I think you and Brad are partially right at best. Half decline of the doubling is very optimistic.

The housing deflation is global, and this will permanently dent a lot of new formed attitudes about housing as an investment.

As I've often said, they may not be making any more land, but there also not making a lot of people who are willing to pay the kind of bubble prices for real estate that we've seen. Seriously, a million dollars for a 2 bedroom cottage next to the freeway? I don't think so.

says, a home-owner.

You certainly could be correct. But if you look at the Internet Stock Bubble. It eventually dropped well below it's average.

Don't asset markets typically overshoot?

DeLong sounds like someone who just bought a 1.5 million, two-bedroom apartment in Manhattan. Stuff like that just can't drop in price, you know, at least not much.

In places like the desirable neighborhoods in San Francisco, the prices are going to largely hold firm. Those top 1%'ers have been getting fat rich, and everyone wants a spot in these "positional" neighborhoods.

But in places like Stockton, CA, prices will mostly revert back to 2000 levels. In these remote burbs, there's no geographical limitations on building - price increases were largely driven by speculation and super-low financing terms and lax mortgage qualification processes.

Mr. Drum said: "rising average earnings have, over time, increased the percentage of income that families are willing (and able) to spend on housing". I'm sure you're aware (since I've read it here many times) that "median" earnings have been almost flat for 30+ years. But using "average earnings" I guess there's truth to that argument - but it's completely driven by increases in the top 20% (and more by the top 1% and up). This means the longer-run prices should fall, by a lot, except in small elite locations.

Or rather (having checked a few prices), bought a 3 million apartment. Those never drop in price.

CR and the IrvineHousingBlog both have the same attitude that house prices will eventually revert to 100 on the Schiller index, or 3-4 times income, or 160-200 rent multiplier. But I agree that they don't account for dramatic increases in population growth (like in CA), limited in-fill capacity near desirable locations (like SF), and higher viable debt-to-income ratios (+45% for those making +200k). Also, renting is not really a substitute for ownership except from a purely economic standpoint - nicely upgraded single family homes in really nice neighborhoods are a scarce commodity.

JMHO, I think the housing market will bottom out only when people will be able to get "regular" mortgages with the same credit checks that occurred around the mid nineties. What that means is that people will be able to get mortgages if and only if they can afford them. Given that we are in a recession, and that job stability/history is a major thing that used to be looked at, I don't think the housing market will go on the upswing anytime soon.

I agree with Luci. The weird thing about the housing market is that, when it comes to home purchases, average buyers are so willing to be seduced into excessive prices to feel like a member of that 1% elite. A good friend of mine once showed off his new $700K home in the PacNW with evident pride. I kept asking myself why he and his wife bought a house twice the size of their previous home *after* their daughters moved out?

The biggest factor that fed the housing bubble were unnaturally low interest rates coupled with low inflation. Don't be surprised that when this recession starts to end that mortgage rates end up quite a bit higher. The amount of house you can buy is more determined by that than nearly anything else. I also doubt that banks are going to peddle many interest-only loans or many loans with less than 10% down. Interest rates and housing prices have an inverse relationship generally. The amount of house you can buy drastically shrinks when a 30-year fixed is 9% versus 6%. That says lower house prices generally to me. Perhaps, a differential demand scenario where cheaper, smaller homes see big demand, bigger homes stay vacant. This all depends on inflation of course. My bet is it is going to get a bit out of control and rates will have to go up.

optical weenie makes a very interesting point. Used to be, your guy working in industry doing manual labor or some managerial capacity had a job more or less for life, absent a real fuckup. So banks could bank on his or her income being pretty stable. Not any more. Job stability in service or information based work is completly gone. How will banks adjust to this or won't they?

Slightly OT but I heard on the radio this morning that they're proposing a tax credit up to $7K for people who buy foreclosed properties as a way of protecting the market. Is it me, or is that sort of whacked? I know that as a taxpayer it's my sacred duty to protect the banks, not the homeowners, but still...

Thersites, a few days back I heard a $15K tax credit.

