Posted on 08/25/2006 8:57:15 AM PDT by Hydroshock
NEW YORK (Fortune) -- For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense.
Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset.
Real estate slowdown New homes slump worsens
Pace of new home sales falls more than forecast as inventory builds, prices decline. (more) Freebies for home buyers Home sellers are trying to find creative ways to get buyers to sign on the dotted line. (more)
Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.
The newest sign that the myth-makers were spectacularly wrong is the data on existing home sales for July. Nationwide, median prices rose .9 percent.
But even that meager number masks the real story. Prices actually fell where housing is most vulnerable, in the bubble markets in the West and Northeast. In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.
Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It's time to examine the clichés that the "experts" - chiefly analysts and economists from realtors and mortgage associations - used to convince Americans that what they're seeing now could never happen. Here are the four great housing myths - and why they never made much sense in the first place.
(Excerpt) Read more at money.cnn.com ...
Whenever someone says "this time it's different," it isn't. Period.
Here is the real story. A newly re assessed home valued at $687,000.00 now up for sale. Asking price $885,000.00.
Tech Bubble under Clinton: "I have $2 Million in Enron stock! Whoo-Hoo! I can retire!"
Rude awakening Type A: "My Enron stock has no value. I have to keep working."
Rude awakening Type B:"My Enron stock has no value. Good thing I diversified."
Real estate bubble under Bush: "I have a beautiful home! It's a $1 Million mansion!"
Rude awakening Type A: "I have a beautiful home! It's a $750,000 mansion!"
Bubbles hurt people who have made dumb decisions. It's the nature of economics.
Just curious. Since when does "asking price" constitute a REAL sale price?
"However, I don't believe there will be a collapse in values. Those that could afford what they bought will mostly stay put for a while and sell at break even or slight gains."
Depends on where you live. I can see prices in CA dropping as every business owner leaves the state causing supply to outstrip demand. Here in Florida prices will continue to increase but at a slower rate.
In your example the real estate investor fared much better. Enron investors basically lost all, but the real estate decline will reverse over time, plus the "loss" was just 25%.
I read the entire article and the explanation of the myths was pretty much on target. I predict a 12-20% delcine nationwide in the prices of a lot of homes in the overbuilt housing markets between now and 1st qtr 2008.
Homes can lose a lot of value (25% loss of value is extreme). But I don't think you can point to any house in America and say, "That has no value. You want it? Take it. It's free."
I agree, real estate is illiquid. Anyone owning one home/property needs that as a place to live. Most second-property owners can afford to sit back and wait for markets to improve. Those over-extended in RE are likely to have to dump property and take a loss, but transactions take a lot of time, and our population is growing fast. Very fast. At least here in Colorado where we have a massive influx of immigrants. The only thing that would make prices crash hard is if everyone tries to unload at once. I don't see it happening.
It's a lot more than that. Everyone was touting the rising prices of homes as the future wealth of America - even Bush.
I went through this the other day with a guy, but you are 99.99% right. The only exceptions being those cases (see them a lot on HGTV) where the city cannot even get a bid to tear down a house, so they "sell" the house for $1 on the promise that the new owner will live in and rehab the house. I saw some they did in Chicago -- 5,000 SQUARE FOOT, ALL BRICK, VICTORIAN MANSIONS SELLING FOR $1. These are inner city shut downs now, where the value of the home is less than the value of the crack that could be vacuumed from between the floor boards.
I have always looked at my house as an important, valuable family asset. I have to pay to live somewhere.
Come on, don't you realize the sky is falling?/sarcasm off
How? They still have a house. Getting upset over paper losses is for idiots.
However, most real estate is owned with a lot of leverage. some of the more aggressive "affordability" mortgage products have 0 or even negative equity contribution from the owner. If I own something outright that goes down 25%, no biggy. If I own something with 20% down which goes down 25%, I am screwed should the bank want its money back.
My own property has been holding steady for 40 years. I can't imagine there is any kind of bubble here even if people are always making offers--usually offers to steal below market.
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