Is any correction going to be disastrous as long as it stays well above that red line?

Seriously, what percent of all of America's homeowners only bought their home in the last six years?

Seriously, what percent of all of America's homeowners only bought their home in the last six years?

100% of them nicknamed "Model 62"!

My parents bought a place in the late 1970's for a little shy of $40,000. Later in the 1980's, places around ours were selling at $90-100,000. Eighteen months later, houses were selling for about $60,000.
It happens. I'm thinking something similar will happen in the next few years.

Any speculation on which rich guys the taxpayers are going to have to bail out first?

Here is a recent Krugman quote:

Meanwhile, it’s becoming clear that the mortgage problem is anything but contained. ... Many on Wall Street are clamoring for a bailout — for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust — it would be saving bad actors from the consequences of their misdeeds.

The people foreclosed on do not disappear.

One also must, frankly, be aware of the possibility of moral hazard among those who opined for the article.

Expectations drive the market. Many predictions are self-fulfilling for that reason. And almost nobody who is connected enough to have a well-informed and experienced opinion about this market is so divorced from it, and so intellectually honest, that s/he wouldn't be willing to put a thumb on the scale.

A bubble of this size is deeply corrupting. I don't take at face value the predictions of anybody about a market like this any more than I do those of a political functionary about a race in which they are involved.

Japan vs US housing prices, FWIW:

http://en.wikipedia.org/wiki/Image:EconomistHomePrices20050615.jpg

One imagines that we need to factor in the effect of baby boomers reaching their peak purchasing years about now, then slowly downsizing over the next 2 decades.

I just finished skimming today's NYT piece on Countrywide Financial Corp. It's a big time loan shark. Twenty-five percent of its sub-prime loans are in default by 90 days. See:

Inside the Countrywide Lending Spree

The housing market is a little different from the stock market. People don't have to invest in the stock market, but they do have to live somewhere. And the supply side of housing can be influenced by developers, who can stop building unless they have orders (this has, I believe, alreayd happened to a large extent); the amount of stock for sale is a little bit harder to control. Of course, few people sell houses short.... I would also guess that home prices are stickier than other prices because of all the emotions wrapped up in home ownership. The person who posted the graph depicting Japanese housing prices got me thinking a bit, but that graph covers a period when Japan was suffering from deflation. We aren't. I can see an argument for a bigger correction than a few percent, but unless there's another shock to the system, my guess is it won't be much bigger.

I just finished skimming today's NYT piece on Countrywide Financial Corp. It's a big time loan shark. Twenty-five percent of its sub-prime loans are in default by 90 days. See:

Inside the Countrywide Lending Spree

Posted by: nepeta on August 25, 2007 at 10:22 PM | PERMALINK

It doesn't help that their CEO looks like a mafia figure. He even dresses like one half the time, wearing these Al Capone-ish, black, thick-striped suits.

[Handle Hijack]

Golly, Egbert, you must not live in the OC! Houses from the 1970s go for $600K there!

I think part of the huge increase in home prices can be attributed to rising income inequality (as can much of the rising cost of living).

Rich people are far, far richer now, compared to most Americans, than in the past. This means they can afford to spend more money, and so "what the market will bear" is higher. Though numerically small, their speculation in the market drives up prices.

Once this started, other not-so-rich and even just not-rich people wanted to get into the game, so you have a speculation bubble. Of course, since it was a speculative bubble, it had to deflate eventually, as it is doing. Too much money chasing too few resources drives up prices beyond their intrinsic worth, at least for a while.

Sure, in a few big cities like Los Angeles you can argue that there's just no more room to build

Not quite. There's almost no greenfield left, but that's not at all the same thing. At some point people are going to have to realize that the Los Angeles of single-story houses is not suitable for a regional population approaching 20 million, and most of them will have to go in favor of duplexes, rowhouses, and apartment buildings (both condo and rental).

Also, Egbert, you're even more full of shit than normal. Since about 1970, real appreciation of housing prices on the coasts has vastly outstripped the increase in average new home size. It's largely land regulation--the one area of the US economy that Reagan dared not liberalize, probably because he and his movie star friends got very rich off of real estate in the '70s--that has driven housing price hikes.