My first question was ......... will this be killed by the AMT?

to David in NY: Banks *have* adjusted: give a mortgage to the guy with no job security, securitize and sell off the mortgage, and now your borrower's financial insecurity is your problem any more. Hence our credit bubble ...

I second the idea that location, location, location is going to add to inequality. Anecdotal evidence suggests that the privileged children of upper-middle-class homes now have, in additional to all their other advantages, an inheritance in the form of their parents' million-dollar house or apartment. That's certainly true here in NYC.

A secondary factor that will keep house prices high in comparative historical terms is that the construction industry hasn't had the benefit of automation and improvements in process efficiency to nearly the same extent as almost all other material goods production industries. Construction remains relatively labor intensive and also requires quite a lot of high-skill labor.

Another factor is that, culturally right now, most men and women really want posh houses and are willing to pay a big chunk of their income to get them. If you built smaller, cheaper houses (comparable to the tenement housing of 100 years ago in sociological terms), an awful lot of today's shoppers would say no to them, even though the cheapo housing is perfectly fine for shelter from the rain, cooking, browsing the internet, and raising children. Consumers will pay for upmarket atmospherics.

I agree with optical weenie. When I bought my "bungalow" in 2002 it was in a dodgy neighborhood but with exceptional transportation access. 2002 price $174k. A house sold last month four doors down from me, same size, etc. for $400k. At the peak I could have sold for $500k easy - for a 850 sqft 2 br/1 ba.

My long term guess is that this house will end up around $250k when prices finally settle, so there is a long way to go still. In order to afford my little starter home at $400k a first-time buyer would have to have a combined monthly income of over $100k and be able to put 10% ($40k) down.

Yes, $100k a year buys you a 850 sqft 1930's bungalow in a dodgy neighborhood on the Southern California coast.

Without first-time buyers being able to afford starter homes like mine, nobody else can move up.

My view is more along the lines of Doc. We entered an unsustainable credit bubble. Credit was cheap, which meant banks and other lenders could lower their standards and interest rates, which lowered the monthly payment and down payment for most new mortgages. This made buying a home easier and cheaper, which drove up prices.

But guess what? It was all a ponzi scheme. There was no new genuine innovation that would support the fact that home price appreciation far exceeded the growth in income the last 15 years. All of it was due to cheap, easy credit and bullshit financial engineering from Wall St hacks looking to skim as much off the top.

This edifice is collapsing right now, and the situation is sooooo much worse than most people realize.. We are in a deflationary spiral, and home prices will go lower. As we go into a recession, more people will lose their jobs, which means more people will be forced to sell their homes, which will put even more downward pressure on home prices.

And let us not forget that it will not be long before the boomer-homeowners begin to sell their houses, pretty much all at the same time.

Where are people going to get the money to pay for these more expensive homes?

Wages are stagnate.

Fuel prices are high and will probably remain high-ish from now on, eating into family budgets. High fuel prices affect grocery prices, etc. etc. etc.

Again, where are people going to get the money to pay for these more expensive homes? I think this theory is too macro and I think it will be proven wrong. People need money to spend it.

What was it they said when the first geographic housing markets started to drop? All real estate is local.

Some cities where market fundamentals can support high-priced homes (New York, San Francisco, Chicago, Boston) or where the rise in prices was only modest (Texas cities, Denver, Minneapolis) will see only modest drops--probably on the order of the 20% or so that "giving back half the increase" implies.

Other cities that saw insane appreciation without the market fundamentals to support it (Las Vegas, Phoenix, Miami, outer suburbs in LA and VA) are going to be brutal. Many of the subdivisions an unrealistic commuting distance from the city and/or condos coming online now will be virtually worthless. I'd suspect a 50%+ decline--maybe as much as 70%.

zombie makes a very good point. Many Boomers own two homes, and as they retire they plan on selling one and living off the capital gains of the other. This will push inventory up even higher. Though this boomer effect will be drawn out over many years, and may not really pick up steam for about 5-10 years, there are good indications that the housing bust may not bottom for at least 5 years.

