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June 15, 2008

Today's Housing Bubble Post -- How Far Will Prices Fall?

-- by Dave Johnson

I was driving this morning and clicking through the AM radio stations. On one station there was a "financial advice" show, with a guy talking about how to make a "236% return" by buying foreclosed houses and renting them out until prices go back up.

In case you were wondering who is buying houses right now, it's the people who fall for this stuff.

Where will housing prices fall to? Prices will revert to the mean, and the mean is where prices were before they started going way up, plus a bit for inflation. Another way is to realize that the price of the house, if rented out, should be low enough that you have positive cash flow after all expenses, and that cash flow should be a lot better than you could get from buying bonds because of the work you are putting into it. (In my area that means house prices should be about a third what they still are.)

But before they do that they will fall a bit below the mean. Here is why. There are several factors that will pressure housing prices even when they reach the pre-bubble level.

  • Before prices can normalize people have to stop thinking that prices will go up again, and get rid of property they are "holding on to." So at the point where they reach the normal level there will be little buying interest. In fact people will understand that buying a house can be a good path to financial ruin.
  • Everyone who wanted a house really, really had a chance to buy a house. If they didn't buy a house when you could get money without even stating whether you had a job...
  • Next there is the huge buildup of inventory. There are many, many more houses out there than there were before the bubble.
  • There are all the housing developments built way outside of areas where people work, with the expectation that they would buy at as lower price there and when prices went up they could sell and make the down payment for a place closer to the job. Now that gas prices are up no one will want to buy these.
  • Then there is the coming rise in utility prices which means that the McMansions are going to cost too much to heat and cool.
  • The baby boomers are retiring, which means they will want to sell bigger houses and rent or buy smaller houses.
People have no idea how far prices are going to fall.

Posted by Dave Johnson at June 15, 2008 3:12 PM

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Comments

I agree about housing as I am in the business of building and renovating them. They became way too expensive. But it's not the house that matters as much as the property and location. Inner city and some small town properties are now at a huge bargain. Whole blocks of Cleveland and Buffalo can be bought on a song. But what to do with them?

Land, conversely won't go down as it's needed for food and development.

Posted by: datadave at June 15, 2008 9:16 PM

Interestingly, up here in the NorthEast USA, Bush's intentionally caused Depression has had some effect, but not as bad as the rest of the country.

Other than huge inflation caused by gas and food (which the GOP does NOT count as inflation any more so they can lie about inflation rates being lower than they obviously are), life up here is still the same.

Our housing is still wildly overpriced, people are driving a little less, town budgets are preparing for next year, but that's it.

Last year our town had a property tax re-assessment. Home prices were still far above the assessment amounts. A home that sold for $235,000 was still being taxed on it's ACTUAL value of $83,000, not that made-up, overpriced value of real estate 'speculators'.

The town's select board were amazed that there were idiots that actually paid three times the value for a home. But homes in our town are STILL selling for three times their actual worth.

Posted by: Comrade Rutherford at June 16, 2008 7:23 AM

My mom lives down in Arizona where the GOP has owned the state governments for decades. In the wisdom of the GOP they reduced property taxes and increased sales tax as their main source of revenue.

Now that the economy has been deliberately sabotaged by the Federal GOP (son of Nazi financier, George Bush, et al), the state and county governments have NO income. Towns are being forced to fire employees because the GOP made sure there was no money to pay their salaries. The town's library needs a staff of seven, they are down to two, and they are being told to cut costs even further.

So in AZ, where the GOP has controlled the government, they are in a sever Depression, up here in the NE where Dems sill have a role in governance, the state's budgets are doing much better.

The GOP lives on intentionally creating misery in it's citizens.

Posted by: Comrade Rutherford at June 16, 2008 7:28 AM

Corretction:

George W. Bush is the Grandson of Nazi financier Prescott Bush. I said above that he was merely the son of a Nazi, when it's George HW Bush that's the son of a Nazi, and current President Bush is the Grandson of a notorious Nazi.

(Prescott Bush was fined by the Fed for violating the 1942 Trading With The Enemies Act, for flagrantly funding the Nazi war machine AFTER Germany had declared war on the US. The Bush family love the Nazis so much more then America that they committed treason.)

Posted by: Comrade Rutherford at June 16, 2008 7:36 AM

thx for the comments, 'oomrade'.

NYTimes had an article about the next shoe to drop which would be municipal and state govts. dropping thousands of employees and cutting budgets due to the decrease in revenue due to the huge runups in 'fixed costs' that are profits for a few players in fixed markets owned by an elite class of well-heeled investors. The 'fixed' markets are energy and health care. They could consume up to 40 percent of the whole GNP and there isn't much elasticity if those two market continue to be controlled by the providers of either w/o consumers having a choice.

People with cars stuck in suburbia with jobs 30 plus miles away are an example of people 'stuck' in a inelastic market. They can only cut costs but that further erodes the economy.

And don't get me started on health "insurance".

Posted by: datadave at June 18, 2008 6:23 PM

I'm not buying until prices start going up on a sustained basis... who knows where the bottom of the market is? Who wants to pay $300,000 for a condo that could be worth $180,000 in a year?
I'd rather pay $325,000 a year later and have a reasonable basis for assuming it will be worth something close to that a year later.

Real estate values are even more arbitrary and subjective than stock market values... one look at abandoned neighborhoods natinwide demonstrates that.

Posted by: Thomas Leavitt at June 18, 2008 9:09 PM

I'm not buying until prices start going up on a sustained basis... who knows where the bottom of the market is? Who wants to pay $300,000 for a condo that could be worth $180,000 in a year?
I'd rather pay $325,000 a year later and have a reasonable basis for assuming it will be worth something close to that a year later.

Real estate values are even more arbitrary and subjective than stock market values... one look at abandoned neighborhoods natinwide demonstrates that.

Posted by: Thomas Leavitt at June 19, 2008 6:39 PM

I'm not buying until prices start going up on a sustained basis... who knows where the bottom of the market is? Who wants to pay $300,000 for a condo that could be worth $180,000 in a year?
I'd rather pay $325,000 a year later and have a reasonable basis for assuming it will be worth something close to that a year later.

Real estate values are even more arbitrary and subjective than stock market values... one look at abandoned neighborhoods natinwide demonstrates that.

Posted by: Thomas Leavitt at June 19, 2008 6:40 PM

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