The Housing Market: The Disappointment Of The Decade
by Alexander Green, Oxford Club Investment Director
Thursday, May 28, 2009: Issue #1006
My colleague Dr. Mark Skousen and I have been having a long-running, good-natured disagreement about the direction of the national housing market.
He calls buying real estate “the investment of the century.” I think it’s more likely to be “the disappointment of the decade.”
He thinks housing prices are about to rebound. I say rebounds (in the price of anything) only come off a genuine bottom. And, despite the precipitous drop in some areas, we still haven’t seen a bottom in home prices.
This week the media reported that the S&P/Case-Shiller National Home Price index fell 19.1% in the first quarter.
Bear in mind, that is not the fall from “the top” but just in the first quarter from a year ago. Moreover, the plunge is picking up speed. It was the biggest drop in the 21-year history of the index…
The Housing Market – One of the Greatest Financial Bubbles of All Time
As I’ve been warning for five years now, we’re witnessing the unwinding of one of the greatest financial bubbles of all time – the housing market.
Yet home prices will not simply “pop” like Internet stocks. It’s going to be a prolonged, gradual deflation.
I’ll explain why – but let me start with my standard disclaimer:
Yes, all real estate is local. Yes, some areas of the country will hold up better than others. Yes, outstanding properties in primo locations will hold up best of all.
With that out of the way, let’s also note that virtually no market is experiencing appreciation right now. Even homes in the New York area – a former bastion of strength – plunged 11.9% in the first quarter.
Trust me, this is not just a result of a weak economy.
Housing Market Prices Peaked At Ridiculous…
Prices at the housing market peak were ridiculous. Ask yourself why home values tripled in many areas from 1995-2005.
- Was it population growth? No.
- Was it inflation? No.
- Was it the cost of building? No.
- Was it sky-high rental income? No.
- Was it a huge leap in discretionary income? No.
It was three things:
- Rock bottom interest rates,
- E-Z credit,
- And an unshakeable conviction that real estate “always goes up.”
It doesn’t. And now everybody knows it.
When Will The Housing Market Reach Equilibrium?
The reason it will take years for the housing market to reach equilibrium – where buyers and sellers can easily meet – is that the market for newer homes is clogged with three types of sellers:
- The first is those who bought in the past few years and owe more on their house than what it’s worth. (No seller relishes the idea of showing up at the closing and writing a big check.)
- The second group is those who bought before prices peaked but pulled the equity out of their homes. Like the first group, they’re stuck.
- The last group comprises unmotivated sellers who can’t get out of their minds what their house was worth a few years ago and – seeing similar homes listed at sky-high prices – won’t reduce their asking price in a meaningful way.
Moreover, banks and mortgage companies – stung by their own lax policies – are now requiring bigger down payments and better credit ratings from borrowers. This further diminishes demand.
The Housing Market – It’s Not As Broad-Based As We Thought…
So, if the housing market is not a broad-based buyers market as transaction-starved realtors keep telling us, then how come average home prices are down so much?
- In many markets, up to half of all sales are foreclosures.
- Short sales – transactions where the lender allows a distressed seller to unload for less than the mortgage balance – often make up another 20%.
- If you attend a foreclosure auction – or can get a bank to accept a short sale – you can indeed find bargains in today’s market.
- But if you have a realtor driving you around showing you a bunch of new listings, get ready for disappointment. They will tell you it’s a buyer’s market. You’ll keep asking “where?”
In some places, of course, it is. Miami, Detroit, Orlando, Las Vegas, Phoenix and Sacramento are a few good examples. Average home prices in these distressed areas are down 45% or more from the peak.
But, in other areas, homes aren’t down nearly as much as they will be in a few months – or a few years.
How can we know this? Because the inventory just keeps piling up. The Associated Press reported this week that the backlog of unsold single-family homes just rose to the highest level in more than two decades.
I’m not gloating about this, incidentally. I own two homes myself and am fully aware that we won’t see a genuine recovery in the economy or the banking system until the housing market stabilizes.
Alas, that day is not here yet.
And – are you’re listening Dr. Skousen? – It won’t be here tomorrow either.
Good investing,
Alexander Green
- Why Housing Prices Will Keep Dropping in Value
- The Housing Market: Three Strikes Against Buyers
- Housing Prices: Why Greenspan Is Right About Real Estate Investments
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10 Responses to “The Housing Market: The Disappointment Of The Decade”
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May 28th, 2009 at 6:26 am
“Alas, that day is not here yet.
And – are you’re listening Dr. Skousen? – It won’t be here tomorrow either.”
Yep. Where I live, I’m expecting it to be years before prices reach bottom. It didn’t rise as fast or as far but way too many people fit into the 2nd and 3rd group in my area.
My sister is “trying” to sell. It’s been on the market for a year and half with a few “low ball” offers (which were above what she paid). I’ve suggested to her to lower her price and that the longer she waits, the lower the price will be. No dice – she has a number now that she won’t go below because that’s what it’s “worth”.