So just as the market will be turning around, boomers will be dumping their homes on the market.

afferent - again JMHO, but not all regions of the country are suffering a housing collapse. Here in SE Washington state the market is pretty stable, housing prices are going up because people are moving into the area. The prices aren't going up as fast as a year ago, but they are still going up. And they are still building new homes too - not as fast as they were, but still building. The interesting thing about the market that I am in is that new home construction isn't all mega mansions. Much of the new stock on the market is relatively modest sized 3 bedroom 2 bath homes around 1400 sq feet.

"I second the idea that location, location, location is going to add to inequality."

I'll second it as well. Where I live (Boulder, CO), housing prices have only fallen 10% in the last year. But most of that drop is for the higher end houses (4 bedroom or more), which are showing a near 50% drop in value. My house has only lost 5% (I have a 3 bedroom). Interestingly, smaller houses have actually gone UP in value, with 2 bedroom houses showing a 25% increase in value. What's interesting here is that the trend shows that Boulder is still a very popular place to live, but people are putting less of a value on the SIZE of their house. But they still want the location. It's hard to really say what's going on here, but I suspect that people are starting to realize that larger houses are becoming very expensive to heat and cool (we have fairly extreme temperatures) and are seeing smaller houses as being more desirable from an energy efficiency standpoint. Regardless, we seem to be more immune to the price drops than most of the country. And we are starting out with some of the country's highest home prices. Obviously not as high as LA or SF, but still quite high.

People need money to spend it.

Posted by: BombIranForChrist on April 8, 2008 at 4:07 PM

Oh Bomb, why do you hate America? People don't need money to spend it, they just need credit!
;-o

I know I'm generalizing, and I realize that the housing bubble was unequally shared across regions. I'm in Seattle, so I know how out of whack things got in some areas. And it wasn't even as bad here as it was in other cities, like the ones cited by Joe above.

Yet the loose credit standards were not a regional phenomenon but could be found nationwide. The insane appreciation caused by easy credit was regional, but I think all areas suffered from at least a little "irrational exuberance". As far as I have heard about SE WA, there are some areas experiencing depreciation; at least that's what I've heard about Pullman. You obviously know better than I do.

above comment meant for optical weenie (nice name BTW)

"and I'd add the fact that rising average earnings have, over time, increased the percentage of income that families are willing (and able) to spend on housing."

Rising average earnings for whom, Kevin?

As usual I think the answer is "it depends." Small rural farm towns are becoming ghost towns. As the size of farms increase and the price of fuel rises this will only increase. In general people will want to live closer to their work. Yeah, I know, telecommuting, but even with that people will want to live close to highspeed internet access.

What about worldwide population? It will fall dramatically, there is no doubt. You would think this would ease the housing costs but again it depends. I think US immigration will continue even as the overall world population falls so in the US at least we won't see much of a population decline. Not compared to the places like Africa.

Africa will be the first to fall. Imagine Somalia in the 90's happening over most of Africa. The death rate in Africa will be horrendous. War, disease, pestilence, famine, drought.

Places is South and Central America as well as rural China and India will get very bad as well.

Slightly OT but I heard on the radio this morning that they're proposing a tax credit up to $7K for people who buy foreclosed properties as a way of protecting the market. Is it me, or is that sort of whacked?

Oh, what a good idea, to have the government encourage MORE speculation . . .

No, it's not just you. It sounds whack to me, too.

Yeah sure, no more room. Like in Hong Kong.

I'm sure there are some Japanese who have been telling themselves that for the past 18 years.

anon: I'm sure there are some Japanese who have been telling themselves that for the past 18 years.

Ok, smartypants, how do you write that in Japanese?

It's a good day, with another fafblog post.

Nice, given that the equity I have in my house is likely to drop from 50% of value to zero.

Home prices may not go back to the trend line. When bubbles burst there is sometimes an over reaction. Look at the Japanese real estate bubble where prices are still below their long term trend line. http://bigpicture.typepad.com/comments/2008/03/housing-us-vs-j.html

I second the idea that location, location, location is going to add to inequality.

Actually, the clustering together of the top 1% will make it easier for the dispossessed rabble to find them, when they come with torches and pitchforks someday.

