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Why is it considered a catastrophe when housing prices drop?
If the price of gasoline or food, or even college, washing machines, cars etc dropped, most would be pleased.
However falling home prices are automatically assumed to always be a bad thing? Yet a decrease in prices for most goods is largely considered positive.
We have been systematically taught that housing is a good investment and that prices must go up. Ask most people why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” However, for many people in many situations, it is not. In fact, housing is can be a bad investment. Over the long run, before the recent age of bubbles, housing pretty much just rose with inflation, certainly not bad. But isn't housings primary purpose shelter. It shouldn't be looked at first as an investment, but as necessity, as shelter. No more than a car should ever be purchased as an investment, for most, it is a necessity.
As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment, prices must always rise. The way they describe the housing market is always couched in those terms. Loss of affordability, higher debt loads, more and more families having a basic necessity out of reach is cheered as a “housing recovery”. This influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:
"Housing prices rise by highest percentage ever. More news that the housing market is recovering."
Interesting…it’s a “housing recovery” when prices are getting expensive and people become in greater bondage and debt slaves. What is so good about a higher burden of debt, for other than salespeople and financiers.
Also interesting: Why is it a decline "painful" when young people, young families and other first-time buyers get more affordable housing, lower their debt burden, and have more discretionary income not tied up in servicing mortgage debt?
Rather than cheerleading "higher prices". What if we discard the assumption? Let’s try the following as hypothetical headlines:
Prices are become more out of reach for young people, and families. Young paying more of their future earning to the entrenched.
Prices reach a new level of expense, draining families of income for things like education, heath care and spending.
Affordability declines for first-time homebuyers, more farther away from stable shelter, bankers continue record profits.
As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,
“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.
Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. Lower housing prices, lower cost of living, less debt, more discretionary spending. This is why this obsession for higher prices, which benefit a few at the expense of many, is so serious and dangerous. Lower home prices actually increase discretionary spending in a broader sense. (Excluding foolish HELOC induced lifestyles of course)
Just because virtually every media presentation celebrates the “rapid increase” in housing values doesn't mean that applies to you. “Higher house prices = good” is a cultural assumption and a very negative one indeed.
Depends who you are asking. If you're moving up, falling home prices are good. If downsizing, then rising prices are good.
Realtors don't care too much about price as much as they do activity, sales/month for example.
Also, it might be WHY housing prices drop: a big employer leaving town? An earthquake or other natural disaster? Rising interest rates (which curbs spending buy individuals and businesses - something characteristic of recessions)?
A bad investment? Only if you financed more than you can afford. The truth is that home ownership is NOT for everyone. A casual glance through this forum any day of the week will tell you that many people have no clue how mortgages and the financing process work. Many are swayed by the catchphrases like, "Interest rates are low! Your monthly mortgage payment will be the same as your rent payment! No money down! 100% financing!"
And they'll sign up for their piece of the American dream without really knowing if they can truly AFFORD it.
With stocks and with homes, you are supposed to buy low and sell high. It takes a lot of work and research to know if you are really doing that.
Why is it considered a catastrophe when housing prices drop?
If the price of gasoline or food, or even college, washing machines, cars etc dropped, most would be pleased. However falling home prices are automatically assumed to always be a bad thing? Yet a decrease in prices for most goods is largely considered positive.
That is a very good question, I have wondered the same thing. Now as others have mentioned, there are negative causes in the community that would cause prices to drop- loss of jobs in an area, etc.- that you don't want to see happening. But I would be much happier with housing prices staying steady, never really going up- because I bought my house to LIVE in, not to try to make a profit off from- so having rising values do nothing but jack up my annual cost of living in the form of higher property taxes. Rising prices do nobody any good except those that are trying to sell and make a profit, which in my mind is not what housing is supposed to be all about.
Why is it considered a catastrophe when housing prices drop?
If the price of gasoline or food, or even college, washing machines, cars etc dropped, most would be pleased.
However falling home prices are automatically assumed to always be a bad thing? Yet a decrease in prices for most goods is largely considered positive.
It depends on which side of the 'fence' on is standing. If one is selling (houses, cars, etc) or an investor in the same, declining prices aren't necessarily a good thing; ... but, if one is buying, 'let em drop!'
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Rising home prices is only bad for those trying to buy their first. For everyone else it's critical to gaining equity to make some money when they sell to move up to a better home, or to retire on. It's good for those in real estate and related industries, such as home improvement stores, contractors, furniture stores, movers, and many more. We have just seen a good clear example of what happens to the entire economy when home prices fall.
falling home prices is bad for the people who own and may want to sell or just don't like seeing their asset go down the tubes. For people looking to buy falling prices are bad because you don't want to buy and then watch the price of your house drop. If you are lucky enough to by at the bottom of the fall and catch the upswing right after buying then it is good but no one can time that it is just luck. We bought in fall 2011 at near the bottom we just got lucky our house has went up around $100k since then.
Because much of America is levered to the price of their homes! They do not lose 30 pct of equity value if gasoline drops 10 pct.
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It is obvious
