5/18/2011 12:25 PM ET|
Why home prices are falling -- again
Too few buyers with too many homes for sale depresses prices. Analysts foresee an additional 10% plunge -- an opportunity for landlords and investors, but bad news for homeowners.
Is your home's price about to fall 10% further?
That's what two respected teams of analysts are predicting right now. And TrimTabs Investment Research is more pessimistic, suggesting it could be five or six years before home prices stabilize and move higher.
Of course, this is just one more problem for investors and consumers to worry about. The economy appears to be slowing again. Stocks have ambled sideways since February. The U.S. government faces the prospect of a technical default on the national debt.
Indeed, we're looking at a time of serious upheaval. We've had the Arab Spring in the Middle East. There's been a spate of natural disasters, including Japan's earthquake and nuclear plant meltdown, as well as floods and tornadoes in America's heartland. And frothy commodities markets have suffered violent setbacks, with silver in particular showing symptoms of excessive speculation. And don't forget that the dollar, after being left for dead, is rising like Lazarus, reanimated by new fears over Greece and the future of the eurozone.
- Equities discussed in this column: iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ); Equity Residential (EQR) and Avalonbay Communities (AVB).
In all of the tumult, it's easy to forget that the root cause of all this mess -- now entering its fourth year -- continues to fester like an untreated wound. I'm talking about the U.S. housing market, which, by some measures, has fallen to new lows. After showing signs of hope late last year in the wake of the homebuyer tax credit, it's now suffering fresh setbacks and reaccelerating price declines.
Consumers, weighed down by rising inflationary pressure and lackluster job growth, are losing confidence. At the same time, tight lending standards and efforts to reform Wall Street and Fannie Mae and Freddie Mac are restricting access to mortgage credit. Right now, housing finance survives on government largesse: Government-backed entities like Fannie Mae and Freddie Mac now account for 95% of new mortgages.
All of this is limiting economic growth by keeping pressure on the financial system. And it risks the creation of a negative feedback loop in which lower home prices result in more homeowners falling into negative equity, leading to more foreclosures, more bank losses, tighter credit and, ultimately, further price declines.
All this leads the analysts to predict another drop in prices before a solid bottom is found. For potential landlords, especially those with cash in hand, this could mean it's time to buy property. For investors, it means bargains on a lot of related equities; I'll have some names later in this column, though I wouldn't start buying just yet.
But for homeowners? More pain. Here's why.
Longtime readers will remember that last December, when the economic outlook was much brighter, I penned a column ("Why it's safe to buy homes again") encouraging buyers to jump back into real estate. And if you got a low interest rate and you planned to stay put, it was. I also wrote that barring some "unforeseen calamity, another self-perpetuating cycle of higher home prices" could be seen as early as this year.
Unfortunately, we've had a few calamities since then; Fed-induced inflation, the Portuguese bailout, unrest in Libya and Japan's quake have led to a manufacturing slowdown. Economic growth slowed dramatically in the first quarter of this year to just 1.8% from 3.1% in the fourth quarter. The team at Capital Economics noted that households had "been hit hard by surging prices for everyday necessities such as food and energy."
And now there is evidence that the job market is softening again, with the unemployment rate popping back up to 9% in April. (I covered the economic slowdown and its impact on stocks in my April 27 column, "Investors, it's time to run and hide.")
Housing activity is way down because of all this. Home sales have stagnated near recessionary lows after unwinding the temporary boost from the homebuyer tax credit. Demand for new mortgages has dropped back to levels not seen since the depths of the financial crisis in 2008. Homebuilder confidence has sunk to very low levels -- and stayed there -- for more than three years and hasn't been positive since April 2006.
As a result, home prices have started falling again. What's more, the price declines seem to be accelerating, with the 20-city Case-Shiller Home Price Index off 3.3% in February from its year-ago level -- a drop of a magnitude not seen since late 2009. That's the eighth consecutive month-over-month price decline. The homeownership rate also continued to fall as more and more distressed owners became renters.
There are still some pluses
That's the bad news. The good news is that the long-term factors I mentioned back in December are still valid. These include record affordability, thanks to low prices and low borrowing rates, and still-favorable long-term demographics, as the United States is one of the few wealthy nations set to enjoy an expanding workforce in the years to come -- unlike Japan and most of Europe.
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a few years ago, when I saw a crappy house worth about $60,000 selling to a californian for $250,000 (YES!!!) I knew troubles were coming..and Obama was NOT president when this happened...then later people were bidding MORE than the asking price for homes even tho I saw no one sleeping in parks because the could not find a house..then people started REFINANCING to buy that big tv,,and the new suv..using their house as a bank..at interest only loans etc...because they thought prices would keep going up and up...
Wonder why we" re in this mess??GREED!! prices are now about where they should be...may be even still a little too high...
Yet another perfect example of so-called “experts, analysts, economists, writers” getting paid to spew absolutely USELESS comments to us. You’ve said nothing in this article that every other expert like you hasn't already said…1) the housing market is bad, 2) the housing market will continue to be bad, 3) I really thought that the housing market was improving and told everyone to jump in, 4) I was wrong about the housing market and need to justify my mistakes with excuses. This is the same story with every single expert out there. You people have no clue how bad it really is out there. You have no concept of what it is like to be unemployed, losing your life savings, losing your house, dealing with incompetent banks, and just being in the trenches with the rest of the REAL WORLD. Folks, it’s going to be bad for a long, long time. And we all know that we don’t need these so-called experts to tell us this. You really thought those tax credits meant something…what a joke.
