Wikinvest Wire

Housing Realism Enters the Mainstream Media

Tuesday, December 19, 2006

It really doesn't take much gray matter to understand two very important facts about the nation's housing market and what these facts imply about its prospects in the years ahead.

The first fact is that housing has peaked, the second is that housing cycles are very long.

The simple conclusion that can be reached as a result of these two truisms?

It will likely be years until home prices exceed their 2005 highs.

A few outlets in the mainstream media seem to be putting two and two together (actually, one and one in this case). In the local paper here in Ventura County, after it was announced that the median home price had dipped more than eight percent from year ago levels, the local paper had a story with the following quote from some of the locals.

Several real estate appraisers, however, said the rebound will take five to eight years, based on historic patterns.

"I'm not sure that we've bottomed out yet," said Lindsay Nielson, a Ventura-based appraiser for more than 40 years. "We're certainly in the trough right now."
This prediction was not prominently displayed in the report, but it's a first step.

This is probably happening in many parts of the country where, now that the frenzy is over, people are taking a deep breath and looking back at previous housing booms and projecting the aftermath into the immediate future.

Pretty simple stuff, actually. Not pleasant for many people, but simple.

BusinessWeek is the latest entrant to the group of housing realists. In their "Where to Invest in 2007" year-end double-issue, they have a number of articles detailing what to expect for the housing market in the new year.

The collection of reports is notable in that they are overwhelmingly negative. Not just a little down on the formerly hot sector, but projecting a housing malaise that is now just in its infancy - one that will continue at least through the rest of the decade.

Here's a partial list of predictions for 2007:

Las Vegas
2006 Median Home Price: $324,000
2007 Median Home Price: $292,000
1-yr Change: -9.9%

2006 Median Home Price: $329,000
2007 Median Home Price: $300,000
1-yr Change: -8.8%

Los Angeles
2006 Median Home Price: $534,000
2007 Median Home Price: $492,000
1-yr Change: -7.9%

Home prices in most cities are predicted to rise modestly, but in the bubbliest areas, the prognosis is not good.

The individual reports fill in the details on the near-term forecast, hungry realtors who may not be looking out for their buyer's interest, the long-term forecast, and much more.
How Bad Will the 2007 Property Market Be?

Americans are increasingly nervous about the real estate market in 2007. They have good reason to be. But the news isn't all bad: Interest rates will remain at historically low levels, homebuyers will see more opportunities, and, best of all, for those planning for the long term, 2009 could be primed for a comeback.

To gauge what the next 12 months might look like, though, asked economists at leading real estate research firms to provide their outlooks for the housing market in 2007. The less-than-festive consensus: Home prices will continue to fall in some markets, and the rate of price appreciation will slow in most places. Declines in homes sales, which directly influence price trends, will set the stage for another year of price decreases in 2008. Foreclosures will continue to increase. For those struggling to hold onto their homes, their net worth will shrink as these homes lose value. Long-term mortgage rates will rise. Housing starts will see double-digit depreciation, the sharpest decline since 1991, the worst year for housing starts on record.
A mainstream media outlet floating the idea of giving up on real estate in 2007 before it has even started, and maybe 2008 as well? That's quite a revelation from such a prominent publication.

And that realtor who you think is working on your behalf? Think again.
Home Buyer, Beware

Ever wonder why a real estate agent seems to be steering you toward a certain house? The agent just might be in line for a jumbo commission or bonus from the owner if he or she manages to sell you that particular property. As the housing market continues to soften, some desperate sellers are offering outsize incentives to influence buyers' agents.

While the typical commission for a broker who works with a buyer is 2% or 3%, outsize commissions are becoming more common. There are 10% commissions on luxury condos in Miami and even a 20% commission on a house in Atlanta. The result can be a strong financial incentive to push a certain home.
Advice to consumers: Start with the assumption that the nice person showing you around is not your ally. Ask up front how much the person would be compensated if you bought a place. If possible, sign a buyer-broker agreement before you start looking at houses.
This is some straight talk that is worth listening to if you're thinking of buying property. You really have to wonder about the whole real estate sales business these days. A few years back listings were dear and buyers were plentiful - today the opposite is true. What poor advice desperate and unscrupulous agents would provide to sellers is completely different, and much less harmful, than that which they may provide to buyers.