It may seem early, but what I see is a long-ish return to normality.

It may take a while, as some here have suggested (3-8 years), but that's the direction now.

How much government intervention is helpful instead of hurtful is always hard to estimate, but I think here at the peak of the crisis it makes sense to use some short-term measures to stave off the worst effects and to begin setting us back on course with regulation.

We may be way down, but from here things are looking up.

houses will be nothing but rubble and ash in the times to come. with our country spinning into to worst face value of all time. i startin to believe the religous freak on the corner" the end is near". remember when the govt is so bold to take one constitutional right it makes it easier to take another, and we are allready down two (habeous corpus and the patriot act) those who will give up there freedom for security deserve neither. and those that wont die for their freedom deserve to be the slaves of the govt.

With the exploding population, we can say that land available for the people on a per capita basis is ever diminishing, and thus probably ever dearer.

"Rising average earnings" - worthless to so many people because of how averages work. The spread is bad, the median is stagnant. What happens when most people's credit starts burning out and coming due? There will be a huge shock of many plain folks not having money to buy much with. Prices presumably will have to give, even in the housing sector.

CR and the IrvineHousingBlog both have the same attitude that house prices will eventually revert to 100 on the Schiller index, or 3-4 times income, or 160-200 rent multiplier. But I agree that they don't account for dramatic increases in population growth (like in CA), limited in-fill capacity near desirable locations (like SF), and higher viable debt-to-income ratios (+45% for those making +200k).

Every single one of those arguments would cause rent to go up. That is why CR and IrvineHousingBlog argue that you are wrong. It why Krugman argues that you are wrong. And it is why over 100 years of home buying history shows that you are wrong.

Also, renting is not really a substitute for ownership except from a purely economic standpoint - nicely upgraded single family homes in really nice neighborhoods are a scarce commodity.

Which in many areas can easily be rented. Often it is lot easier to get in a nice neighborhood (particularly with good schools) by renting a SFH than buying. This is particularly true given today's mobile society. With transaction costs killing you if you sell only a few years after you buy, buying is quite risky for your family if you do not have solid job security.

It has always been about the rent multiples. It will always be about the rent multiples.

You forgot about bird flu and peak oil.

There is much more elasticity in urban rental unit supply than there is in single family homes (which make up only 25% of the rental market), so I would expect availability/cost of rentals to more closely track general inflation. But to the extent close-in single family housing becomes more scarce, its price should rise faster than inflation as urban area populations grow.

I also disagree that SFH rentals are the same in quality or availability - though granted cheaper if you count transaction costs. Typically its very hard to find well-maintained, up-to-date, high-quality properties in nice areas. Agreed that it may not matter if you are mobile and just looking for temporary shelter.

I think it is more a question of the US banks being solvent in the very near future? you know, unlike those savings and loans that were not solvent.

BTW, this all happened back in the mid 80s, the house market crashed then too. Then big oil followed with a glut of oil on the market and a complete collapse.

House went way, way down and NOBODY was buying. The housing prices of today smiply are not realistic anymore and this is how I know that the sliding has not stop. SO without the APR gimmick, the cost of today's housing is completely insurmountable. We haven't seen nothing yet.

There should be an iron-clad rule:

When oil reigns, everyone else goes bankrupt.

we will ultimately give back half of the doubling

That is why so many people are selling. Somebody told me all of their savings was in their house, which is why I told them to sell now. They could not understand that the value of their home was falling and the only way to take advantage of the bubble equity was to sell.

I don't sure that others have noticed this or not.. but doesn't John McCain in the ad over on the right gutter look a lot like Steve Martin?

If Brad DeLong thinks they won't fall that far, they will. And Kevin again links to him.

An entrant for Kevin's weakest post of the week pops up early.

Doc: The biggest factor that fed the housing bubble were unnaturally low interest rates coupled with low inflation.

Ummm...no, doc. Not even close and no cigar either. We have not had low inflation; what we've had are inflation figures massaged past all recognition. Inflated asset cost IS inflation, doc.

