, I suppose I will not commit suicide over this drop.
Every market corrects, weather it's stocks, bonds, cash or real estate. The only cause is, and always will be, human emotion. (We) put value on things and take them away. A chunk of land is the same as it was 1000 years ago, only we put a value on it. And when people start to panic look out. The old saying" sell your stocks when your barber starts giving you advise" also rings true in real estate when everyone jumps in to "flip" houses and make "easy" money. What goes up must come down(and correct) and the bigger they are the harder they fall. Many people will get hurt in the next few years, it's the people who keep their wits and think clearly, they will be the ones who really come out winners.
I get a kick out of those who think them media is "panicking". LOL!
I saw a post where some genius in Malibu thinks housing crashes overnight. LOL! There will always be those heavily invested in Real Estate who are unwilling, unable, or a combination of both, to acknowledge reality. The bubble is over folks� Well here on the east cost of florida, prices have shot through the roof and the average home price is 450K, there goes the cops,firemen,teachers and others priced out. Not to mention the property tax has jumped a 100% or more in 12 months. Now your property tax is same as your mortugage Now try getting home owner insurance after Jeb Bush sucked down 9 1/2 millon form Insurance companies.
Home prices are not falling, yet homes sales and condo sales has fallen flat. Florida is screwed............. WTF - Another Bush I really, really do hope that bubble burst. Specially in Phoenix!! My husband make well over 6 figure but we can not buy decent house at decent neighborhood with fixed conventional loan. Buying a house suppose to be a joy. not a getting to huge debt..or poo.
Simple math. 1999 2bd/2bth condo in my SD coastal neighborhood was $99k. 2005 they were selling for $425k. 2007 they are listed at $295k on the decline and not moving.
I live in a western suburb of Rochester NY and the BRAND NEW 1600 sq ft house that I bought in 1985 for $72,500 has NOT EVEN doubled in 21 YEARS ! It's only worth $117,000 now. That's not bad for a house on a half acre that borders woods, but the high cost of living elsewhere means I wouldn't consider moving to a place where a lesser house costs 3x as much !
I agree with Willow. Take it from an OKIE who remembers the oil bust. Treat your home as a HOME not a cash machine. If you're upside down right now just live in your home and enjoy it until things get better. Besides, there are plenty of guaranteed investments out there, they aren't glamourous but then neither is a foreclosure.
Anyone who has bought since mid 2003 and held on until now has really been renting for that entire time in regards to equity gains. We are back in 2003 again today! Anyone who bought after 2004 at 100% financing is underwater today! The end of this won't come until the new president is elected and in office for a year! Hold onto your FICO scores until then!
I used to live in LA, CA. I had purchased a house in 2001 (fighting off 12 other offers at the same time) and by 2005 I saw an opportunity to unload my home for triple the amount. I did and moved elsewhere where home prices seems to make sense. I for one thought that the prices simply did not make sense. Wages did not go up nor did the IRS decided to stop collecting taxes :-) to support this frenzy.
With the recent news of the subprime lending market, it all started to make sense. I am happy that I got out and waiting to get back into the LA market when I see the low point. Sad, but my happiness is built on top of other people's stupidity and misery, however, I won't feel sorry for it. Why would I want to own a house if I can rent it on the cheap and invest the money elsewhere? Go to
Rent vs Own for a comparison. In many cases, it is far better to rent than own these days. Do the math before you write the big check for a house down payment. Beware of victimizing people who can�t afford their payments! The only way things will be affordable again is by allowing fundamental economic principles to unwind. Speculators (read as �the many stories you will see about little old ladies who can�t afford their new payments�), as well as mortgage companies and investors MUST pay for the risk they took with these financial instruments. If congress bails the banks and "little old ladies" who can�t afford their payments, then prices will not drop and those who patiently � and wisely � waited will get the short end of the stick. Remember, no one is entitled to wealth and those who speculated in the real estate market (no one in their right mind would pay the prices people were paying for stuff) must pay for their risk they took - like any other economic entity (even if that economic entity is a little old lady).
