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EScroogeJr (< 20)

Median home price rises for the first time

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September 25, 2007 – Comments (25)

Anybody there still dreaming about cheap houses? The NAR has just driven the last nail into the coffin of the Ever-Hopeful-Would-Be-First-Time-Homebuyer.  With the total sales dropping like a stone, and with Builders like HOV pretending to cut prices, the poor first-time buyers are increasingly being forced to pay more.

How much more? The median price rose to $224,500 in August, up 0.2% from August 2006. Still down in real terms, but for the permabears hoping for a 10% discount, today's news is going to be like a cold shower pouring out from a hot water tap. Yes, folks, the news is out! As I already explained in an earlier post titled don't count on cheap housing, prices of entry-level homes have been growing all along, a phenomenon the bears pretended didn't exist. Now, with the numbers officially confirming the trend, the permabears can no longer deny that the king is naked.

For many months in a row, the falling median price was used by the permabears in their effort to prove that a price hike is actually a price decline. In short, the way it worked is as follows: people buying luxury homes from TOL were taking a break, while people buying manufactured homes in trailer parks, 1-bedroom coops in slums, 400 ft^2 studios, 1-family wooden shacks in the center of the Arizona Desert, were desperately buying this substandard housing at ever-steeper prices. As long as these prices, while growing 20--30% a year in many regions, still remained substantially below the US average, this buyer desperation was helping the permabears promote their cause because it was causing the median to move down.

But as a poet rightly observed, nothing gold can stay. The midnight clock strikes, and permabears, their thesis shattered and their hopes destroyed, are caught by surprise like Cinderella at the ball. What ended the permabear party was a simple, inevitable, and 100% predicatable process: as the typical price of entry-level homes was beginning to approach what used to be the median line, the leading edge of this category of housing crossed the boundary, and some of the first-time buyers were now making their purchases on the other side of the fence. The party is now over. As entry-level homes keep getting more expensive, all those transactions which previously were helping the permabears look smart, will now be making them look foolish. As the tidal wave of desperate homebuyers rolls over the $224,500 boundary, this median won't hold.

What will the permabears say then? Quote the Case-Shiller index? That may work for a while, but may I submit that when you see a $200,000 co-op back on the market at the price of $270,000, it's a poor consolation to know that McMansions are getting bigger? Yes, ladies and gentlement, you can't fool all of the people all of the time. You can't tell a desperate homebuyer who sees his last chance of homeownership moving away faster than a racing car to wait for a dip in McMansion prices.

Anyway, even this will only be a temporary reprieve becuase the luxury segment isn't going to fall further against this background. The owners of luxury homes are not going to lower the asking price when they see the median moving up. Seller psychology just doesn't work that way. When they see that fear was overblown, sellers will simply call their broker, tell him to hike the asking price 20% and then go on vacation and rest comfortably under the palm tree until the cell phone rings. 

My blog is full of comments from people who believe prices can only fall because nobody can afford them. Let them explain then why the median price is rising. After all, the housing bubble has burst, right?

Let us be generous to the permabears. There is still one explanation they could use: changed composition of sales. With the subprime crisis unfolding, maybe the poor people are now buying less houses than the rich people?

That's a logical possibility, to be sure. But it wouldn't be so obvious. If anything, the 44% revenue drop at LEN compared to a mere 12.8% drop in home sales indicates that the crisis is mostly limited to the upper segments of the market. But even if the permabears were able to identify the evaporation of subprime mortgages as the culprit, that would still put them in an awkward position of having to tell prospective buyers to wait for a discount price while the median price is going up.

Besides, that would be rather inconsistent on their part. After all, when the median was falling, they didn't care about the composition of sales. It's time to care now. 

25 Comments – Post Your Own

#1) On September 26, 2007 at 12:13 AM, kristm (99.75) wrote:

I just lost all respect I ever had for you...

The median price is rising but the number of actual sales continues to fall. The sales can only drop so far before they have to lower prices or cease to be in business. It's simple economics. They think they can keep prices at current levels and wait on buyers to blink, like a giant game of chicken. But it's not going to work that way.

You can take your bottom-third CAPS ranking and all your housing stock outperform calls and go jump off a pier with them.

