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Home prices in record plunge



February 12, 2009 – Comments (19)


Anyone who steps in front of the freight train that is falling home prices and purchases stock in a homebuilder right now is nuts.  I continue to be short any that I can find in CAPS.

Home prices in record plunge

National Association of Realtors reports that home prices dropped a record 12.4% in 2008 - the biggest fall in 30 years.

The economy will not bottom until home prices do, or at least until the pace of the declines slows significantly.  The more prices fall, the less the toxic assets on banks books are worth, the more money banks need, the less they will lend, the more consumer confidence falls as they see the value of their most expensive asset implode, the more consumer spending slows as a result of this low consumer confidence, the more companies that are selling less stuff lay people off...on, and on, and on.

If it really wants to waste money trying to prop up a broken economy, the least the government could do is do it right.  It's not a perfect solution or necessarily the "right" thing to do, but the only way that I can see for the government to pull us out of this mess now is to lower mortgage rates to 4% - putting a temporary floor under housing and more money into consumers' pockets. 

I am not necessarily advocating these things, both of these would likely either be either temporary fixes which delay the inevitable or have terrible side effects, but in my opinion now that the stimulus package can't be changed this is one of the few options left that might work.

Some have said that the government doesn't set mortgage rates.  They're right, but you can't honestly tell me that if Uncle Sam really wanted to they couldn't get mortgage rates down to 4%.  The Fed could buy Treasuries like they were going out of style.  Everyone would move out of the way of that freight train pretty darn fast.  The government could even get Fannie and Freddie (which were essentially nationalized) in on the act.

I am not necessarily in favor of massive intervention like this, but instead am suggesting an alternative that wouldn't cost any more money than that was already spent on TARP, TALF, stimulus, etc... yet would likely be much more effective.

I am not looking for additional homes to be built.  There are too many already.  What lowering mortgage rates significantly would accomplish is the stabilization of asset prices and lowering of mortgage payments.  This would in turn prop up or at least put a floor under all of the toxic assets on bank balance sheets that are tied to housing.  Thus keeping the banks from constantly needing more money.

At the same time some of the money that consumers were keeping from their significantly lower mortgage rate, in many cases several hundred dollars per month every single month for years rather than a stupid $10 per week for a year or two, would flow back into the economy in the form of increased consumer spending.  This would at least slow the job losses that we have been seeing.

If one put the brakes on the rapidly deteriorating economy, they could then work on long-term solutions to our problems like encouraging domestic manufacturing, a switch to domestic fuel sources, better education for our children, better mass transit, a smarter power grid.  These things are very necessary, but they take time.  Fix our short term problems ASAP with lower mortgage rates and then move on to fixing what's really wrong with America.

Moves like this to make mortgage payments are not unprecedented.  Years ago the vast majority of mortgages were only for 15 years.  In an effort to pump up asset prices, the government pushed the market towards 30-year mortgages.

I'd love to hear others' thoughts on this subject.


19 Comments – Post Your Own

#1) On February 12, 2009 at 11:35 AM, TDRH (96.87) wrote:

" but the only way that I can see for the government to pull us out of this mess now is to lower mortgage rates to 4% - putting a temporary floor under housing and more money into consumers' pockets. "

The problem is it would be trap for those who chose to buy at the current price.   What happens when interest rates rise and you want to sell your house.  There will be few qualified buyers.

The price/value decline is a necessary and painful correction to historical relations between income and home prices.  Any interference only delays the correction.

Assuming Median income does not decline dramatically , the median home price in the US should be more or less $150K.  Right now it is at $178K.   Housing pricing will stabilize at $150K.   This will not be a recovery, there will be no rebound, it will be an L-shape for many years to come. 

Very nice post again, not trying to undermine your case in any way.

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#2) On February 12, 2009 at 11:59 AM, devoish (67.86) wrote:


I read on Calculated Risk the inventory of homes is 19million if you include homes that are not on the market because people are waiting for better prices to sell, and homes that builders could complete with the addition of the last kitchen counter. That was before 3 million people lost their jobs.

You can lower mortgage rates to 4% but according to Calculated Risk, a substantial number of foreclosures and late payments were happening even before the low teaser rates were reset. The homebuyer does not have enough money. Your plan will probably just move some home mortgagers/owners from one house into the next, but I doubt it would substantially reduce inventory of empty homes. For every CMG/B restaurant there is probably only one person who can genuinely afford a home, if that (what do they pay management?).