What goes up will eventually come down. This market was completely inflated. Just like the Internet boom when I heard taxi drivers and waiters giving stock tips I knew it was time to get out. The same goes for the housing bubble. People don't realize these "exotic loans" were never meant for the average worker. They were invented for the millionaires who could already "afford" a $25,000 a month mortgage but wanted to invest their money somewhere else for a better return. The key point here is that they could afford the payment anyway. When people making 40-60K a year and are buying 500K+ homes thinking the market will go up you know we have a problem. If you have one of these loans get out now if you can't afford the what a normal 30 year loan would cost.
Foreclosures are abound and for the savvy investor their will be lots of opportunity. Buy low - sell high! Keep on dreaming, Jeff in Newport. That's the same line of BS that people bought into in Tokyo 20 years ago. Guess what their financial wizards dreamed up? 100-year mortgages. They called them "three generation mortgages". Guess what happened to Tokyo's bubble? 15 years of decline...
Sorry to rain on the gloom parade, but remember that when financing real estate with a 30yr much of the borrowing is paid back in inflated dollars, i.e. the mortgage is an inflation hedge. So when the baby boomers retire, inflation spikes to 50%/annum, the mortgage basically goes away in real terms over a period of time.
My philosophy on this kind of matter is that, like anything else, with the "wrong" ingredients, housing prices can always drop, and with "perfectly wrong" ingredients, drop very steeply (and the opposite is true too).
Take my parents' house in Japan. They bought the house in 1974 for about $200,000. There were right ingredients in Japan for housing prices to appreciate at one point, and by 1991, their house was assessed at something like $1.2 million. Then perfectly wrong stuff came in, and today, in 2007, the same house has a market value of about $350,000. My parents did not lose money, or did they care one way or the other as they were not going anywhere. But what about those neighbors who bought in 1991? Up until then, everyone believed that the real estate value would never come down in Japan. Right. What goes up does come down, and comes down very hard at times, with wrong ingredients. Thanks Jeff for being the voice of sanity..here is the real deal:
The CNN site---like all sites--- have to come up with new material to post daily and quickly to keep readers coming back. This in turn brings the CNN site advertiser revenue. Doom and gloom brings more eyeballs to the site than, "Hey real estate is going through a normal correction." Bottom line: Hold your real estate for now if you can...they don't make any more land. Some very good points here. The only thing wrong is those of us who are reading and posting are not the one's who need this information. The problem is not the "12 National Builders" (these are my thoughts) who can control the process. It is the problem of ignorant, money hungry local builders who claim to be custom. In fact they are only higher priced production builders with more "upgrades". In a normal market these builders are the ones who a homeowner will go to for their second home after they went through the production homebuilder. This naturally should take place about 6-10 years (or even longer, i.e. kids out of the house) after they build w/ a production builder. All the local "custom builders" heard how much the production builders were making on their net investment and decided to try it out. They purchased land, did a small development, built spec's, hired "has been" production sales staff, and flooded the market even more. What is worse, they don't have the six figure person who studies the local economy every day like the "big 12". What you are left with is an overpriced home sold to people who possibly can afford it, yet is still a strugle to get by. Now these people have to turn and sell their production home at an over-rated price to a buyer. Most of these buyers are your "sub-prime", or IO's, arm's, etc. The other buyers of these production units are investors. They have bit off more then they can chew as of now. I don't call it ripple effect, I don't have the words to describe it. I just tried to warn as many as I could in the prev. years about this happening. Those people thought I was too young to be shelling out advise. I am hearing some "not so good" news on their end.
Why does it seem like only those who are leveraged to the hilt refuse to admit there is a liquidity crisis?