Additionally, I would add that renting your house from the bank--which is what most of these homeowners who bought with zero-down 5/1 option ARMs are effectively doing--is hardly making yourself part of the "ownership society."

Kevin, if you want to learn more about this stuff, I really suggest Calculated Risk.

I don't know why you're confused. You've already got this one put together. In previous posts, you say that we had a credit boom. True enough. When credit booms occur, risk comes cheap. People throw money at all kinds of people who are high risk - just like less than a decade ago, we threw all kinds of money at "New Economy" companies who were high risk. I watched out my window while Dr. Koop imploded. I presented at funding rounds where we got money for a powerpoint deck of 5 slides and no due diligence. The only thing that's different this time is that the money went into granite counter tops.

As Egbert points out, that means that many high risk folks now "own" their homes. Well, sure, in the same way that Dr. Koop was a company: all they had was rental space on Far West Blvd and suckers pumping money into the server room.

And just like Dr. Koop imploded in a wave of nothingness, we are seeing the rise in forclosure rates. But the Egbert is right: people do "own" their homes as we currently define the word - they rent from a bank rather than a landlord. If you were in a mind to make this a conservative argument, you could just say, "there's a sucker born every minute" and then bail out the richest suckers (See Fed's argument of "too big to fail.")

It's good to be the gorilla, I guess.

As Pete points out you don`t own your home while your banker is renting it to you.

To own something means you have no liens against said property as in being the legal owner instead of just the registered owner.

"Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through." - Jonathan Swift

The housing market is a little different from the stock market. People don't have to invest in the stock market, but they do have to live somewhere.

Renting is significantly cheaper than buying in most areas of the US right now. Homebuyers will become renters until prices come down to rebalance this.

And the supply side of housing can be influenced by developers, who can stop building unless they have orders (this has, I believe, alreayd happened to a large extent);

False. Builders have loans that they took out when they bought land. They cannot choose to leave this land fallow. They must "build or die" to develop this. As long as they do, if they cannot sell, the banks can at least take something of value from them.

I would also guess that home prices are stickier than other prices because of all the emotions wrapped up in home ownership.

This is only true if you can afford to hold on to the house and chose to not sell it. REOs (bank owned foreclosures) will definitely cause prices to drop as no bank will hold on to a house just to keep its value up.

The person who posted the graph depicting Japanese housing prices got me thinking a bit, but that graph covers a period when Japan was suffering from deflation.

Deflation caused by banks failures and the evaporation of liquidity because of the collapse of real estate.

We aren't.

It is not that simple. We most likely will see deflation on investment assets. We probably won't see deflation in basic needs because the Fed will destroy the dollar before deflation reaches that sector.

Of course the Fed could move to prevent any deflation, including that of homes. If they do that, then your model is not Japan, but Argentina. One of these two (Japan, Argentina) will happen, it is just unclear which one.

The portion of the curve on the graph from roughly 1990 to 2000 corresponds to my experience - house prices started going down (in Los Angeles) in the late 80s, and didn't get back to their original level for about 10 years.

There's no reason to expect anything less this time, and given the level of price excess, it could well be longer.

Of course the Fed could move to prevent any deflation, including that of homes. If they do that, then your model is not Japan, but Argentina. One of these two (Japan, Argentina) will happen, it is just unclear which one.

Posted by: Walker on August 25, 2007 at 11:45 PM | PERMALINK

Load up on those S&P puts, my boy. You'll then be able to take your profits, and buy into the collapsing real estate market at its lows. You'll be richer than Bill Gates and Carlos Slim. Combined. A fortune awaits someone with your prognosticating abilities. Several fortunes, in fact.

Help! I make $40K a year and cannot afford my $600K home. The government needs to help pay. So lets get a bailout for me. I need to keep my cell phone and need an HDTV so I cannot pay more. Also my car is three years old.

Obviously I need assistance. My zero down, interest only loan is going up.

Kevin,

The Housing Price Index uses an average methodology, rather than a median. That means that if the gazillion dollar homes ticked up a little, that would influence an average like the Index quite a bit, whereas it would not affect a median much at all. Likewise, if the bottom drops out of the studio/starter home market, but the gazillion dollar homes don't much change, that won't budge the Index much at all, even though the sheer numbers of homes involved in price change may be large.