This next one was the story that really stood out - 15 years until the next peak?
Housing: Curb Your Enthusiasm About A Recovery

Home prices still have room to decline, and it may take 15 years or more to reach new inflation-adjusted highs

Housing booms are short and exciting. Housing busts, on the other hand, are long and painful. So don't put much faith in those oft-heard assertions that the worst is already over. Prices are likely to fall further in many markets in 2007. In some others, prices may rise, but at less than the rate of inflation. A BusinessWeek analysis of the past three decades shows that if history repeats itself, it's likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.
Advice to homeowners: If you need to sell and you're not getting much interest, cut the price by an extreme amount. If you make halfhearted cuts, you'll remain overpriced and you'll follow the market all the way to the bottom.
That sounds just like early 1990s California - be stubborn with your asking price and you can ride prices all the way down over a period of years.

The only story that provided any real hope for the near-term future of the bubble markets was at the bottom of the list and carries a title best characterized as "tentative".
Boom! Bust! Boom?

Housing has gone from a sure thing to a complete muddle. Median prices fell nationwide for a second straight month in September, the first time that has happened since 1990, according to a report on Oct. 25. Homeowners don't know whether to sit tight or bail. They have no idea whether they're experiencing the beginnings of a deep bust that will leave a permanent hole in their wealth, or a small hiccup.
With apologies to the mainstream, the truth is that supply considerations can cause markets to diverge from what seem to be the fundamentals for a long time, perhaps permanently. One explanation for this is the "superstar cities" concept developed by economists Joseph E. Gyourko and Todd M. Sinai of the University of Pennsylvania's Wharton School and Christopher J. Mayer of Columbia Business School. They argue that certain cities -- Boston and San Francisco, say -- benefit from a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there.
It's funny that the writer apologizes before introducing the housing perma-bull creator of the superstar-cities theory - none other than Chris Mayer. This idea was scrutinized here more than a year ago in the memorable post Money Magazine Does a One-Eighty.

Notably absent throughout the stories are quotes from either National Association of Realtors Chief Economist David Lereah or former Fed Chief Alan Greenspan.

Times sure have changed.


Anonymous said...


Your median price predictions for Miami, LA, and LV are probably about right.

But it's important to remember that, when the housing market goes down, the true price decline is much worse than the median figures imply.

For example, in my suburban neighborhood west of Boston, median prices declined maybe 2-3% from 2005 to 2006. But I know that comparable houses are going for about 15% less than at the peak. Buyers are exploiting the price decline to buy more house.

Media econo-cheerleaders largely ignore this fact.

Aaron Krowne said...

Yesterday the AJC (yes, the AJC -- normally a shameless mouthpiece for the real estate industry) actually blushed a front page "Recession?" article, which was surprisingly fair. It mentioned the fact that every single one of the last 4 or 5 recessions was preceded by a housing downturn just like the present one (the chart is from my files, not the article).

Mainstream sentiment has definitely turned over.

Anonymous said...

There are no one-size-fits-all indicators for the trend in housing prices. All you can really do is look around your neighborhood and see what people are paying. This is one of the reasons why real estate trends are so long compared to other markets. In addition to it taking much longer to consumate a transaction, buyers and sellers are making uninformed decisions based on partial information, all heavily influenced by the contradictory opinions of friends, family, realtors, and the media. It is just amazing to see all the things coming true that bubble bloggers began talking about a year or eighteen months ago. The media has done the home-buying public a giant disservice by giving the likes of David Lereah a big mouthpiece. They appear to have stopped doing this and that will benefit consumers.

donna said...