The CEO of Countrywide Financial, in an interview yesterday, said, "There is currently a liquidity crisis in the sub-prime market" If anyone is dumb enough to think the upper echelon alone will save housing, you deserve to lose your shirt in this over-inflated market. Only those who financially can't handle a loss in real estate, refuse to see the reality that is before them. I know buying a house is the American Dream but man, I still want to live. I currently rent and looking for a house with my brother. Our income is around $150K together. I went over my numbers and was thinking, how can I even live my life after putting all my money into the house. What about traveling, going out for fun? Those things are important in life too. I'm hoping for a 10% reduction in price... then I can feel better about getting into a house. One thing people have to consider is that the real estate market has given a ton of people jobs. There is clearly going to be a downturn in business so what are they going to do? Where are they going to live? I ran into my friend that works at Etrade yesterday and works with mortgage loans. She told me all the money is in foreclosures now. That might give you a hint of where this is going.
The only people taking a "loss" are the ones who bought the year the bubble peaked...or financed on risky terms. Everyone else is going to at least break even.
Ok people you need to WAKE UP that MEDIAN PRICE stats =useless and trickery.
Read up on it. Median continues up when Actual Prices go down. This has been happening EVERYWHERE. Median is not average and its not same home sales. It just means more higher end homes are selling. "Rich people keep buying" is what the headline should say. New homes are pricey and that skews the number. Who cares?! However when you see median go down you can add 25% to that to see an actual price decrease that is happengin. Check out ZILLOW.com for ballpark in your area. The sad thing is I meet people who still say 'but prices are still going up' because the realtors publish the median stats, NO THEY HAVE BEEN GOING DOWN SINCE LAST SUMMER AND STILL TANKING. They might as well make up a number thats how misleading median is! Its a travesty it is. At the risk of stereotyping, doesn't the subprime market drying up affect a certain economic strata and correspondingly, a home value level? Meaning, there can't be a lot of subprime buyers getting in above $300- 400k, can there?
Just wondering if this is the flip side of the dot-bomb burst, where paper houses over $1M were suddenly going for 30% off. If so, is there a slice of the home selling pie which is relatively stable and thus immune from these two ends of the buyer spectrum. C'mon...make some of us middle-of-the-road guys feel a little optimistic!! Thank goodness Hillary and Dodd are going to pass legislation to help out distressed borrowers. Now I can trade up from a boxster to a 911 when my lease is up next year!
See when the teaser rate expired I was vacationing in Hawaii and didn�t notice for a month or two since I took a few months off of work to travel. Everyone should take many expensive vacations, do like I do and use the mortgage payment money for it. Now I�m back from Hawaii (with an awsome tan BTW!) and the credit cards are maxed out, the mortgage is behind and the rate reset up! Its not fair. I�m glad this is The Dmocrats platform: Everyone deserves 4 months a year vacation, a new porche every other year, and mortgage debt forgivness to pay for it all. Hopefully they can raise the FHA loan limit like Hilaray wants to 500k so I can buy a beach front condo in Maui, and lie on my application that its a primary residence. That way I can get it for no down payment, guaranteed by the you dumb tax payers and then rent it one year and flip it for HUGE $$$$. Oh and I can write off my vacations too! THANK YOU DEMOCRATS -THE PARTY OF THE REAL ESTATE FLIPPERS!!! REAL ESTATE IS THE NEW SOCIAL MOBILITY VEHICLE, YEAH!!!! Let the War On Savers continueth! real estate is a local market. if you bought into a market at the top where there was rampant speculation then you are obviously going to see a drop in your homes value. Most parts of PA, NJ, haven't seen any significant drop in values aside from certain pockets of market weakness. i know that isn't the case in places like FL, NV, AZ, etc. where people went nuts on cheap real estate and drove the market over the top. also remember, like it does with everything else... the media built the market up during the last several years getting people in a frenzy to buy homes, now they are doing the opposite. they play on your emotions for one reason... to sell advertising. if you are able, stay calm, stay put, hope to keep your job or work to get a better one, and everything will likely turn out just fine. the ones who keep a level head are the ones who survive. good luck.