What needs to be plotted is the inflation adjusted price$ per square foot. That way you remove some of the effects of affluence (GDP growth) to get a more accurate picture. Then take and assign colors to the various resultant % change in price$/sq. ft. patterns and create a national map to show where it is changing disproportionately. I believe that you will find that a median family income in 1970 owned a much smaller house than a median family income in 2000. And probably had a smaller family.

Perhaps if easy credit after 1997 or so would have directed investment into something more productive than McMansions we would have higher paying jobs and would spend less money on hydrocarbons to cool/heat them and drive to and from them.

I hope prices fall about 40 %, slowly, over the next 5 years. We need a STEEP, NECESSARY CORRECTION.

Now, if someone could find a way to pin this terrible HOUSING INFLATION on BUSH and GREENSPAN, that person deserves a medal.

The thing to keep in mind is that housing "value" is the sum of the value you get from a place to live + "investment value". Those little starter houses with $200K pricetags don't deliver $200K worth of housing, it's the investment side that's bumping up the price.

If housing prices head downward, even a bit, that investment value suddenly drops to zero (well, a little bit more than zero, much like the stock value of a bankrupt company never quite hits zero).

It's just that there's so much delay and transacation costs built into the housing market, you don't see the effect right away.

Now, as to why the prices rose so high, my own (biased) opinion is that the rise of dual-income families are a lot of the reason for the price inflation of 'family purchases' (houses, cars, appliances...). I don't see the trend reversing, but it that it will be increasingly difficult for singles (and single-income families) to get by.

If we start a group-marriage, then we can really afford a nice place! Hmmm....

Perhaps if easy credit after 1997 or so would have directed investment into something more productive than McMansions we would have higher paying jobs and would spend less money on hydrocarbons to cool/heat them and drive to and from them.
Posted by: Doc at the Radar Station

If people would simply grasp the distinction that housing is primarily consumption rather than a productive investment, our whacked out Tax Code to the contrary, it might be possible to talk sanely about these issues.

(I'd really be interested in hearing why all my postings to economics threads have disappeared, too.)

'Of course, debt is not necessarily bad - it all depends on what you do with it. If it is invested in long term infrastructure, plant and equipment and other such economic and productivity enhancements, then debt can be very beneficial. But if debt is created to leverage the "manufacture" of even more debt and speculation in other assets (e.g. margin and LBO debt, debt to fund stock buy-backs, CDO-squared and -cubed, hybrid CDO's, CLO's, CPDO's and ABCP's), then this type of borrowing can be extremely dangerous to the underlying "real" economy. We are currently getting a taste of this: essentially what is happening right now is the inability of the "real" economy to service all this debt piled on it, out of "real economy" earnings.

In many ways, the US has become an economy that manufactures, packages, ships, exports, markets, trades, services and promotes one product: financial sector debt - in all of its permutations and variations. The related products are hedge funds, LBO companies and private equity concerns, all of which create the demand for and depend on the consumption of an uninterrupted supply of fresh debt, grossly mis-labeled as "liquidity".'
Hellasious - http://suddendebt.blogspot.com/

Doc at the Radar Station said:
hat needs to be plotted is the inflation adjusted price$ per square foot. That way you remove some of the effects of affluence (GDP growth) to get a more accurate picture. Then take and assign colors to the various resultant % change in price$/sq. ft. patterns and create a national map to show where it is changing disproportionately. I believe that you will find that a median family income in 1970 owned a much smaller house than a median family income in 2000. And probably had a smaller family.

Perhaps if easy credit after 1997 or so would have directed investment into something more productive than McMansions we would have higher paying jobs and would spend less money on hydrocarbons to cool/heat them and drive to and from them.

Valuethinker replies:

Doc good analysis.

It has actually been done, by a fellow called Robert Shiller (prof at Yale) and a firm called Shiller-Weiss. The first pages of Shiller's book about bubble 'Irrational Exuberance SECOND EDITION' has a table of US housing prices adjusted for housing size since 1890.

The short answer is housing prices have never been so high, ever, and they are way, way off trend.

http://www.econ.yale.edu/~shiller/publications.htm

has some links to some of his papers.