I agree with the conclusion of this article that home prices are going to fall. However, the author's major premise that the US housing market is a "root cause" of the economic mess is pure nonsense! Here's what he writes - "In all of the tumult, it's easy to forget that the root cause of all this mess -- now entering its fourth year -- continues to fester like an untreated wound. I'm talking about the U.S. housing market"
In fact the US housing market problem is not a cause whatsoever - it's the result and a victim! Plummeting home prices are the result of so many factors. The obvious big factors are: irresponsible lending, irresponsible borrowing, increasing unemployment, excessive regulation and taxation of American based manufacturing, free trade (importation) of cheap products from unregulated foreign manufacturers, out-sourcing, excessive domestic entitlement programs, expensive wars abroad, an estimated 12 million illegal aliens, and the list goes on!.
And then finally - Lower housing prices are not a problem for any society. Low housing prices are an obvious benefit to any society! The only people that really suffer from falling home prices are investors, speculators, and bankers that get burned! Homeowners that lose their home will be better off in five years if they manage some savings - which should be easier than it would be with a burdensome and excessive mortgage payment on a house that cost more than it's worth. Their credit will be mostly restored if they are responsible (not to mention that they will be part of a huge status quo). House prices will be more affordable in five years. And their savings could end up being a much more significant down payment! Win, win, and win for the responsible future homeowner!
The big losers are the US taxpayer because the mortgage losses are mostly insured by HUD, Fannie, and Freddie = US! The banks are not desperate to sell at fire sale prices because they would become insolvent, be taken over by the FDIC, and the executives would lose their jobs! The big banks keep what the author calls "shadow inventory" off the market because the market values would be significantly less than their book values. The inflated book values keep their executives in power and in the money with their outrageous compensation. They get them off their books when their bank can collect the insurance on each property - after trying for a period of months (required by the insurance) to sell it - though at more than they're worth!
The housing market is correcting, and that's not the cause of our economic problems, it's the result!
You know...my dad always said and all of his children have the same saying "is it a reason or an excuse". Yes, many variables too long to list here have caused the housing crisis. However, if you can afford to live in the home and you are underwater, at least it is yours. If you live in an apartment, you live by the owners rules. In your home you live by your rules. Uprooting young children from school and friends is way more traumatic than for adults when moving.
On another subject which is the job market. As a country we made a decision to ship millions of jobs offshore in order that we could buy less expensive goods. Guess what, we now import an average of $50 billion dollars a month more than we export. A good decision at the time however not anymore because other countries money is valued so low we can not compete with them and we are their dumping ground.
We have the best military in the world. Of course we do!!! If we only had to defend us it would not cost as much as it does. Japan, Korea, Germany, Iraq and Afghanistan drain us dry along with many other countries.
Housing is not the issue, money is not the issue, jobs and military spending is the issue.
"Give a man a fish, he eats for a day. Give him, yes give him the tools and teach him how to fish he will eat forever". Simply put, if we as a nation want to return to prosperity, we have to provide the means as a government and private business to hire, train and make use of our most important resource. We the people.
I walked out of my realtor's office recently because they were trying to push an overpriced house on me. The realtor said, "...but that's what the property is worth!" and she had the nerve to get upset when I replied "It's not worth what you say it's worth, it's worth whatever I'm willing to pay for it."
Poor baby. Guess she was counting on the commission to put gas in her Cadillac SUV.
Insurance is contributing to the demise of the U.S. If we got rid of all insurance, then we could "know" & pay the true cost of things. The systems/programs in the U.S. are ponzi schemes and we all know what happens to ponzi schemes when they top out. Social Security, Medicare, Housing, insurance, stock market, etc.
Almost everyone is to blame for the housing collapse - builders, buyers, banks, realtors, mortgage originators, wall street, etc. - they all pigged out at the trough. All of these parties supplied the rope and the buyers took that rope and placed it around their necks.
Anthony, I love your stuff! Anyway, here's 2 very important economic factors you are missing: 1). When the GOVERNMENT got involved in giving away Student Loans to ANYONE and EVERYONE way back when - the MONEY HUNGRY Colleges and Universities took advantage of this by JACKING UP their costs of attending at an alarming rate (at least 16% PER YEAR over the last 35 years!) which is way above the cost of living. Just yesterday I read that the outstanding College Loan Debt is now higher than the outstanding Credit Card Debt. The majority of College Graduates will not be able to afford Housing for a very long time. Combine that with the fact that the baby boomers are now looking to downsize or move into retirement communities. You now have the ultimate "Murphy's Law" scenario: Low Demand from the financially strapped - together with an Increasing Supply of Houses (in worse physical condition because no one has the money anymore to keep with the repair costs). This is much worse than a "Perfect Storm" - it's the horrible nightmare, which may NEVER end!
Housing correction and price drop are healthy for our economy and good in a long term. We are still long way from the bottom.
Save as much money as you possibly can and use it for future downpayments. Do not make the same mistakes again. House is a place to live, not ATM or investment.
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