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#2) On September 26, 2007 at 12:35 AM, renegade49 (90.26) wrote:

I won't be as harsh as kristm, but I have to confess I'm starting to wonder what planet you are observing, 'cause back here on earth things look a lot different to me.

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#3) On September 26, 2007 at 1:04 AM, EScroogeJr (< 20) wrote:

Sorry, kristm, I can't follow your reasoning. Individuals who want to sell their old house must lower prices or cease to be in business? What business? They don't have any business to cease to be in. Why "must lower prices?" They have freedom of will. If they don't like your bid price, they can decide not to sell or to sell later. What "lowering of prices" in the cheap-housing segment when demand exceeds supply in that segment and numbers show that prices are growing? What "outperform calls"? An outperform on Joe Schmuck from Atlanta putting his venerable 50-year-old 2-bedroom condo for sale at 5% above the US median? Or maybe in your mind, every seller's name is Hovnanian? :-)

renegade49, your profile says Seattle. Tell me the truth, if you were shopping for the cheapest home in Seattle today, would you get a better price than last year? Just between you and me. I won't tell anybody, promise.  :-)

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#4) On September 26, 2007 at 2:18 AM, renegade49 (90.26) wrote:

Seattle and places like it are what gave the uptick to the national median.  Some areas like mine are booming economically. But even here, there's fatigue setting in and inventories are starting to grow.  Use a little common sense.  Everyone who could afford to buy a house at way overvaluations already did so and thanks to the subprime market a whole lot of people who could not afford it also bought.  A lot of people do not have the choice of waiting for their price as people have to relocate because of new jobs, etc.  And God forbid we go into recession and people start losing their jobs, because instead of the 15-20% drop I am expecting, it will be much, much worse.  While I agree with you that the goverment will try it's best to prevent a meltdown, it will not be able to prevent a significant correction even if rates go to zero.

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#5) On September 26, 2007 at 8:29 AM, EScroogeJr (< 20) wrote:

This is all good and well. And yet I haven't heard your explanation of the rising median. "Seattle has spoiled my theory" and "prices are falling, though I must pay more" can't be taken very seriously.

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#6) On September 26, 2007 at 8:32 AM, TMFHelical (98.71) wrote:

EScroogeJr,

Good post and I would expect that your comment late in the post is correct, it is the mix of homes selling that is driving the uptick.  Mortgages are going to those who can afford them and the glut of inventory is on the high end of the price scale.  Seems that way in the greater Boston area anyway which has seen a great deal of mansionification over the last few years.

Zz 

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#7) On September 26, 2007 at 8:33 AM, TMFHelical (98.71) wrote:

EScroogeJr,

Good post and I would expect that your comment late in the post is correct, it is the mix of homes selling that is driving the uptick.  Mortgages are going to those who can afford them and the glut of inventory is on the high end of the price scale.  Seems that way in the greater Boston area anyway which has seen a great deal of mansionification over the last few years.

Zz 

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#8) On September 26, 2007 at 8:45 AM, TDRH (99.65) wrote:

Really all I can say is I hope that you are not gambling your retirement investing in homebuilders.    Playing devils advocate is fine as long as it is a personal cry for attention.  If you really believe this you will lose. 

 

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#9) On September 26, 2007 at 9:19 AM, EScroogeJr (< 20) wrote:

HelicalZZ, I think it is a little bit of both. After we've had the riff-raff removed, it turned out that the lower-middle class looking for a minimal comfort at a still reasonable price must spend  more than $224,000. Unfortunately, this price is also going up becuase population is growing and all construction is in the luxury segment.

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#10) On September 26, 2007 at 10:31 AM, FourthAxis (< 20) wrote:

Scrooge...man...I don't know what to say.  I'm worried you're living on another planet.  However, I'm proud that you have the nerve to be such a contrarian in the face of such obvious evidence. 

HOLY SH*T  You're actually quoting the NAR!?!?!?  

Go read the LEN quarterly, then come back and tell the same lie twice.

 

 

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#11) On September 26, 2007 at 11:12 AM, EScroogeJr (< 20) wrote:

ForthAxis, I'm just slightly worried that may be rushing to comment immediately after reading the headline. Otherwise you'd have realized that I'm "quoting" hard cold numbers, not what the NAR hopes will happen, but what has already transpired. By the same token, TMFBent, floridabuilder, and others who are gloating over that 12.8% drop in sales in the NAR press release can as well be accused of "Quating the NAR".

