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EScroogeJr (< 20)

Crisis? What crisis?



August 20, 2007 – Comments (6)

If there is a bursting bubble on the housing market, the NAR is unaware of it. 

"In the second quarter, 97 out of 149 metropolitan statistical areas 1 show year-over-year increases in median existing single-family home prices, including nine areas with double-digit annual gains; 50 had price declines; and two were unchanged.  In the first quarter of 2007, revised data shows 83 areas had annual price increases, while in the fourth quarter of 2006 only 68 areas were up".

In plain English, as a first-time home buyer, you'll be worse off this year than the previous year. And even worse, the price dynamics does not give you any chance to get off the hook. Whenever the area is livable, prices keep going up. Whenever prices retreat, either the area is unlivable, or the discount is a useless 5% off the luxury $1M condo. Oregon is up. Washington is up. New York state is up. Pensilvania is up. New Jersey is up. The whole New England is up. Detroit is down, but it's a city of closing factories, so what's the use of it? Los Angeles luxury housing is down a bit, but it starts from $1.5M anyway.  Want to "enjoy" a 1% discount vs. last year? Welcome to the Rust Belt or to the Bible Belt. Ready to accept a rotten compromise - Raleigh, NC or Austin, TX?  Sorry, these place are up. You were not the only one thinking along these lines.

 Want to take comfort in price drops outside the metro areas, in provincial backwaters? Yes, there were some. That's what drove the nationwide median price down 1.5% vs. last year. Only, these are not the price drops that you want to see. Cheaper areas did not sell any houses at a discount. They simply sold more houses vs. the expensive areas.  Best performing states in terms of volume? Yes, you guessed it: Wyoming, Iowa, North Dakota, Oklahoma, Indiana, Nebraska.

If stock market crashes were like this, we'd be millionnaires by now.

6 Comments – Post Your Own

#1) On August 20, 2007 at 9:03 PM, leohaas (29.81) wrote:

The NAR is one of the cheerleaders of the real estate industry. That's why...

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#2) On August 20, 2007 at 9:14 PM, EScroogeJr (< 20) wrote:

Cheerleaders - maybe. This is not the same as saying that their statistics has been deliberately falsified. I would not make such a statement, unless I could prove it.

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#3) On August 20, 2007 at 11:13 PM, MakeItSeven (31.61) wrote:

The statistics was not falsified but just falsely represented.

With the demise of the subprime loans in second quarter, the "median" price this year is for a house quite different from the one last year.

You should use the Case-Schiller index instead if you want to compare apple to apple.

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#4) On August 21, 2007 at 12:50 AM, EScroogeJr (< 20) wrote:

MakeItSeven, I haven't heard about his index before, but I've just googled it, and it looks like an interesting methodology for apple-to-apple comparisons. Looks like 2.5% dip in mid-2006, with some recovery by the year-end on the US National graph, doesn't it? But I have a question. From the methodology description, it sounds like they are comparing the aggregate market capitalizations, that is to say, price changes in the expensive segment would have a larger weight, am I correct? I would rather prefer a methodology that assigns equal weights to all price points, even though "overall capitalization" is surely meaningful to the banking/mortgage industry. But thanks for telling me about this index anyway, that's the educational value of Caps.

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#5) On August 21, 2007 at 3:07 AM, MakeItSeven (31.61) wrote:

Well, this is the latest numbers from the Case-Schiller index:

"June 26, 2007 11:49 a.m. EST

 Fourteen of twenty metropolitan areas sampled revealed dropping prices in the last year. That list is lead by Detroit, which is 9.3 percent lower, San Diego, lower by 6.7 percent, and Washington, down by 5.7 percent."

Let's take this block of houses in San Diego just reported by the Voice of SD:

“The homes that have sold since 2005 on the resale market sold for an average of $336 per square foot. But the homes that are currently for sale are listed for an average of $285 per square foot.”

So, the drop is around 16% in two years.  Assuming a somewhat below-median price of 600K on those houses; assuming the buyers put 20% down payment; and assuming during the 2 years he pays about 20K more in mortgages, taxes and maintenance compared to renting the house (this is after adjusting for tax benefit).

Now, compare that to putting the 120K of investment in the stock market  (one international and one domestic fund, say) for two years, then what is the difference between the two approaches ?  Did the home buyer lose all of 120K or even more than that ?

No stock market crash can hurt more than that. 

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#6) On August 21, 2007 at 8:53 AM, EScroogeJr (< 20) wrote:

An irrelevant example. Nobody can buy a San Diego house from scratch. This is a market for Californian homeowners, and you must already own one home and tap your equity in it.

Now, if you have, say $400K equity in your first home, such a purchase makes a world of sense. How else can you tap that equity and put it to work? Sell the old house = 6% to the agent + relocation costs + closing costs + opportunity cost (no longer having the first house). Make a HEW and put in index funds? Then you will pay 8% interest on the loan, vs. 6% on a mortgage. Buy a second house, retaining the first? Yes, that's how you use your equity. 


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