April 17, 2009
-- by Dave Johnson
This is my prediction: there is a new wave of housing price drops and foreclosures coming as holdouts stop holding out. Only when reality intrudes on people's belief that owning a home is supposed to be an "investment" will things be able to start to stabilize. You are supposed to buy a house to live in.
The current "green shoots" euphoria will subside, and then people who have been holding out because "real estate always goes up" will stop holding out. Only then will expectations and behavior start to change in ways that begin to make a difference for the long term.
1) Unemployment is still rising, and rising fast. Unemployed people can't pay mortgages forever.
2) Houses still cost more to buy than to rent in most areas so it is still a bubble. House prices have not fallen to the level they were before the bubble, so it is still a bubble. And the average house price in most areas is still higher than the average-wage person can buy so this is still a bubble. Meanwhile there has been an increase in the number of houses (supply is up), while the boomers are starting to retire and want to sell their large house (demand is down). And unemployment is also reducing the demand side. The increase sales and price drops we are seeing is from people who are being forced to sell, not from people realizing house prices are too high.
3) Distressed people have been holding out since the recession started, but can't hold on forever and savings are running out. This includes renters so rents will have to start dropping as they run out of money for rent (feedback to #2 above) and some of the houses that aren't selling become rentals. Compare California to Michigan, and you'll understand what I am saying. Michigan stopped holding out a while back and rents and house prices have adjusted accordingly and are affordable. California still thinks things are temporary and will get back to "normal" and people are "snapping up" houses that are as "low" as $400,000 for a 3br/2ba.
4) I'm including everyone whose house is "under water" in #2, and this is an increasing number of people. Everyone thinks "housing will go back up" so they aren't walking away yet. But if it turns out that housing doesn't "always go up" they will stop holding out and go buy something based on what they can afford with no expectation that it will go up.
5) There is a HUGE inventory of houses being held off the market. Banks are holding houses off the market. People who would have sold are waiting to sell (holding out), and there are still just a record number of houses on the market now that haven't sold yet. This inventory is going to overwhelm any current increase in sales that is based on people believing we are "at a bottom." There just are many many more houses for sale or waiting to be sold than there are buyers. This is not a "crisis of confidence" where people just aren't buying because they are scared, it is a crisis of too many people not having money, just debt.
6) People buying now (those who aren't yet broke from buying real estate) will lose their shirts, too, because they are expecting that "this is a bottom" and it isn't.
What it comes down to is that expectations and behavior haven't changed yet. Real estate doesn't "always go up." Real estate is not the path to wealth, except as a bubble is developing. Real estate is not a sure thing otherwise. You would think that so many people being wiped out by thinking these things right in front of everyone's eyes would be a clue, but not yet. This is because the bubble developed over a long period, and people got used to real estate "always" going up. When people start to come down to earth and see reality and realize that owning a house can be a costly burden, then things will get to the point where stabilization is possible. As long as owning a house is seen as a path to riches things cannot stabilize.
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.
Posted by Dave Johnson at April 17, 2009 9:07 PM
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