The short answer is the average home is now c. 2000 square foot, and it was then c. 1200 square foot. But the family size/ household size was larger (don't know the numbers). This is called a rising standard of living.

You are entirely right that the housing bubble, like the dot com bubble before it, caused a waste of resources. Money was invested in the tech and telecoms industry in the 90s, that was not invested in mines, transportation and energy infrastructure. Result in the '00s: jammed ports, jammed railways, grid electricity deficiencies, too little oil refinery capacity etc. etc. The oil industry was firing geologists and engineers wholesale in 1998.

If we'd spent that money on energy conservation, we'd be in a far better place than if we'd spent it on granite countertops.

Post 9-11, the authorities were desparate to prevent recession. Tax cuts had already taken place, but Greenspan added to the mix by a radical cutting of interest rates, which reached the lowest point of the postwar era in late 2002. The housing market responded, growing from a long run average of 4% of GDP, to 6%.

If it sinks back to its postwar average that is 2/3-3/4 of a year's economic growth lost. If the problems keep going, and it falls to its normal recession of c 3%, then it would be a year's worth of economic growth.

Whether the US can stay out of recession in that circumstance is a moot point.

"Now, as to why the prices rose so high, my own (biased) opinion is that the rise of dual-income families are a lot of the reason for the price inflation of 'family purchases' (houses, cars, appliances...). I don't see the trend reversing, but it that it will be increasingly difficult for singles (and single-income families) to get by."

Nonsense. This accounts for increases since 1990 or so, when the two-earner household became totally standard. It does not account for the 100 % increase in house values since Bush became president.

That is accounted for by the Bush - Greenspan strategy of disguising his tax cuts for billionaires by confusing the public with the increase in house values, allowing for huge, unsustainable second mortgages to be written.

I'd second Doc's opinion that the increase in the size of houses should be accounted for in determining what is a rational bottom for the market.

"in a few big cities like Los Angeles you can argue that there's just no more room to build..."
You must be joking.
Mean population density of Los Angeles: 3,041 people per km².
Mean population density of Hong Kong: 6,200 people per km², counting the New Territories, most of which is steep hills; in the urban core of Hong Kong Island and Kowloon, it's 35,700/km² (data from Wikipedia).
The American lifestyle of urban sprawl is not a given.

The Shiller data plot that valuethinker mentioned is beautfully done in a NY Times gif at

http://mysite.verizon.net/vodkajim/housingbubble/shiller_graph.gif

It covers data from 1890 and is very good in showing the current irrational exhuberance. I don't have a link for it, but there was a relatively recent production that took one on a virtual roller coaster ride based on shillers graph.

My understanding is that the dramatic, permanent change in the housing market isn't necessarily in demand or supply or frenzied market behavior. What has really changed is the cost of construction materials, which has skyrocketed right along with housing prices during this period. If anything would keep prices up, I would think it would be the continued high cost of new construction.

I Voted

building materials are probably only c. 20% of the cost of the finished house.

The big costs are land, financing cost for the developer, labour, and site costs (sewerage and access roads).

So even a 50% rise in the cost of building materials (probably not unrealistic the last 5 years) has only been a 10-20% rise in the cost of housing.

James

Los Angeles is odd, and that urban density number (widely quoted) is also suspect.

About 30% of Los Angeles urban area is unbuildable-- mountains etc. (I'm remembering that number, so I could be off).

What creates LA's unique traffic and habitation patterns is 'there is no there, there' ie work and living are both geographically spread, the business centre is not a disproporationate employer.

So yes Los Angelenes could live more densely (the rebuilding of the downtown/Beacon Hill(?) is intended to achieve this). But it would still be a very spread out city.

In terms of urban sprawl, LA already sprawls far beyond its political boundaries: the Inland Empire. Unless and unwhen energy prices become far, far, higher than they are now, that is unlikely to change.

Any effort to characterise urban planning, which doesn't account for the absolute uniqueness of LA in some respects is likely to be doomed to failure.

Valuethinker and keramik: thanks for the Shiller links. "Behavioral finance" sounds very interesting.