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#12) On September 26, 2007 at 1:05 PM, TMFKopp (98.25) wrote:

I'll just throw in here that it's great to have someone representing the bull side of the housing market. If we had just bears I'd be really worried (I've heard one-sided markets don't work too well... ask Pets.com and the other internet bubble stocks).

I figure if you take some of your bullish thoughts, mix it (carefully, you don't want an explosion..) with a helping of the abundant bearish thoughts and then maybe sprinkle it with a dash of the hello-I'm-Switzerland-I'll-just-stay-neutral flavoring that I've been sitting on, we could probably get pretty close to the actual outcome.

Of course, I could care less about the homebuilders... I just would like to see us avoid a massive housing-induced recession.

kopp 

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#13) On September 26, 2007 at 1:13 PM, FourthAxis (< 20) wrote:

I'll be clear.  I think the NAR are a pack of liars.  I think their numbers are inflated crap.  No one (except realtors) have been able to reconcile those numbers with the economic data coming out. 

"The realtors group showed a rise in U.S. median home prices, but a separate report by S&P/Case-Shiller, also released Tuesday, showed the decline in U.S. home prices accelerated in July. Its index of 20 U.S. cities fell 3.9 percent in July from a year ago, the steepest drop since July 1991." 

Hmmmm...who has the incentive to inflate NAR or Case Shiller?

Just for kicks, we got new home sales data coming out tomorrow.  I'll stop in afterwards to see how the HBs are doing.

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#14) On September 26, 2007 at 1:20 PM, leohaas (31.85) wrote:

My fingers have been itching since Scrooge started his bull argument for housing, and this time I could not resist.

In general, Scrooge is doing an excellent job of arguing his case. I always like to hear both sides. CAPS is at risk of "group think" (see Iraq for what that can result in), so having someone argue the other side adds tremendous value.

Quoting NAR statistics, however, does not add to Scrooge's argument. The NAR is the chearleader of the 6% industry. That means that good numbers need to be taken with a grain of salt (even if they are claimed to be "hard cold"), and bad numbers are usually spun so as to look not so bad after all.

Scrooge, keep up the good work. In the mean time, I see my put options on XHB, PHM, HOV, and LEN increase in value. 

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#15) On September 26, 2007 at 2:11 PM, EScroogeJr (< 20) wrote:

Let us try to be objective. The median and the Case-Shiller are two entirely different indexes. Each has advantages and disadvatages. The Case-Shiller is a weighted index, so it doesn't really tell you what's happening in the cheap segment. Simply put, a 1% discount on a $1M house and a 10% hike on a $100K house would balance each other as far as Case-Shiller is concerned. The median is not a very meaningful number either, as I keep repeating all the time. Ideally we should be looking at decile individually. On the positive side, the median (unlike the Case-Shiller and the average) has the advantage of not being skewed to either side. I would be using Case-Shiller for quantitative analysis of the luxury segment (think TOL, HOV, etc.) and the median for trends analysis. The 0.2% rise in the median does not mean that HOV is going to report a great third quarter. The main point of my post, if you pay attention, is that the bears have been using the median while the going was good for them, and now they're switching in mass to the Case-Shiller
 camp when the median is no longer convenient. And I do see a problem with that.

Scrooge. 

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#16) On September 26, 2007 at 5:43 PM, FourthAxis (< 20) wrote:

Don't Worry All Recessions Are Local

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#17) On September 27, 2007 at 1:18 AM, kristm (99.75) wrote:

The problem here isn't with people selling their own homes where they live, it's with selling houses built or bought solely as an investment - the massive planned-community developers and the smaller contractors building a few homes at a time along with the house brokers and "flippers." They're the ones that are in trouble and they're the ones who will blink first when it's time to do a staredown on price.

Houses bought or built as investments do nothing but depreciate and cost money when they're sitting empty, so the owners of those properties have a lot more to lose than average joe homeowner. People who live in their homes have no strong incentives to sell at a lower price unless there's a special circumstance (like needing to relocate).

