Businessweek: Why housing may fall 25-30%

[pghquest]

Originally Posted by AnthonyB

Not true at all. In 2000 you could buy a 2/3 bed town house in Central Jersey for $125 - $150k (depending on amenities) and a 2/3 bedroom "starter" (older ranch or split in an OK neighbourhood) for between $150 - $200k, again depending on amenities/location etc. Those prices would be high for some states but quite reasonable for the area considering salaries.

Fast forward 6/7 years and the townhouse is now $340 and the starter $400, if it hasn't been torn down for a McMansion.

The Tri-State is historically priced higher than most other areas - fair enough. But now it is priced higher than the local economy can support, which is a problem.

Homeowners in the short term obviously don't want prices to come down. However the speculation and overborrowing that pushed prices much higher than inflation are also responsible for areas of foreclosure blight, empty condo buildings and renting neighbours that change every year.
Far better in the long run to have lower prices and stable neighbourhoods. Where the person who buys the house next door isn't an 'investor" who leaves a job half done or rents out to 3 families to cover his mortgage, but a young family planning on staying for a while.

The problem with your example, is that the price increases you've stated existed all over this country. Houses all over have doubled in prices since 2000. To think that just the tri-state area has been over inflated is just wrong because the whole market became over infated by lower interest rates.

People buy homes on monthly payments. For the "average" consumer, the total sales price on the home, and the total price they paid into it does not even enter the equation. People say I can afford $2,000 a month, then they go out, figure out what price range they can afford based upon that $2,000 a month payment, and they maximize the home features, qualities etc for that price range. When the interest rates go lower for all, housing prices have no choice but to go up, giving people an imaginary increase in property values, which people go refi, cash out, everything the government wanted us to do. What people dont see is the long term effect because if everyone cashes out today, there is no one left to cash out tomorrow, and the market collapses. Exactly what we're seeing today. You cant keep increasing the property values higher and higher because eventually, the balloon bursts as people cant afford to pay more.

I 100% agree with your statement about lower prices, stable neighborhood, its something I've been stating for a very long time. Part of the problem is the fact that banking regulations occur primarily on a state level, (with federal oversite), economies are on a local level, taxes and housing regulations and controls are local, its unreasonable and financially incorrect to have interest rates on a national level.

Its perfectly understandable that lowering the interest rates could benefit one location, and be harmful in another area that already has high priced housing. I'd rather see interest rates for Michigan be lower then say NYC, because Michigan is right now a depressed state while NYC isnt. If they had lowered the interest rates for Michigan, housing prices in Michigan would rise, businesses could expand, development would occur, but in NYC, spurring such actions could have a negative reaction, pricing people out of the ability to buy homes. Until the federal government learns they need to control interest rates on a state level, problems like this will never go away.

[AnthonyB]

Originally Posted by pghquest

The problem with your example, is that the price increases you've stated existed all over this country. Houses all over have doubled in prices since 2000. To think that just the tri-state area has been over inflated is just wrong because the whole market became over infated by lower interest rates.

Prices haven't doubled all over - that is why this example is used. There have been lots of people on this board who have been going on about how prices never rose insanely in their areas. OK never doubled, neither did a lot of the Mid-West. Orange County CA tripled.

What they didn't realize was that the ridiculous rises in prices in areas such as the tri-state, California, Florida and elsewhere also affected them by driving demand abnormally in the cheaper areas.
The whole "real estate is local' mantra constantly repeated by the naysayers here is relevant only when talking about comps, or why someone chooses one school district over another. However the current problem is a credit problem and it is global - there was a bubble here, one in the UK, Australia, New Zealand and parts of Europe. House wealthy Brits buying up vacation properties in Spain affected their market and affordability. Californians taking out home equity loans pushed up demand in Vegas, New Jerseyans looking for affordability drove up demand in the Carolinas.

This bubble was NOT a local phenomenon.

The tri-state area IS over inflated, relative to local economic conditions. Some less expensive areas aren't overinflated, but there was severe overbuilding and no demand for what is out there.

[mojo_1979]

Originally Posted by Captain Bill

I can't see any homeowner wanting homes to return to a year 2000 level as you suggest.

I can't see the investors that are out standing in line to buy these foreclosures wanting to see the home prices drop further.

I cannot buy into your affordability argument.

I'll bet all those stock speculators back in 2000 didn't want the NASDAQ to crash, losing 78% of its value in a very short time frame... Maybe if they would've all held hands and sang songs it would have prevented the bubble from popping. I guess what I'm saying is that economics and fundamentals don't care what you or other "homeowners" want. In the long run, prices will revert to their historic mean, which means we have a LONG way to go (on the dowside of course).

And what is with the word "homeowner" anyways? If I go out and put $0 down and get 100% financing on a house does that make me a homeowner? Or does that just make me someone who owns nothing and is seriously in debt and paying a TON of interest on a loan? Hmm....