I Voted for Kodos: Yes, construction inputs have been rising a lot, too. Demand from China has been blamed as well as rising transportation costs. Here's a little twist though:
http://www.buildingteamforecast.com/article/CA6471454.html?industryid=43720

"...Falling U.S. Dollar is Driving Up Prices
A sizeable share of the recent rise in materials prices is due to the depreciating U.S. dollar, rather than increases in demand from contractors. This negative currency impact is significant for lumber, metal, energy and concrete prices. It will continue in the period ahead, but somewhat more slowly than in recent months. By next spring, additional pressure on prices will be added by the resumed increase in total construction spending..."

Housing prices are a full third higher than historical trendlines predict, and I still haven't heard any compelling reason why the housing market should have changed drastically and permanently starting in 1996. Sure, in a few big cities like Los Angeles you can argue that there's just no more room to build and that's driving a long-term change, but what about the rest of the country?

Well, I think one of the issues that will help prop up prices -- or at least keep price declines moderate -- is pent up demand. Here in Eastern Massachusetts (and I would imagine this holds true for, say, Southern California or the tri-state NYC area) home ownership levels are some of the lowest in the country. Seems to me this places a pretty high floor under any potential price drops. I personally wish this weren't so, because I'm one of the hundreds of thousands of renters in this area who's hording my cash, dreaming of the day (hopefully soon!) when I, too, will be able to get on the property ladder. But that's exactly what I'm talking about. I'm not alone. My guess, therefore, is that, somewhat ironically, the country's cheaper real estate markets will suffer a sharper and more prolonged slump than the areas that were the craziest during the boom. But more traditionally expensive metro areas will bottom out more quickly, and will start to see price increases again.

Help! I make $40K a year and cannot afford my $600K home. The government needs to help pay. So lets get a bailout for me. I need to keep my cell phone and need an HDTV so I cannot pay more. Also my car is three years old.

Obviously I need assistance. My zero down, interest only loan is going up.

Help! I'm the president of a mortgage company that decided that subprime loans with punitive terms given to people with bad credit would be profitable forever. How were we to know that people with bad credit would start defaulting when they couldn't afford the payments anymore?

Obviously, we need assistance. Foreclosures are going up as people default on loans we shouldn't have made in the first place.

Call me Malthusian, but I can't see how falling housing prices could be a long-term trend. As the population increases, the stock of available housing has to be strained, and the available living space has to be pushed towards its limits. Both real estate and housing prices should rise in the long term, unless we have a catastrophic reduction in the population.

David, many boomers that are retiring have been counting on flipping their inflated homes for a big profit and retiring on the cheap. A California couple with a $500K valued home (last year!), might have planned to retire in Oklahoma-buy 10 acres and the same sized house for $250K. Now the plans are thwarted. It isn't Malthusian, it's just greed and wishful thinking that banks didn't actively discourage because it was in their short term interest not to.

Not quite. There's almost no greenfield left, but that's not at all the same thing. At some point people are going to have to realize that the Los Angeles of single-story houses is not suitable for a regional population approaching 20 million, and most of them will have to go in favor of duplexes, rowhouses, and apartment buildings (both condo and rental).

Which would actually seem to argue for a sustained increase in values--at least of single-story single-family homes. The rarer they are, the more valuable. See the neighborhood around Melrose and Highland Ave in LA.

And what exactly do you mean by "most of them will have to go"? Or is that just hand-waving?

Kevin, you are making a mistake with your trendline, and thus it is wrong to say housing prices are a third above where the trendline indicates. Becuase this is a price index, a sustained grow rate will result in upward sloping curve due to the compounding effect. To get your straight red dotted trendline, you have to assume a decrease in the growth rate.

Speaking of the dollar tanking... do any of you smart people have suggestions what to do in this situation? Especially for a person whose money is not in the stock market or bonds but is in, well, dollars (money market funds).

Would appreciate hearing. I, too, hope prices in L.A. go down so I could afford living in more than a little hovel (I am talking 700 square feet... but I AM happy to almost own it).

Thank you.

ibc

Until the 1920s, those apartment blocks on the Upper West Side and Upper East Side of Manhattan were 3 story townhomes.

It's a matter of zoning. When land values get that high, if you can rezone, then it's worth doing. Our generation has had the 'teardown', tear down one small house, and build a far bigger one. But the next wave will be building up, on what are now single family dwellings.

