Why Housing Prices Will Keep Dropping in Value
by Alexander Green, Advisory Panelist
Saturday, August 29, 2009: Issue #1079
Good news has been swirling around the housing market lately.
The Commerce Department reported on Wednesday that sales of new U.S. homes surged 9.6% in July.
A week before, the National Association of Realtors reported that previously-owned home sales in July jumped at the fastest rate in 10 years.
Realtors are now reminding us that sales have risen for four consecutive months. Thanks to low interest rates and government incentives, they tell us, housing prices will soon be heading back up.
Don’t bet on it…
I was in real estate for years. Asking my colleagues whether prices were likely to head higher was like asking the Army Corp of Engineers whether a river needed a bridge.
The answer was a foregone conclusion.
In many ways, this is understandable. Real estate agents need transactions. Those transactions are less likely to happen if potential buyers think prices will fall. So there is a strong tendency to put a positive spin on things…
Why Housing Prices Will Continue to Decline…
At the risk of being the skunk at the garden party, however, there are many reasons to believe that housing prices will keep coming down in most markets, especially if you’re shopping the high end.
Here’s why…
- A new survey by the trade publication Inside Mortgage Finance found that only 36% of all real estate sales in recent months involved “nondistressed” properties.
- Of these nondistressed properties, only 31% were “unforced or optional.” In other words, nearly seven out of 10 of even these sellers were in the midst of some financial or personal crisis.
To put this in perspective:
- Two-thirds of home sales are either foreclosures or short sales (i.e. banks taking a loss on the mortgage).
- Only a third of the remaining – roughly 10% of overall sales – comes from something we could call a normal selling process.
That’s hardly encouraging.
Meanwhile, the Mortgage Bankers Association said last week that the number of homeowners behind on their mortgage payments hit a new high in the second quarter, with more than one in eight homeowners delinquent or in the foreclosure process.
These pending sales will put more pressure on sales prices. And, thanks in part to the refinancing boom, it’s estimated that approximately one quarter of all homeowners owe more on their homes than they are currently worth.
So why are the headlines filled with glad tidings about the housing market stabilizing?
Housing Prices Appear to be Hitting Bottom in Some Areas of the U.S.
Because in some areas, especially in the low end of hard hit areas like Las Vegas, Phoenix and Orlando (where prices have fallen more than 50%), housing prices do appear to be making a bottom.
But understand that the median sales price of the more than 400,000 homes that sold in July was $210,100. I’ll bet most people reading this live in a house worth more than that.
And those higher-end homes are precisely the ones that are likely to keep falling in value. Why?
- For starters, government-sponsored incentives don’t benefit the top part of the market. For example, the $8,000 tax credit for first-time homeowners – which ends in November – phases out for single buyers whose income exceeds $75,000 or couples making more than $150,000.
- And low interest-rate mortgages backed by the FHA, Fannie and Freddie are only available on loans below limits set by Congress. That limit is $417,000, excluding certain high-end markets in California, New York and Hawaii.
- Mortgages for amounts that exceed this limit – jumbo mortgages – face interest rates more than a full point higher. Plus, lenders – newly sober – are now requiring down payments of 20% to 30% or more on jumbo mortgages.
Tougher credit standards, higher interest rates and big down payments are set to torpedo the high end of the housing market. And at the worst possible time…
According to First American Corelogic, jumbo mortgages are the fastest-rising category of defaults of all types of mortgages.
Add in the death of home-flipping and the idea that the smartest thing a buyer can do is buy all the house he can afford and the planets are in alignment for lower – not higher – housing prices.
I’m not gloating about this, incidentally. I own two homes myself. But if you’re in the market to buy a new home, caveat emptor.
Housing prices in most markets – especially the higher end – are almost certain to head lower.
Good investing,
Alex
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8 Responses to “Why Housing Prices Will Keep Dropping in Value”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
here in Wellington, Florida, i see at least 10% increase in home prices in last 3 months. The home prices are going up. And everybody has feeling the market has already bottomed out. This can create upward loop, which will increase first time home buyer and then second time home buyer, who are upgrading their home to higher one. And then price going up will reduce the homes in water. That will reduce the pressure on the banks and default mortgages and then foreclosures and then home inventory.
I think, this situation can change home prices to go up eventually, whether, there are too much problems now.
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I purchased my house on 2.5 acres in Feb of 2004 for 180k. My neighbor just put her house for sale, identical to mine if not better which sits on 20 acres for 100k. We are in rural MN. PJ
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Thanks for that analysis. I will be returning to the USA in 2010, and plan to buy a house at that time. I was concerned that home prices might be shooting upwards again.
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Every person’s financial situation is different, so any generalized advice will never fit everyone. Example: We are an older retired couple. We have owned our home for 18 years and own it free and clear. House is all on one floor with no stairs, vital given my wife’s severe arthritis. House is one of a very small number in our Central CA coastal neighborhood that has frontage on the water. Prices have risen steadily for many years; they fell during last year’s collapse but much less than most. Conclusion: We are staying put and are sleeping well at night.
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I have a mobile home park in FL – any interst, please respond! THlanks .25 on the dollar
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You left out the BIG one: HVCC. Now that brokers and realtors aren’t driving prices by forcing appraisers to inflate values, one day we may find out that supply and demand have little to do with housing prices.
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The attitude and the comments of the Real Estate Agents is the reason we are in this mess. Real Estate agents drive prices up just like auctioneers. Some type of regulation needs to happen in the real estate market. It is a monopoly owned by the NAR is is policed by themselves. No wonder were in this mess!
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Couldn’t have said it better myself bob though I think they are more like… Racketeers.
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