Actually I think we all just need to take some well earned time off, relax a little and then do a little home repair (infrastructure/environmental cleanup etc).


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#3) On February 12, 2009 at 12:06 PM, DemonDoug (31.36) wrote:

lowering mortgage rates will do nothing except keep housing priced at unaffordable levels for most americans.  Would you rather buy a house for 250k at 5% interest, or the same house across the street for 125K at 10%?

This is a no-brainer to me.

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#4) On February 12, 2009 at 12:18 PM, MarketBottom (28.52) wrote:

Due to the extreme excesses of the last sixteen years, all asset classes will revert to and through the mean, and stay below mean for a number of years. Interest rates at this stage have very little effect on the outcome.

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#5) On February 12, 2009 at 12:58 PM, cbwang888 (25.57) wrote:

The longer homebuilders survive, the longer the housing slump will last. Homebuilders should be mothballed or have their credits denied.

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#6) On February 12, 2009 at 1:08 PM, jmt587 (99.42) wrote:

I wish you could recommend blog replies / comments.

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#7) On February 12, 2009 at 1:47 PM, TMFDeej (97.65) wrote:

Doug, it's not about what you or I want, it's about fixing an economy that is spinning out of control which the government seems determined to do regardless of what anyone says.  To me lower mortgage rates seems like the fastest way for the government to accomplish its goal of stabilizing the economy.  They are pissing money away on all sorts of unproductive things like recapitalizing banks rather than targeting the cause of their woes, home values. 

Continually giving banks money is like repeatedly filling up a car that has a hole in its tank with gas rather than just plugging the hole.

If Uncle Sam wants to interfere with the correction of the excesses that have occurred over the past decade, the least they could do is do it right.

Lower mortgage rates would accomplish much more than putting an artificial floor under home values.  It would put real money back in the pockets of American consumers.  The government seems to think that tossing a token $10 per week towards someone who has seen tens of thousands of dollars in wealth evaporate over the course of a little more than a year will fix things.  It won't.  It's too little money and one-time payments are saved, not spent.

Cutting everyone's mortgage payment on their existing home by several hundred dollars per month would do more to pump up this farce that we call an economy than anything else the government is doing now.

Once they get things stabilized, they can focus their attention on doing what it right and formulating an actual plan for long term economic growth through better infrastructure, more domestic production, better education, becoming less reliant upon foreign oil, whatever...


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#8) On February 12, 2009 at 1:49 PM, cubanstockpicker (21.08) wrote:

There has been a new stream of sales hitting record numbers. Banks are dropping the houses for a loss at 50% and 60% TO GET RID OF the asset. The good thing is the floor is 50% of peak cost in Miami. The houses that are at these level are now turning a sale over in less than 3 weeks. The bad thing is the banks will take the hit, good news is they are getting liquidity back albeit at a severe loss. The homebuilders wont make a dime until the next 2 years, people stop buying homebuilders, you will go bankrupt.

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#9) On February 12, 2009 at 1:53 PM, ByrneShill (82.85) wrote:

Deej, i know this is mostly an answer to me. So here I go:

About buying treasuries: Yes, the fed could buy a gazilion $ of treasuries. It would lower mortgage rates a bit. But to significantly lower those rates, insane amount of money (which would dwarf the current tarp amounts) would be necessary. So it's either issue more debt or print more money. Either way it is extremely unfair to those who didn't buy. It is a simple transfer of wealth from renters to owners. If you're gonna do that, just tax every renter and give the money to house owners, cause that's the same thing, but with much less hassle.

Involving Fannie and Freddy in the mess isn't a great idea either. Politicians playing with the Maes is what got them killed in the first place.

It also amounts to subsidizing housing, which the US definitely does not need. The tax deduction of interest on mortgages is bad enough, stup!d stimulus housing credits makes it worse, don't pile up with arcane methods to subsidize on top of that. As TDRH says, at some point, those subsidies will have to go away, and the housing market will crash then.

You also have to understand that 4% long-term mortgage rates is unsustainable. 7% (2 for risk, 2 for profits, 3 for inflation) is closer to a normal long-term mortgage rate. What you're proposing is essentially half that. That's just insane.

Then you have the d|mwits who bought their houses on reverse-amortization or no-interest mortgages. These guys are cooked no matter what the interest rate is if they have to refinance to 30 years. Interest rates won't matter then, they'll foreclose no matter what, pulling prices down.

