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Let the prices fall
Monday, May 19, 2008
Wow! Even Lawrence Yun, the Chief Economist for the National Association of Realtors, is getting on the "let's get the price declines over with" bandwagon.
In this fine LA Times report by Maura Reynolds, when asked about plunging home prices, the usually upbeat Yun noted, "Peak to trough, we'll be looking at 20% or even greater" and then continued with, "Because the prices are going down so fast, we'll be hitting the stabilization point sooner".
When you think about it, maybe it does make a lot of sense to encourage the downward move in asking prices - stubborn sellers certainly aren't going to wake up to this reality without the help of the real estate sales industry and six percent of something is a lot better than six percent of nothing.
The Times report covers all the bases on the growing realization that maybe it would be best if home prices were allowed to reach more reasonable levels sooner rather than later.The hard truth is that the housing correction is turning out to be deeper and longer than nearly anyone anticipated. And that's bad news, not just for homeowners and would-be home buyers but for pretty much everyone.
The latest DataQuick real estate sales figures for Southern California should be out in the next day or two.
With every month of lower home prices, homeowners see their net worth decline. Potential purchasers are paralyzed by a lack of financing and by the fear that if they buy before the market hits bottom, they will lose money too.
...
Thomas Lawler, a housing economist who runs a consulting firm in Leesburg, Va., noted that in the last housing price correction, which occurred in the early 1990s, it wound up taking prices seven years to drop 20%. Compared with that protracted slump and recovery, he thinks the current free fall in home prices is a good thing.
"Do you want a slow bleed?" Lawler asked. "Wouldn't it be nice to just get it over with? It might be that that's what we're seeing."
Who knows what's in store for the month of April. Here's what it looked like as of March.
10 comments:
The problem isn't fear or lack of financing, the problem is lack of "fresh" buyers (first time buyers or buyers of an additional home such as vacation or rental property). Here's why.
Say Abe wants to sell his big house and buy a McMansion, but he first has to sell his house. Bob wants to buy Abe's big house, but first he has to sell his medium size house. Chris wants to buy Bob's medium size house, but first he has to sell his small house. You get the idea.
What we have is not the sale of an individual house but, in order for any of the sales in that chain to happen, the whole chain has to happen. That's only possible if there's an anchor on the end, namely a purchase of that "fresh" house by someone who doesn't have to sell his existing house first.
What happened in the last decade is that scores of new "fresh" buyers were brought into the market. Loans had essentially no requirements, bringing new (unqualified) buyers into the marketplace. People who already had houses bought second houses for investments. Now, that pool of "fresh" buyers has dried up, so the chains can't complete.
You can lower the prices all you want, but it won't restart the housing market until there's enough people to buy those "fresh" houses.
Interestingly enough, a year ago, all the (few) houses that sold in my neighborhood were bought by relocation services for people who were changing jobs. I think that's pretty much stopped now, since the relocation services got stuck with so many unsalable houses.
So, the unwinding of this will be a wave of foreclosures forcing people out of their houses into apartments, their credit destroyed. Over a period of years, they build back up their finances and credit, then re-enter the market as new "fresh" buyers.
The big question I haven't been able to figure out is what's going to happen to all the vacant houses? Other than, of course, drugs, gangs and entropy.
- Pete
Yun is a clown to think that he knows where the bottom is and that we'll be getting there quickly because prices are dropping so fast. Methinks his "bottom" is made of nothing more than paper mache. If the price drop was like a feather falling lightly, well, the bottom might support the feather. But since it appears that the price drop is like a heavy rock, there's no way this "bottom" can support the rock. The sound of paper tearing will soon be heard.
6% eh? The Telegraph (UK) had a story this weekend about an estate agent [realtor] getting business by cutting his commission to 0.85%.
Realtors want to make the commission so they want the seller to list the house at a price at which it will sell. The sooner it sells, the faster they get their commission so they want the price low enough to get a quick sale.
So Mr. Yun, et al, want the prices to drop quickly so sales will pick up and commissions will resume.
Also, it's sure frustrating to constantly read/hear the "housing correction is turning out to be deeper and longer than nearly anyone anticipated" line of garbage over and over. It's much like the crap the media kept reporting after Katrina that "no one could have anticipated New Orleans would flood like this." The New Orleans problems were well known for decades before it happened.