It all depends how tough the zoning is. In practice, it will be industrial land and marginal land that will go first and become condo towers-- think Brooklyn Navy Yard, or the rezoning of downtown LA.

David Ross, what you are missing is *density*. A 1500 square foot home is probably not uncommon in LA, but would be tiny in Texas, say. Conversely New Yorkers live in 700 square foot apartments. Density changes with the price per square foot. Mumbai has a square mile with over 200,000 people in it.

If the US goes into a protracted housing slump, people per household will likely go up-- simple things like kids continuing to live with their parents into their 20s.

Americans will have the houses they can afford. Right now, restrictive zoning prevents 'infill' housing in many areas, so the new developments (the Inland Empire) are a long ways away. There's probably a limit to how far people will commute, but we've yet to find that limit.

I agree the US has modestly positive demographics for housing. The Baby Boomers will be selling, but the new waves of Hispanic and other immigrants, and their children, will be buying. People in Northeastern cities with falling populations like Detroit, will, however, likely not benefit from influxes of younger buyers.

Clem

It's likely the Fed will cut interest rates to fight the housing slump. You may want to investigate putting some of your money in CDs, FDIC insured. Another thing you could do with spare cash, is pay off the mortgage (depending on penalties).

On the US dollar, I wouldn't worry too much. If you are not saving for the longterm (ie not investing in stocks and bonds) then most of what you buy is basically priced in US dollars, so you are hedged.

Everbank does have foreign currency accounts, but the dollar is as likely to go up, from here, as down. At least relative to the Euro if not the Yen.

Jasper

You make a good point. My observation of the dynamics of housing slumps, real slumps, though, is that when prices start falling, people get afraid to buy.

So it's not like new buyers keep coming into the market.

Robert Shiller had a piece in the New York Times over the weekend about what causes housing and stock prices to go up. Basically he was saying that fundamentals get them started, but it then becomes self fulfilling, it is the expectation of future price rises that keeps pushing them up.

Eventually we get to where the US housing market is now, it runs out of air. There is then the reverse expectation of falling prices (this is probably a year or two away) which forces prices down. The upward trend becomes a self perpetuating downward trend (until eventually houses get just too cheap). Boston was like this in the early 90s.

It's worth googling Robert Shiller's pages at yale University, and Edward Gleaser's at Harvard (the price of urban land-- there was a good profile in the New York Times about him and I would actually pay the archive fee to retrieve it), and reading through what is there.

I can tell you that house prices in the hinterlands have yet to drop, not because houses are selling all that fast, but because the real estate folks are at a loss as to how to price a house right now.

Essentially, the real estate folks are leaving it up to the buyer "to make an offer." This is their traditional way of doing business but it means, at the same time, that we won't know how much houses have dropped in price for perhaps a year.

Meantime the old prices -- those from last year --continue to be advertised, but sellers, among others are very, very nervous. And they should be.

On the other hand, look at it this way. A 20-year-old one-owner house on the market today at $l75,000 was purchased by that owner at $75,000 or less. Even if it dropped to $125,000, mom and pop or their heirs would be ahead of the game, though not by as much as they anticipated.

While folks who bought houses in high-cost areas in recent years, and paid way to much for them, are getting the press now, you'll be hearing next year of the downturn in the housing market for those who've had their houses paid off for years. This is the other story that has yet to break into print. And, as usual in recessions or depressions, a good many of the folks getting hurt had nothing to do with the situation that brought it about.

I never know what to think about this stuff. I understand the lending scandal stuff, somewhat. My main perspective, however, is as a guy about to turn 30 who "would like to own a house someday."

I have no immediate plans, so my concern comes down to: "Does the current situation bode ill or well for new families wanting to own their first home in the next 3-6 years?"

Adam, the pricing might be *ideal* for you in about 3-4 years. But the likelihood that we will be in a recession (or just coming out of one) is quite high during that time frame as well. So, there are two problems with that:
1) Does your job feel secure enough to weather a recession?
2) After this all unwinds banks are likely to be risk averse, so you might need more %down to get into the house.