Not that it's really bad. If the american dream is a suburban house with a dog and white picket fence, then the lower the prices will go, the more people will live the american dream. Housing prices desperately need to come down. I know you don't like that, since you personnaly own a house, which is probably worth less than what you paid for, and, like every home owner who's got a mortgage, you'd like to see your interest rate come down. I'd like to see mine go down too. But the cost to interfere with market forces is too high. And in the end, you (or your kids, or grandkids) will be the one footing the bill.

I didn't give much attention to the US stimulus plan, but at the end of the day, infrastructure is infrastructure, and the only thing which you should care about is if those infrastructures, whether they are highways, power lines, fighter planes or a more performant software for the IRS, will make the US economy more performant.

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#10) On February 12, 2009 at 2:08 PM, ByrneShill (82.85) wrote:

Cutting everyone's mortgage payment on their existing home by several hundred dollars per month would do more to pump up this farce that we call an economy than anything else the government is doing now

Cutting everyone's mortgages payment on their existing home by several hundred dollars per month would also cost several hundred of dollars per month per home. If everyone had a home, then that would merely be signing a check to yourself. Since some people rent, it's just taxing renters to give to owners.

It's too little money and one-time payments are saved, not spent.

1)Consumer spendings got US in the poo it is right now.

2)What do you think happens when a dollar is saved? If it's in a saving/checking account, the bank can lend it, lowering (on aggregate) the interest rates (a buck in a bank account is a buck offered for a loan). If the saver pays his mortgages, it frees up money for the bank to lend, lowering interest rates on aggregate (again, it's a raise in money offered for lending).

They are pissing money away on all sorts of unproductive things like recapitalizing banks rather than targeting the cause of their woes, home values. 

This is where you're wrong: The root of the problem isn't home values, it's home prices. Or, to be more precise, the disconnection between home prices and values. Remember that price is what you pay for something, and value is what you get. Right now prices>value. At some point, prices will come down  and price will equal value. Until then no one should buy. But lower prices isn't the problem, really, it's the solution. The problem is that prices got too high.

Maybe price will become lower than value at some point. Then it's gonna be time to snap up a house.

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#11) On February 12, 2009 at 2:13 PM, devoish (67.86) wrote:


I know this is off topic slightly but you have twice griped about the insignificance of the $10/week tax credit. What if it was $1500 bucks, or one weeks pay? Would that make it significant to you? Not right or wrong, significant.

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#12) On February 12, 2009 at 2:51 PM, OleDrippy (< 20) wrote:

Artificially low interest rates are what got us in this mess. People need to lose their houses and prices need to reach a less levered equilibrium. Trying to set interest rate floors, etc. will only exacerbate and prolong the problem.

And people say there are no Libertarians in an economic crisis!! WRONG!! :)

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#13) On February 12, 2009 at 2:57 PM, AnomaLee (28.95) wrote:

All the kings horses, and all the kings men...

I wrote about this just about a year ago here. I stated that one of the simplest ways to limit this crisis would be to increase the federal minimum wage and peg all wages in the U.S. to an index mandated to increase by at least 3-4% for the next 3-4 years while cutting the corporate tax significantly to allow businesses to cope with this program while satisfying the theory of the Laffer Curve.

Access to credit is not the problem --- prices are.

Your idea is to stabilize credit in an attempt to stabilize housing prices. If the intent is to encourage inflation then wages must increase because it is the only way that inflation can be absorbed into the system.

Reason: Equillibrium is achieved through real(relative) prices

Of course the price of other goods will increase, but I assure you there won't be any re-igniting of a bubble in housing. Housing would still decline in real terms, and it will continue to do so further in real value regardless of what interference occurs.

I don't think anyone would be very receptive to my idea, but it was a far better idea than any other inflationary agenda. It was simple, inflationary, and cheaper to execute.  People have been subsidizing their real(relative) stagnant wages with credit for over a decade. Unless, of course anyone believes the CPI data computer over the past 15 years.

Consider when gas was $4 that the federal minimum wage had not increased in 10 years. People lost years of real disposable income because of distorted credit markets.

When unemployment begins to near 10%, and interest rates begin to rise which will cause many small banks and thrifts into bankruptcy, foreign demand for our debt will not be able to cope with our growing deficits. The only way to prevent further downward spiraling at that point will be coordinated nationalizations of the banking system and the establishment of another Bretton Wood-type system.