Tens of thousands (if not more) of people predicted the housing problem long ago. Many wrote about it. I've been reading about it, expecting it and watching it develop for years and I'm just a normal Joe. So, the constant reference to the housing bust 'surprise' is galling.
I suspect it's just literary license and a way to express frustration at the housing situation but it denigrates all those people who have been screaming for years that this was going to happen.
Also, it ignores many of the same people who are TODAY screaming that it will get worse and last a lot longer. It seems to reflect an expectation that this problem will soon disappear. It won't.
Sadly, the media is, in general, full of incompetent hacks just trying to make a deadline in order to make a buck. For me, it's best to just ignore them as much as possible.
I think prices will drop to well below all historical norms before we get to the bottom. Who is going to be able to afford a house at even normal prices? This economy has become so completely misdirected that it will take a long time before people can be put back to work on truly productive enterprises.
"The problem isn't fear or lack of financing, the problem is lack of "fresh" buyers (first time buyers or buyers of an additional home such as vacation or rental property)."
The whole reason there is a lack of "fresh" buyers as you put it is precisely due to the very reasons you listed:
- Lack of available credit (financing).
- Market Fears
The whole reason there is a lack of "fresh" buyers as you put it is precisely due to the very reasons you listed:
- Lack of available credit (financing).
- Market Fears
I think it's more than that. I have money to spend on a house - but I won't spend it on something that's highly overpriced - I judge it being overpriced by income::price ratio which can have some room to move via available credit / interest rates, but it doesn't have that much room. I don't care if the money was free (well, maybe free), it would still appear a bad purchase to me. To some like me, it's not fear, it's reason.
I have no idea why a realtor carries weight in this kind of discussion. Interviews with realtors on any subject under the sun will always carry a rosy tinge. Thats their trade. Intyerviewing unsuitable happy people is the press's trade.
Until groups like the following begin to economically and financially suffer and start to facing reality, RE sales and related transactions will be sticky and difficult in the next few years. This list doesn't even include the pain of housing dependant businesses and services from the Home Depots to roofers and carpenters.
Greedy owners
RE agents
builders
Banks and lenders
Title and escrow companies
Local Government Property Tax entities
Assessors.
Selling overpriced houses to each other got us in this mess and attempting sell overpriced foreclosures to each other certainly won't save us.
Somebody deserves and must suffer...so Let the PAIN BEGIN!
FIrst, it just occurred to me why the mass media is not necessarily reporting the full extent of all the problems. First, you've got real reporters out there trying to get a story. They say to themselves, "Who can I talk to that would be at the front lines and be able to see what's happening?" They go to a real estate agent, because they see the listings and they see the sales. The real estate agent understandably says, "Yes, things are tough, and prices aren't coming down much, but they are slowly" and because prices are dropping below what they were before, they say, "Now is a good time to buy"
Then the reporter goes to a banker and asks about how the loan market looks and the banker understandably knows it is not very pretty, but also knows that if he or she were to come out and say how bad it is getting that it would initiate an immediate loss of confidence and cause runs on the bank, which are very bad. So the banker is not willing to say how bad it is until a solution has been found which he can present along with the bad news.
Then the reporter goes to an economist and the economist is so educated with technical and difficult mathematical models and gets all wrapped around the axel with all the different variables to consider that all they can say is, "It is worse than we thought and it may not recover until early next year" or something like, "There may be sustained weakness in the economy for significant period of time."
Meanwhile, the rest of us ordinary Joes and Josephinas know darn well that if a lot of people don't pay back their loans, then no one wants to loan money. We also know that if nobody trusts other people to take care of money that doesn't belong to them, then it is only a matter of time when the money leaves the market. We also know that if there is too much housing supply and not enough demand, then prices have to come down, because wages certainly are not rising like they should enough to get rid of the supply.
But back to why the media parrots this "We-never-knew-it-would-be-this-bad" line.. When things are going good, no one wants to say things are not as great as they sound. (Warren Buffet is probably the only one that people would ever pay attention to who has been saying this all along, and even he had people saying stuff like, 'Warren could be losing his grip' Everyone else with lesser credibility was laughed off the stage, and everyone else with as much or greater credibility were in positions powerful enough that they had to watch what they said VERY CLOSELY)
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