A Record Drop In Home Prices

Washington Post ^ | October 26, 2006 | Kirstin Downey

[GodGunsGuts]

The price of existing homes last month fell 2.2 percent, the largest monthly decline in the almost four decades the number has been tracked, according to an industry report released yesterday.

Nationwide, the number of existing single-family homes sold fell 14.2 percent in September compared with September 2005, according to the report from the National Association of Realtors. The number of sales has fallen each month since March.

Prices fell everywhere in the country, with the Northeast and West most affected. Declines were more moderate in the South, which includes the Washington area....

[Torie]

It will erase the increase in net wealth from real estate. It will cause the increasing equity in real estate to cease to be an ATM card for some. How important is that? Not very, except in a few areas. In most areas, particularly in fly over country, real estate has not served as an ATM card, and even on the coasts, it has not for most. Most folks don't borrow from their home equity to travel to Tibet, etc.

[GodGunsGuts]

I don't think the possibility of erasing the increase in wealth from real estate is something we can blithely dismiss. After all, as stated earlier, it represents approx. 41% of the entire increase in wealth for the last three years. And when you add the fact that the US household financial balance sheet has been falling deeply and steeply into the red ever since the early 1990s, you have the potential for a debt crisis. In addition, as I already mentioned, disposable personal income has not kept pace with the interest we have to pay on our massive debts. The only way out of this mess is for asset appreciation to continue. The asset bubble of the late 1990s allowed Americans to sustain their extreme level of debt for a while, and then the FED manufactured the housing bubble to sustain our debt once the bubble of the late 1990s popped. But what is the FED going to be able to do if the housing bubble pops? They can't go on creating asset bubbles forever. At some point we will have to pay the piper, and as far as I can tell, when that day finally comes, it won't be pretty.

[Torie]

How much do you think real estate is "overvalued" and where, and how much will it drop in value and when? You need a rather substantial and rapid drop to get traction for your thesis. My opinion? I think real estate is somewhat overvalued in certain markets, and mostly for homes, and not by that much, given continuing low interest rates, and the level of incomes in those markets. It was much more overvalued in 1989. I don't see a big valuation move, absent a substantial rise in interest rates, or a severe rescession, neither or which are on the horizon. JMO.

[sten]

*Pssst*

I said, when the boomers retire... do the math...

1946 + 63 == 2009 at the earliest
(not counting the small percentage that retire early)

oh, and I'm sorry, but that 20 sq miles would not be considered representative of the northeast. Manhattan and NYC would be one of the last places jobs would drain from. First hit would be the burbs and rural areas (VT, NH, ME, parts of Connecticut). Families whose children have left the nest, and are now looking to retire.

Don't worry, naysayers like you already missed the massive increase in FL real estate. Homes selling for $300k in 1995 sell for $2-3m today (beach front example). The average home price is still under $250k... but it will go up as the demand increases with the influx of the boomers. The numbers seen up north and out west are a taste of what to expect by 2012 in parts of FL (limited real estate... waterfront, golf courses, etc)

[Pelham]

I had wondered if you understood Kindleberger, and tried misrepresenting his position by selectively editing his writing.

Or if you didn't have a clue about what he was writing and actually believed that you had posted him accurately.

I'm leaning to you being clueless judging from the lack of substance you often bring to the table. The CAPS for emphasis do provide some comic relief, it makes your posts look like the scribblings of a middle school girl. All you need is a flower to dot your i's.

[GodGunsGuts]

First, as the article that got this thread going already demonstrates, housing prices are already dropping nationwide. But to answer you question, I think the following links give a pretty good indication to what degree housing is overvalued, and where:

http://www.housingbubblebust.com/Fed/GDPvsHSG.html

http://www.housingbubblebust.com/HM/HM-Metros.html

[Torie]

Nice charts. Now it is your turn to comment on their meaning, vis a vis our tete a tete, which frankly escapes me.

[nopardons]

Pssssssssssssssssssssssst.....you painted and still paint with far too broad a brush. You also misrepresent/twist facts; if you even know any, to begin with.

As with all doom&gloomers and bubblebusting proponents, when refuted, you get even more hysterical....in both senses of that word.

Not ALL Baby Boomer retirees are going to sell their homes and move south or west. Many BOOMERS already have second and third homes. And there are a lot more of them, than in any previous generation, who have retired early.

You claimed that ALL of the Northeast would fall prey to problems from a bursting housing bubble. That just isn't so, Not every region, not even every state has seen a large real estate surge in the past 5 years. Ergo, they are unaffected buy a turn down in real estate; whic h IS and has been selective.

Since many people who live in Jersey and Ct. work in N.Y.C., they wouldn't be hit by any job losses.

And BTW, lots of retirees and Baby Boomers own a second or third home in N.H. and Vt.!

You have NO idea what my circumstances are, nor that of most FREEPERS. To make snide, not to mention spurious and fallacious comments about Florida real estate, is also a dumb move on your part. FYI....you couldn't have bought a house on Bird Key, in 1995, for $300,000 unless it was a complete tear-down; pet. And it might be true that in the entire state of Florida, the "average" home may cost $250,000 today, none of them are situated in places that most people consider moving to.

Oh yes and IF you think that you can find a house on the water or in a gated community, or in a gated, golf course community in the southwestern part of Florida, today, for $250,000, you have NO idea what THAT market is like at all!

You're also ignoring the fact that many Baby Boomers have now or soon shall be inheriting a LOT of money from their parents, who were SAVERS; unlike many people today. They have money/assets to use, quite removed from just the price of their own homes.

[nopardons]

I understand Kindleberger's book and figured that your incessant mangling of his positions were because you are and idiot, you were trying to play games with me, or more than likely, both. I see that my assumptions about you were correct.