Prices have been falling in some markets that's for sure. I sold two houses in CA and Phoenix last spring both dropped in value 5% and 21% respectively. People I know are suffering losses in Florida and Vages. These are investors and they are loosing money monthly because the rents do not cover the mortgage/tax/insurance payments and they can't sell or refy because they are upside down. At this point they are thinking of walking away and foreclosing before wasting cash for another 5-10 years. These people are not alone there are plenty of other investors that are in the red and as conditions get even worse they will walk away from their properties and that will only add to the inventory levels.
As of today, in most cases, buyers will need to have 5% down payment. In the coming months that might even increase to 10%, if the market will show more weakness. While majority of the country will survive the downfall, markets in CA, FL, AZ, and Las Vegas will suffer for a very long time. In Los Angeles we have seen prices drop accross many neighborhoods, but for some reason the averages still point to a growth from 2005 to 2006. I am still puzzled how this happens. Majority of the renters can not afford to buy their first homes. Also many homeowners, who refied recently, have spent most of the money on remodeling, vacation and etc. Now is the time to pay those bills. Very soon we'll see justification for paying $800K 60 year old small houses. Only time will tell what happens, but the current fundamentals here are way off in LA and most of CA. I bought my house in Casper, WY in 1994 and it's appreciated almost 400% thanks to yet another boom coupled with "the easy-credit-driven housing inflation of the early 2000s". What's amazing is watching hundreds of homeowners who have lived here long enough to remember the last bust take their equity and trade up into a nice new big house with a mortgage that will be underwater for sure in the next one. In the oil patch, a bust eventually following on a boom is 100% predictable, but knowing that doesn't lead many people to make any better financial decisions than the rest of the naive, bubble-intoxicated nation.
A 20%, 30% or 50% drop in real estate prices would have no effect on my wealth. How could that be? Because I don't measure the value of my house in dollars (or Chilean Pesos for that matter). My house is worth 1 House. I could sell it and use the proceeds to buy another one just like it (same sq. ft., same location, same pool, etc.). I wouldn't be 20% poorer. I wouldn't have 20% less kitchen or 20% less pool and I wouldn't have to reduce my spending by 20% because I my income would be the same.
What's my point? If you buy a house to live in, you shouldn't worry about how much money a real estate speculator (a.k.a. ex-dotcom speculator) is losing. What Greenspent said & What Greenspent will be remember for:
�Irrational exuberance� precedes: �Rational emaciation� Pat,
This post is useful in several ways. First of all, by showing the extremes in certain local markets over the years you help point out this current upturn in prices isn't a national phenomenon. Real estate is very local and the current areas of the country facing pricing drops are contained to those localities for specific reasons. Look to the Midwest as an area that didn't have a pricing boom over the past five years. Look to Utah and Washington and New Mexico as areas that are still seeing appreciation gains. Real estate is very local and the so called housing bulls take offense to the mainstream media suggesting otherwise. The second point you make here regards jobs. That's the biggest reason there are housing bulls during this housing downturn. If jobs were bad, I don't think there would be any bulls, but they're not. While house prices have risen significantly, wages have lagged behind. The 2001-02 recession retarded wages which are now seeing a comeback. Even after the recent downturn in the stock market, unemployment is still dropping. Today's surprising employment numbers missed the headlines I guess to keep the bad news flowing. After doing my own research on past housing trends, I have my own theories about house prices. You can read some of them here and here. 30 yrs ago a person bought a house that was well within their means with the intent to one day own the home. Today it seems that purchasing a home is a way to get rich quick or as an ATM cash machine. I bought a home, will pay off the loan, and own it. That will be the one thing that no one (bank) can take from me. Many will loose out in this downturn and may learn a hard lesson: Market fundamentals allways win.
This is getting so boring. Renters |
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