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May 24, 2007

Today's Housing Bubble Post - HUGE Price Drop

-- by Dave Johnson

The headline masks the real story: Home sales soar by record amount. But in the story, this:

However, the median price of a new home sold last month fell to $229,100, a record 11.1 percent decline from the previous month. The big price decline indicated that builders are slashing prices in an effort to move a huge overhang of unsold homes.
ELEVEN PERCENT PRICE DROP IN A MONTH???
The drop in median prices in April compared to March was a record one-month decline. If the April sales price was compared to the sales price a year ago, the decline was 10.9 percent, the biggest year-over-year drop since 1970.
So is it a good idea to buy a house when prices are ropping eleven percent a month?

So where should prices be before you think about buying? Well, take the price before the bubble - maybe 1999 or 2000 - add in inflation, and there you are. In other words, they have to fall at least 50%, more in many areas.

Posted by Dave Johnson at May 24, 2007 9:23 AM

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Comments

Is New York City, especially Manhattan but the other boroughs as well, the only exception to this? In Manhattan, the price for APARTMENTS has risen by about 23% over the past year! There's lots of building going on, pretty strictly for luxury apartments, of course. Entire neighborhoods, including mine, are transforming completely within a few months to a year; it used to take about 10 years. What's fueling this? I assume huge profits on the stock market -- plus the desire to live close to where one works considering the skyrocketing price of gasoline.

Posted by: MJ [TypeKey Profile Page] at May 24, 2007 11:53 AM

Dave - A 2000 price + inflation is probably too low. If you wait for that, you might be waiting forever. The reason is that in 2000, 30-year fixed rates were about 8% and today they are about 6%. That drop in rates led to some legitimate price rises for housing (most of the rise was the bubble, but some of it was based on the fundamentals). Gains based on the changes in prevailing interest rates are likely to persist for as long as rates remain low.

However, it's possible that the housing correction will overshoot, and that prices will go down to where they were in 2000, but if you're counting on that you're taking big risk. If it does happen, I'll cash in everything I own and buy as many houses as possible - because they will be sure to rise significantly from that point.

All that said, prices are going to keep falling for some time.

Posted by: jaymuntz [TypeKey Profile Page] at May 25, 2007 7:02 PM

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