Prices for lived-in housing will hold steady as investment home sales plummet. New/empty home prices will eventually drop far enough to cause sales to pick up again, but the sellers of lived-in homes will have to lower their prices at that point to compete or just stay where they are. If they stay where they are, they won't sell many and the prices they want for their homes won't make an impact on the median sale price - so the cheaper selling investment properties will make the median price fall.

How's that?

(If you think this is mean just wait until I finish writing a blog about China I've been working on for a week.)

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#18) On September 27, 2007 at 2:26 AM, renegade49 (90.26) wrote:

Great link FourAxis.  The speculators are a big part of the problem in places like Florida.  But much larger is the pool of people that traded up or bought their first home under suicide conditions.  One of my kids bought a house a couple of years back and the first thing I inquired about was if it was a regular prime 30 yrs morgatge or an A.R.M.  The answer was "An A.R.M.?  I would never do that daddy!"  I was so proud. 

I do appreciate the contrarian point of view.  I've always been a contrarian myself.  I enjoy reading this blog a lot as it generates a lot of discussion.  But after reading all the various blogs and the financial news and analysis in a myriad of publications I have to come to the conclussion that the evidence is so overwhelming that housing will continue to drop and that there is an actual risk that it will drag the whole economy into a recession, that Scrooge is just plain 99% wrong.  I wish he wasn't, because this could turn very ugly and painfull for America.  We continue to spend, both as a nation and as individuals, like a bunch of drunken sailors on shore leave.  The goverment sells the country to the China ATM and individuals sell their very homes to the home equity ATM.  We are the fattest nation on earth in more ways than one.  Oh well, I'm saving up for my $80,000 luxury condo in Miami and taking Mandarin lessons.  

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#19) On September 27, 2007 at 3:52 AM, EScroogeJr (< 20) wrote:

kristm, I'm under the impression after reading your take on prices that for some reason, you believe people like TOL are selling houses below the median :) Am I right?

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#20) On September 27, 2007 at 11:41 AM, kristm (99.75) wrote:

TOL isn't selling houses at all right now, mostly because they won't lower their price below the median.

It's like illegal price collusion - everybody keeps their prices high because they know once one company lowers prices they'll all have to lower prices. Like two gas stations across the street from each other. As long as they both keep prices the same they'll be OK but if one lowers prices the other will too.

Once somebody in housing blinks and drops prices to improve slipping sales, the entire price structure will slide. And we'll all be better off for it.

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#21) On September 27, 2007 at 1:49 PM, TMFBent (99.81) wrote:

The reason escr's argument doesn't make sense is that the NAR numbers aren't  adjusted for things like rennovation, addition, etc. The case shiller index out this week shows an enormous and accelerating drop in home prices. It compares like sales to like sales, so it is a far better measure. Finally, remember that the numbers from the NAR don't record all those seller giveaways, which total tens of thousands of dollars these days.

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#22) On September 27, 2007 at 6:58 PM, EScroogeJr (< 20) wrote:

"The reason escr's argument doesn't make sense is that the NAR numbers aren't  adjusted for things like rennovation, addition, etc."

Bent, you know that in most cases I agree with your opinions, but here I must voice my objections. You cannot treat an addition the same way as an ordinary sale, because it was not purchased by the customer voluntarily. In most cases the customer would be much happier just to pay less money and do without that swimming pool. There is a reason these enhancements are bundled together with the house and not sold separately. In this respect Case-Shiller reminds me of hedonics. In my opinion, an involuntary "purchase" like this should be counted at 50% of its face value.

 

 

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#23) On September 28, 2007 at 12:09 PM, TMFBent (99.81) wrote:

The reason escr's argument doesn't make sense is that the NAR numbers aren't  adjusted for things like rennovation, addition, etc. The case shiller index out this week shows an enormous and accelerating drop in home prices. It compares like sales to like sales, so it is a far better measure. Finally, remember that the numbers from the NAR don't record all those seller giveaways, which total tens of thousands of dollars these days.

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#24) On September 28, 2007 at 12:12 PM, TMFBent (99.81) wrote:

Huh? The point is that median price numbers that don't look at straining this stuff out cannot be taken for evidence of simple assett appreciation.

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#25) On September 28, 2007 at 12:58 PM, EScroogeJr (< 20) wrote:

There can be no one single "evidence" for "asset appreciation" or "depreciation". But there is some evidence that lower segments show asset appreciation even as the upper segments show depreciation :-).

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