It's not all that amazing to see it happen as the bloggers have predicted - it's just that some of us have been through it a time or two before. ;^)

I've been in my home 21 years now, have seen a couple of boom and bust cycles. We've refinanced many a time, but still have over $300,000 in equity, and no plans to sell anytime soon. When we do, we'll do fine. But a lot of people right now are going to hit that nasty inversion where they bought for more than they can sell for. Those are the ones most hurt by this, especially if they have speculated and own several homes.

If you buy a home to be a home, you'll never have a problem. Rent until conditions are favorable for you, buy when you are ready and the market is right for you, and it just won't be an issue. We stretched a lot when we bought because we were young and didn't have a lot of savings, but we've been amazed to see how crazy some of the cycles here have been. The young couple living next to us now basically paid for the retirement of the older neighbor couple who sold it to them. But our neighborhood is extremely stable and houses here don't turn over very often. When they have a hard time selling, we know conditions elsewhere must really be horrible. I've been reading the economic blogs for a couple years now to track when all this would start to hit - if you think housing is nasty, just wait to see what happens in the general economy the next couple of years. It will not be pretty.

I really hope all readers here are out of debt.

Anonymous said...

This housing massacre is in its infancy. expect 25-40% drops depending on the market. The bubbiest expect near high end.

It is amazing how the maonstream media was so late to the game in reporting the bubble. yes many did predict this 2 years ago. But noone confronts the sleeze at the NAR and the damage they have done to trusting fools.

Anonymous said...


soon. real soon.

TJ & The Bear said...

Median prices may decline less than 10%, but the home purchased at that median will be twice as nice as it is now.

Look for same-house declines exceeding 40% next year, and that's only the beginning.

Anonymous said...

Sadly, the folks who purchased homes recently, here in Orange County, CA, don't even have the faintest clue of what is happening. About 60% of the recent mortgages in our coastal region are interest only! Subprime loans are nearly everywhere including the self-destructive reverse amortization loan.

Many of us expect price drops of up to 50% or more in the coming few years. No joke, the carnage is just about ready to begin. Folks have been living far beyond their means for too long with bigger than necessary houses, vastly overpriced autos (mostly leased), little or no savings and a lifestyle that is just plain unsustainable.

Last week, within 10 minutes while visiting Newport Beach (AKA: The Kellogg Coast - Flakes) I spotted at least 5 new Bentley's costing more than $ 125K each. That's just for starters. High school kids with new Jags, Bmers, Benzes and over $ 40K pickup trucks and $ 50K plus Hummers, fancy clothes, etc. It seems that everyone is gabbing on cell phones and worrying about no-nothing celebs than planning for tomorrow that may pose the biggest economic danger since the Great Depression. Like Nero, these folks are fiddling while Rome burns. Their children completely unequipped to deal with hard times that no doubt are on their way. Unlike 1929, we have no sense of community essential to provide staples and other help to the less fortunate. As a nation, our manufacturing industries have been gutten and shipped overseas. Our hospitals are filled to the brim with illegal aliens. We don't have enough resources to take care of our own people, yet the morons in Washington can't seem to get it through their heads that eventually we will not be able to support, feed, educate, medicate and incarcerate up to 9% of Mexico's population now residing within our borders.

Once the housing slump hits hard, the need for illegal alien workers will fall like a rock. Another amnesty for up to 12 million illegals? What are those dummies in DC smoking? Never mind that these folks have large families that range from 4 - 6 children each! When the economy falls, will these folks contribute to our nation or will they continue to suck us dry until the American people say, enough! Go on home!

Best idea yet, pray hard!

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Stivel Velasquez said...

Several home price indexes show the housing market is likely at its weakest since 1997. The median home price fell by a fifth of a percent - the third straight monthly decline in price - according to the S&P/Case-Shiller home-price index. march madness The data is based on median prices in a cross-section of 20 American cities; the worst declines occurred in San Diego, Tampa and Cleveland. The data concurs with a recent report by the National Association of Realtors, which showed a 3.5% year-over-year decrease in home prices in October.

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