Agree entirely with Doc:

-plan to save a downpayment, 10% at least and maybe 20%. The days of piggyback loans to get to 0 down are probably gone for some time. Time to open that Vanguard Prime Money Market fund (or equivalent) or that ladder of FDIC insured CDs, and save like the blazes.

- prices won't drop as much in the places where they did not go up as much. Texas for example doesn't look at all like bubble territory. The local economy will be critical though: Detroit didn't bubble up much, but it is sure dropping now

I think 2009 may mark the bottom, or even late 2008. With an absolute peak of summer 2005, that 4 year length would match any housing recession in US history.

But it could be a rough ride getting there.

This has been a great discussion.

Regarding increasing density and infill--there has been a trend of this sort in Atlanta for quite a long time. The entire "midtown" area used to be old genteel mansions and is now towering condos and office buildings. This trend has basically migrated north to "Buckhead" (a loose term at best) in the area around the Lenox Mall. This area used to have a lot of quaint single family homes. Most of these have been replaced by huge gated apartment complexes and condo towers.

Unfortunately, although these areas are far more dense than they once were they are probably far less urban and pedestrian friendly in character. In any event, this sort of thing is the obvious reaction to increasing land values in the urban core coupled with an increased need for housing.

I think it's pretty obvious that the main thing that's changed in the housing market since the mid 90s are the insane expectations of what it means to say your home is an investment. People basically started expecting to win the lottery on their homes so they were willing to pay a whole lot more than they needed to just for a nice place to live. I have my doubts that increased constructions costs, increased home sizes, or increased luxuries are to blame when most new housing is (to paraphrase Howard Kunstler) constructed of vinyl and glue.

I think the general consensus that housing prices will continue to drop until the median hits the low 100s is probably correct.

But, Adam, I caution you against trying to time the market. That's a sucker's game and is highly risky. Right now home prices are lower than they've been in 5 years or more. If you can find a place that you like at a price you can afford and that you think is reasonable, then this is probably a good time to buy. But if you're goal is to time the market and get something cheap and ride the next wave of market speculation--I suggest you try taking your money to Vegas.

Valuethinker,

If we have a situation where the dollar is falling, inflation trends are UP, and housing is crashing... can the federal reserve really "help out" very much by cutting interest rates? It seems to me that we would be pouring a hell of a lot of gasoline on the general price inflation problem just to keep housing stable. Also, what good would interest rate cuts really do if banks are hesitant to lend and people are hesitant to buy if they expect prices to fall still further?

Doc

Your analysis is dead on. Paul Krugman, who studied the financial crises of the likes of Japan in the 90s, has been warning of these dangers for at least a couple of years. Dean Baker even longer.

The US could be caught in a 'liquidity trap' where lending and borrowing doesn't take place, even at very low prevailing interest rates. And the US government with its deficits has limited room to manoeuvre.

And the Fed is very mindful of the need to keep general inflation down. Fortunately the worst commodity price increases (so far) have come through the system, without triggering general inflation. Ditto a weakness of the dollar: down about 20% against the world (and 40% against the Euro) since 2000.

The real danger now is the US housing market just freezes up, and doesn't recover. Think Boston or Southern California in the early 90s, but across the country. So far, it doesn't look like it, but Countrywide's problems are not inspiring.

I remain cautiously optimistic, but not about housing prices, where I think there is a good deal more pain to take. Ditto other risky credit-related assets like High Yield bonds, REITs etc.

VT,

This is a little bit off topic, but I've been wondering for a little while about the relative "rigidity" of the housing market vs. the ever increasing mobility of employment. Everybody wants to own a home, but people change jobs faster and faster nowadays and relocate more and more. You mentioned the danger of the housing market "freezing up". At some point doesn't owning a home become incompatible with today's job market? It seems to me that our houses are turning out to be more and more of a financial boat anchor. If people "freeze up" and are afraid to buy or sell, it is really going to put strain on companies that are needing to recruit employees or transfer employees.

Doc

If there is widespread negative equity it could be a huge problem. People won't move, because they would have to pay back the bank, and they wouldn't be able to.

Someone wisely suggested one problem with New Orleans was that many of the poor owned their own homes, so they couldn't/ wouldn't move to places with better jobs. This is certainly the case in the Detroit region, I believe. People stick tight, even if there is no work or no good work.