'The US inflation rate is about twice as high as the government’s inflation measures report. In order to hold down Social Security payments, the government changed the way it measures inflation. In the old measure, inflation measured the nominal cost of a defined standard of living. If the price of steak rose, up went the inflation rate. Today if the price of steak rises, the government assumes that people switch to hamburger. Inflation doesn’t go up. Instead, the standard of living it measures goes down.' - Watching the Dollar Die By PAUL CRAIG ROBERTS

Get a grip, people. Repeat after me: 'My house is not appreciating; my currency is DEPRECIATING.'

Bob Wood of Kaizen Managed Assets opines that, "The amazing thing is that not a day goes by that either my local newspaper or the FT isn't filled with stories about rapidly rising consumer prices. The last thing any central bank should be doing is trying to inflate an economy already burdened by rapidly rising prices. And that is exactly what they want to do now! If this is not madness, nothing else is." Keynesian quackery By The Mogambo Guru http://www.atimes.com/atimes/ Global_Economy/JB02Dj01.html

We're freakin' doomed.

Read this: David Leonhardt: For Many, a Boom That Wasn’t in today's NYT

Or go here and take a good long look at the chart (Sources: US Census Bureau and Jared Bernstein) here: http://bigpicture.typepad.com/

Kevin: stop citing 'average income'. It MEANS NOTHING. Look at the stagnating MEDIAN. From 1960 to 1970 real median household income rose 37%.

From 1970 to 2007 (even figuring in more 2 income families and longer hours worked) real median (a suspect computation in and of itself since it relies on the CPI which is corrupt as hell.) income gained only 30% over the course of 30 years. That's 1/3 the 1960-1970 rate.

And from 2000 to the 2007 it has DECLINED 1%.

'Our economy – our financially stretched consumers and vulnerable businesses - will now have no option other than to bid against highly liquefied competitors for a lengthening list of resources. Failure to recognize that this situation is a major inflationary problem is disregarding reality. The same can be said for suggesting that we can continue on this current course - with massive Current Account Deficits and rampant speculative financial outflows to the world fueling myriad dangerous Bubbles and maladjustment on an unprecedented global scale. 'Road to ruin' By Doug Noland http://www.atimes.com/atimes/Global_Economy/ IK06Dj01.html

Okay, here's something to consider: Yes, as the NAR helpfully remind us, "all markets are different." I'll go with what I know: Jersey's population is stagnating. NJ is the quintessential "close to places that matter" state--NYC and Phila, for example. God isn't making more land, but real estate prices and related factors (ridiculously high property taxes, etc), ARE making relocation a viable option. And God did green-light the Israelites exodus out of Egypt... (Though he didn't pay Moses' relocation expenses.)

And, as we're headed into the first genuine recession of the post-industrial/lifetime-covenant-employment era, can we please dial back the optimism that rising salaries will mitigate the gulf separating house prices and the actual means of ordinary people to buy a house? (Or at least wait till the monthly cost of owning drops below 160% of renting, as is currently the case in many areas.) Then there's the thorny issue of tight credit for all but those with FICO ratings over 770... I can't foresee that predicament changing much over the next twelve months.

Full give backs to 2000 might be a stretch (then again, maybe not), but I'm already seeing 2003 prices, and the decline hasn't really even gotten started. Right now, inventories are at historical highs; sales of existing homes are at all-time lows; and prospective buyers are holding back, for fear of purchasing a depreciating asset. Additionally, whereas Time Magazine and the network news were flogging the "buy now or you're nuts" narrative as recently as Fall 2005, the media all have climbed onto the "real estate is toxic" bandwagon. Not a determinate factor, but one worth considering.

Realistically, I'd expect prices to trough in the same range that they were in 2001-2, adjusted for a nominal rate of 4% annual gain--and I'd expect the present decline to continue at least till 3q 2009.

I bought my home--three miles from Manhattan (I bike to work)-- in 1998. After all is said and done, I expect a real gain in the area of 5%/annum, which is more in line with home price appreciation over the long term. I genuinely pity some who, over the past six years, bought houses because they thought their it'd make them rich.