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#14) On February 12, 2009 at 4:27 PM, TMFDeej (97.65) wrote:

I'm not necessarily advocating taking this action, just saying that it would work much better than what the government is doing right now.  If they're going to go to all the trouble to interfere with the free markets they should at least do it right.

As far as this being only a temporary solution goes, I don't think that there is any permanent solution to this problem.  The government lowered rates when the Internet bubble popped, creating the housing bubble and it exascerbated things by removing the leverage caps on banks and not policing the ratings agencies.  Nothing but a lot of pain will likely solve this mess, but Uncle Sam seems to be determined to reflate this bubble.  This might do the trick for a while and buy time until we can take actions to get a real economy going.

You're right, this action would be completely unfair to prospective buyers and renters, but nothing is fair about throwing money at the banks that caused this whole mess to begin with either.


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#15) On February 12, 2009 at 6:54 PM, devoish (67.86) wrote:

Better than TARP, yes.

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#16) On February 12, 2009 at 7:22 PM, Nainara (< 20) wrote:

Whats with all this interest rate beating-around-the-bush? 

With 1-trillion dollars of stimulus money, the government could buy up 4 million $250,000 homes and bulldoze them into the ground. Not only would it would serve as a backstop for existing home prices, but bulldozing those houses would create many thousands of new jobs!

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#17) On February 12, 2009 at 9:17 PM, AbstractMotion (< 20) wrote:

Personaly I liked the proposal Vikram Pandit made to deal with the problem a lot more then then trying to force rates down or flat out subsidizing a portion of people's payments.  Basically he said that the government should essentially buy up these assets are the current mark to market and obligate the banks the pay down any future losses at a later date, perhaps a minimum date could be slapped on like 5 years or something just so just to let everyone know that huge payments wouldn't have to be made in the near future while the banks are still recovering.  This should basically get them off the banks books, give them time to mature to a reasonable value and obligate the banks to pay for it over the long term.


I'm really against the concept of trying to prop home builders, real estate companies and people who flat out purchased a home they could not pay for and that really seems like a goal a lot of people are trying to push for here.  These groups are the other guilty party in this mess.  Housing prices need to reach a fair market price and interfering with that process is only going to lead to trouble down the road.  However I do agree that the driving force shouldn't be speculation and uncertainty, but the difference in supply and demand.  We should not be trying to prop these industries back up with easy credit and ridiculously low interest rates, that's really what got us here in the first place.


Long term I think the government really needs to evaluate or regulate the right of the banks to issue these time bomb loans too.   While I'll admit it's somewhat stupid to accept one of these loans over a good fixed rate loans, the systemic risk they pose should really limit how many of them can be issued and to what type of credit risks.  I can see a place for these in the lowest levels of high risk credit, but the fact that so many were issued to people with decent ratings does strike me as greedy on the issuers part.  

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#18) On February 13, 2009 at 11:16 AM, smcecil (< 20) wrote:

Government should give incentive to banks to drop rates.  The rates are at record lows, and the market has dropped 16-20% and yet the sales are stagnant.  This means if another .5-1% were shaved off it could push sales.  Prices would not increase because houses are just not selling as it is with historically low rates, so another drop  will only be a little nudge -- flood gates will not be opened, and the housing market won't suddenly sore again.  History shows us this anyway - there are several years of flat prices before prices start to rise again after a steep drop.

I certainly don't think lending standards should be loosened again any time soon.  Qualified borrowers ARE getting loans now -- 20% down, credit score >700, normal DTI (40%ish).  This is what is was like 15 years ago, before the push for subprime loans really took off.   These loans are perfectly appropriate -- And since taxpayers are funding the banks now, we should really not go back to high risk lending to unqualified borrowers.

These qualified buyers just need to feel less nervous -- the need the government to stop telling them we are in a Great Depression and everyone is going to lose their jobs.  Many of these people are first time home buyers and can afford to buy a home for the first time now, but they are not experienced which makes them nervous.  At 4% or 4.5%, they'll be more likely to take the plunge.  I think it would be a good idea.

Don't worry too much about these low interst rates -- they'll be temporary.  Sure we have low rates now and we have deflation now, but once this Spending bill gets out there, I think we'll be facing inflation soon enough.  It's inevitable.

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#19) On July 11, 2009 at 8:48 AM, Tudd (< 20) wrote:

Agree with you thats first time ever record decrease in sales of houses as economy in recession people are not able to pay their installments due on their proprty and even they are willing to sale it out to pay their dues.Also there is long pending list of credit card processing and banks are going to backup all the related files.

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