She’s now in the process of moving and plans to rent the house instead. Oh, well. We rent and I suspect downward pressures on rent like her property will be helping us very soon.
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May 28th, 2009 at 6:29 am
Your reasoning, as far as it went is sound. It does not however deal with the fiat nature of the USD. Housing prices are denominated in USD. Short term interest rates are controlled by the US government. Therefore the USD dollar pricing of real estate becomes another X factor.
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May 28th, 2009 at 8:50 am
As a realtor for the past 30 years I feel the comments you made about the inventory and the absurd price escalations you’re correct.
An other point is that a number of potential sellers are not putting their house on the market because the market is so slow and feel it will not sell anyway. All are waiting for the upturn in the market.
The problem I personally see is that developers paid highly inflated prices for the land they purchased and escalated the prices of homes accordingly and even at whatever prices the buyers were willing to pay with easy obtainable mortgages. That in turn escalated the prices on resales beyond what was a normal level of appreciation.
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May 28th, 2009 at 10:30 am
Alexander, you are totally correct. I live in Las Vegas (ground zero, and my daughter is in real estate. She says that almost all her sales are short-sale and foreclosures. The only other properties that are selling, are being greatly discounted. Additionally, she says that more foreclosures are about to enter the market due to the ending of the moratorium on foreclosures. Also comercial real estate is also suffering. I don’t see real estate bottoming until unemployment improves.
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May 28th, 2009 at 11:51 am
I fully agree with your analysis. I believe that Dr. Skousen wrote that US economy is not dependent on consumer spending now.
I am glad I am learning from Investment U – from Porter Stansberry, Steve Sjuggerud and from your writings…..
I have been subscribing to several newsletters over a decade or more….
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May 28th, 2009 at 12:08 pm
Alex,
You have it right! I suggest if people want to convince themselves, just go to http://www.realtytrac.com. Put in your zip code, click “view map” and see how many homes are currently going through foreclosure just in your area. Now go city to city. This should be very convincing that low priced inventory will be here for a long time. Everyone’s realestate values will continue to drop for years. Also, peoples credit will be tarnished, jobs are being lost and the self employeed can’t get stated income loans, all reasons that will reduce the future potential “buyers pool”. In addition, our large baby boomer population as they age will begin unloading their multiple realestate properities over the coming years in order to simplify their lives. The population curve behind them is not large enough or wealthy enough to absorb all this inventory. It’s a simple- to much supply and not enough qualified demand senario.
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May 28th, 2009 at 1:06 pm
Another factor supporting your argument is the lagging nature of home prices. When the recessions of the early 1980s and early 1990s ended, residential real estate continued declining for another two or three years. There is little to suggest that scenario won’t be repeated when the current recession is over.
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May 31st, 2009 at 2:49 pm
Thank you for your clear cut explanation of how so many people wanted to believe that their home was primarily an investment that couldn’t fail to bring endlessly escalating returns. As a real estate and interior design professional I have witnessed many bright, successful people make giddy decisions about the value of what they own. So many thought they couldn’t lose by using “OPM” and neglected to think through a worse case scenario. Everyone wanted to be another Rockefeller.
If your first purpose in owning your home is not for your own security, shelter from the elements in a community in which you can thrive and at a payment you can really afford, it is inevitable that the day will come that all those “other people” will need to be paid. There is no joy in watching the foreclosure numbers as the financial, personal and social costs of this hard lesson will play out with pain for many. Lives have been “flipped” in the process.
Now the giddy process has moved to the foreclosure seminar attendees on their way
to making a killing in real estate. We’ll see.
Everybody needs a place to live.
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June 1st, 2009 at 7:51 pm
It will be years before home prices go up. Yes there is a lot of inventory out there and it will take time to draw this inventory down, but we are headed for a period of high inflation, I recall when I bought my home in the mid 80’s, interest rates were pushing 15%, the higher the interest rate goes, the more pressure there will be on home prices, so until we get though this excessive inventory and after we peak on interest rates, then we will start to see home prices appreciating again. So unless you have to sell your home, hunker down and ride this one out, I estimate its going to take 3 – 5 years, especially in the former hot markets of CA, NV, AZ, and FL, where it might be more like 5 – 7 years. In the mean time if you want to invest in rental homes, now is the time to load up, plenty of deals out there and you should be able to make it cash flow. If you can’t make it cash flow, then it’s a bad deal and go look for another one.
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June 7th, 2009 at 9:50 pm
Alex,
It appears to me that both of you are right in a sense. If one is interested in a property for a long term rental income, then this is a decently good entry point if you can find reasonable tenants w/ good employment or prospects. If, on the other hand, one is looking for capital gains on a property, then you are probably right that the market hasn’t bottomed and probably won’t for many years similar to Japan for the last twenty years.
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