[another guy]

Originally Posted by DMenscha

(...)

Goldman Sachs; Hmmm another Wall Street success story when it comes to mortgage backed securities.

(...)

Just FYI, Goldman made a killing on the crash. Though they lost $1.5-$2 billion on mortgage-backed securities, they simultaneously bet against those same securities, with the gains of about $4 billion more than offsetting their losses. I also disagree with most of the rest of your post, but CouponJack took care of that.

Originally Posted by olecapt

Disagree. The main problem is buyer confidence. The hardest hit segments here are the least expensive condos. It is pretty clear the REPO market has bottomed or is very close. The buyers are bidding up the units so the price has stopped dropping. But those are mostly the small three BR/2 bath SFRs. The condos are not seen as attractive by the buyers and sit there. And that will likely continue until the renters decide the housing market has bottomed. You can sell very well at 200K...but you can't at 100K. Is that affordability?

Where do you think affordability hits first? At the low end of the market or the high end? I'd say that if you're observing the least expensive condos as the worst-hit segment, that supports the argument for affordability keeping buyers out.

Originally Posted by momof2dfw

Thanks Bill.

There are other problems that come with bringing the values down too far. This dreaming buyer is waiting for the home that was $500K last year but purchased 10 years ago for $350K to come down to BELOW $200K or so. They may be stretching it financially to make it to get that home at $250K or $300K. So they pick it up for $275K. That bigger home costs MORE for utilities which the buyer may not realize as they SHOULD have been in a much smaller home in that area. Then in a few years if they have not learned to save better and went out and furnished that home to the hilt (hear people complain all the time about people buying "BIG HOUSES" but don't have furniture - so what, I'm taking MY TIME to find what I REALLY WANT and to pay CASH for it . Oh, and I buy QUALITY items too) on credit. You know the house MUST be fully furnished for the Gottahave family. And next thing you know - WHAM-O!!!! They did want their property to appreciate but they forget to think ahead about the future property taxes at what SHOULD have been the price in the beginning and when it does make it up to that THEY CAN'T AFFORD IT ANYMORE. DUH!!! The other thing I've seen is people that do buy into a neighborhood of homes that are at a MUCH higher price than the "bargain" they got, they can not keep up w/ the work. These typically are the worst kept homes and yards .

(...)

Wow. I suspect you just don't know much about bubble areas. I happen to live in one of them. A home that sold for $350K ten year ago would have been listed at probably $1 million or so last year (at least early last year). No one would be waiting for it to fall to $200K or less. Prospective buyers just want it to go down to about $700K -$800K or so. No one would expect it to go below $600K, absent some crazy particular problems with it. Prices in nominal terms won't fall as much they should, but part of the price reduction obviously comes in the form of high inflation and a depreciating US dollar. I'm just annoyed that as a non-home owner, I'm subsidizing this mess.

Originally Posted by momof2dfw

1. When this "buying frenzy" got under way in markets like California several years ago it was the BUYERS at the root of the problem. They HAD TO HAVE THAT house. They were WILLING to BID on houes and dumps at that. No one forced them to make this outragous bids. Why did the buyers THEN not do what buyers NOW are doing. Refuse to pay the high prices? The sellers recognized what was going on and took advantage of it. Can't blame them as there is NO ONE that could say they would not sell their property for the highest price they could possibly get for it. It was a basic Ebay real estate market then. Sure the lenders did not help. It is fuzzy math and I totally agree with that. People living on "wealth" on paper not what money they had in the bank.

(...)

You do realize that the buyers during the bubble period are often the same people selling now, don't you?

What's more, buyers today are often people who were sitting out the bubble because they knew it was a bubble that would be popped eventually.

Originally Posted by pghquest

Where in the world do you live that people are "priced out"?

I've seen homes under $10,000 in some areas that are livable, as is.. Far from priced out for someone who even works at McDonalds.

While I wont argue that some areas some people are priced out of home ownership, to just banket the whole country, based upon the exception areas is just nuts.

$10,000? Wow, again, you're just not in a bubble area.

Originally Posted by mojo_1979

I'll bet all those stock speculators back in 2000 didn't want the NASDAQ to crash, losing 78% of its value in a very short time frame... Maybe if they would've all held hands and sang songs it would have prevented the bubble from popping. I guess what I'm saying is that economics and fundamentals don't care what you or other "homeowners" want. In the long run, prices will revert to their historic mean, which means we have a LONG way to go (on the dowside of course).

And what is with the word "homeowner" anyways? If I go out and put $0 down and get 100% financing on a house does that make me a homeowner? Or does that just make me someone who owns nothing and is seriously in debt and paying a TON of interest on a loan? Hmm....

Great post, only one thing to add--what about option ARM's? You're not even covering the interest on the loan, your principal actual increases.