I quoted from the book accurately and correctly. How could it be otherwise, since I was typing what is in his book.

Your own biases don't mean that what you say is factual nor true. Thanks for providing the unalloyed school boy humor to these threads. It's sort of cute to watch you unconsciously expose your true self, in public. LOL

[sten]

doom and gloom? i guess that depends on where you live. I'm thinking the future is looking pretty sweet, personally. as for a broad brush, that'd be called a trend.

large real estate surge? yes, the southern states have seen a massive surge in pricing and homes sales in the passed 10 years.

bird key? pet? check the time, I think your meds wore off. boomers don't save, yet they have 2 or 3 houses? they are just waiting on their parents to die so they can loot the bank accounts? quality people you must know.

And just like your earlier statement that somehow Manhattan was representative of the northeast, now the southwestern part of Florida is somehow representative of the entire state?

looking at your other posts, I think maybe you need to lighten up on the caffeine.

[goldstategop]

It couldn't last forever. I want to move out before Thanksgiving and I've had to slash my asking price twice.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[Toddsterpatriot]

And when you add the fact that the US household financial balance sheet has been falling deeply and steeply into the red ever since the early 1990s, you have the potential for a debt crisis.

All this gloom with no facts to back you up. It's getting to be a habit.

Doesn't look too bad to me. Maybe you have some different facts?

In addition, as I already mentioned, disposable personal income has not kept pace with the interest we have to pay on our massive debts.

Source?

The asset bubble of the late 1990s allowed Americans to sustain their extreme level of debt for a while, and then the FED manufactured the housing bubble to sustain our debt once the bubble of the late 1990s popped.

Extreme level of debt? Sounds scary!

At some point we will have to pay the piper, and as far as I can tell, when that day finally comes, it won't be pretty.

We know, angels with magnets pulling gold to $1650.

P.S. since you won't (can't?) back up your assertion (lie?) about "Goldstocks paying better dividends than most other investments for the last five years" I did the work for you. Your beloved "AMEX GOLD BUGS INDEX (^HUI)" consists of 15 stocks. 7 pay dividends ranging from 0.1% to 2.1%. 8 pay no dividends (that'd be 0.0%). I couldn't find the weightings of the components, but if they're equally weighted, your index pays about 0.44% in dividends.

Unless you're comparing that to gold (0.0% yield), I'd say your assertion (lie?) was off just a bit.

[Mikey_1962]

Unlike most business that set the price based on the purchased price, gas stations set the price based on the cost of the next 10,000 gallons they will have to buy.

Those prices are determined by the refiners.

[Torie]

I think that is a wrap - game, set and match. :)

There is a case for gold (well gold mining stocks, not gold itself), because historically its price movements are uncorrelated with other equities, and a good diversifier. Incorporating it as about 5% of your equities portfolio makes some sense. Do I bother with doing that however? The answer is no. It isn't worth the trouble for me.

[poinq]

The problem is that its actually good for the middle class and lower middle class. Home prices move up Mortgage payments. Young families spend a far larger percent of their income on housing.

The people who would and could spend their home equity on new cars and expensive shoes have already done so. Now the population is just paying higher and higher mortgages without much of a benefit.

The best thing for America is five years of price stability maybe 1% annual gains and a reduction in building to just over the population growth in every city.

[poinq]

If Housing drops even 10% thats huge to someone who wants to move. If they buy a $1 Million dollar home and can only sell it for $900,000 they owe $100,000 or they just can't sell.

Its this factor that keeps the housing bubble from busting. People cant panic because they can't pony up the money for the loss.

[poinq]

Your graphs show a sever bubble burst in New York, San Fran. and LA in the early '90s. I remember people who had bought houses in each of these markets. The burst was caused by the interest rate changes.

It took people 5 years to get back the value in their houses. And they had to sit in the houses, go bankrupt or leave them empty until they could sell them at or near their buying price.

A bubble burst only moves down the price 10% or 20%. The factor is tied to the rise in interest rates because that is the real cost of ownership.

[GodGunsGuts]

The point is that housing has far surpassed GDP, inflation, and as you can see from the following graphs, there is currently an oversupply. You will also notice that overvaluation is more acute in some areas than others, but it is also clear that it is a nationwide problem. Here's are the charts demonstrating over supply. Notice the oversupply begins with the steadily falling interest rates that began after 1980:

http://www.housingbubblebust.com/PopHsgRates/Overbuilt.html

[Torie]

You are assuming that demand for housing per capita is some kind of constant. It is not. It is affected by price and by consumer choice, including inter alia, the increasing demand for second homes. In any event, the supply and demand clears. It is not as if there are tons of empty homes out there.

[Mase]

I saw your chart in post #142. So what?

Household wealth does not increase in a straight line but it does increase. It declined from 2000-2001 and again from 2001-2002. However, the long term trend is up, up, up. Since 1981, our household net worth has increased by $31 trillion. That's more than the previous 200 years combined. We ran trade and budget deficits (twin, not triple) during that time yet our net wealth increased dramatically. Were we doomed during those years too?

There is no doubt that the increasing value of our homes helped the growth in net worth but still, our homeowner equity accounts for just 20.6% of our total household net worth. If home prices lose one, two or three percent this year vs. 2005, is it really going to have much impact on our net worth? Hardly. Because, as you're seeing now, as capital flows out of real estate it flows back into the equity markets. Witness the performance of the Dow and other indices over the past few months. We have a lot of wealth outside our homes and our household debt, as a percentage of income, has only increased by a half a percent since 1996. Our annual national debt is just 2% of GDP which is lower than the 2.7% it has averaged over the past several decades. How anyone can find doom in these facts is a mystery. Of course, I don't get my economic news from Kitco or Economyincrisis.org.