(same problem with people in public housing with security of tenure or private housing with rent control: if they move, they are in worse shape, so they don't move)

In practice in normal times the US has a pretty free moving housing market-- Americans are some of the most mobile people in the world. Houses get sold and bought. Despite agents' fees which to us (UK c. 3%) seem completely crazy.

But anecdotally the new CFO of a cousin's company won't move, because he can't sell his house in New Jersey to move to the Midwest. So this could be an increasing problem.

These aren't normal times, and there will be creation of unemployment, because people can't move to where the jobs are. I do remember this in the early 90s, people wound up taking huge losses on their homes, or renting them out for years.

A bear market in stocks affects directly mostly the 10% of Americans who own stocks. Indirectly it has wider effects (eg on state pension plans and university endowments, and hence budgets).

By contrast, a bear market in housing hits 70%+ Americans.

If you read the New York Times investigation into Countrywide's mortgage lending practices (avoiding selling cheaper FHA loans to eligible customers because they could sell them more lucrative sub prime, etc.) you can see what a total mess this is going to become. Also see Calculated Risk blog.

Rob Mac, Adam

Normally I'm against timing markets.

*but*

we can see which way the US housing market is going, at least nationally, which is down.

*and*

we can see that the Fed will cut rates (or at the very least, prices aren't likely to get higher for some time).

So my view is there is time to wait on house buying. 2008 would be the normal bottom for a housing cycle (peak in Q3 2005) but this one could well be extended by the degree to which it went up-- I could see the real bottom even as far as 2009. Places like Florida and Washington, where the condo bubble was particularly bad, I think there is a lot more pain to take.

Keep an eye on calculated risk blog, which is written by 2 housing experts (CR and Tanta).

Now if I lived in Texas, where there hasn't been rampant inflation in housing, AFAIK, I might feel differently.

The hard calls are Seattle/Portland/New York, where prices really haven't taken a hit yet, although anecdotally suburban New Jersey is taking pain.

Very interesting discussion-- thanks!

I really don't owe on this place... no mortgage. Mine but for a little I owe relatives.

But if all my long-saved money is in dollars, is not that risky? If nothing else, inflation eats it up and it gets taxed.

Ordinarily, before all this, I thought I should be "diversified" and in stocks/bonds. Now, well, I guess I'm glad not to be in stocks!!

I do have a CD and money market funds. So no thoughts of putting dollars into other currencies? When I am told I am "hedged" I feel like a big shot, but am not exactly sure what it means (but it sounds good!) lol.

Just sit on dollars and hope maybe to be able to buy something a bit larger? I'm in literally 720 square feet, no closet space... I have boxes everywhere since there is no room. This is a houselet circa 1939.

Also, Doc and VM, do you feel that Los Angeles is a special case other than in the obvious.. especially awful traffic and air and overpopulation and no transit system.

Oh, my uneducated 2 cents on the causes of things... I did think it insane when Greenspan kept lowering interest rates to l950's rates, seemingly so people WOULD buy houses for nothing.
Now, if they do lower rates again, with huge inflation now (whether they deny it or not, it is there), what will happen?

Where is Warren Buffet when we need him?
I know, Omaha ;-)

Thank you all.

Pardon. I called VT, VM.

Clem, I think there *is* a special case with Los Angeles with respect to the heavy concentration of defense industries there. When defense spending was reduced-"the peace dividend", it really hit housing prices there in the early '90s harder than a lot of other areas due to layoffs in those industries. Defense spending has been quite high the last several years, so I wouldn't be surprised if we see some cuts in the near future. That would tend to put even further downward pressure on prices. I'd hang out with the extra boxes for another year or two and see what happens.

What bothers me is that housing in certain places is out of whack for new entrants, even well-paid entrants. For example, my wife wants to move to DC to be closer to family. We're well educated and will have probably $120K+ in combined household salary once she finishes grad school, but housing in the DC area is astronomical. Median households in the basic suburbs in Maryland (worse in VA) are $450K+. With credit drying up, that means a 20% down payment is 90K, which is just absolutely huge for a young couple (much less a young individual) or starting family.