Median home price rises for the first time
September 25, 2007
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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.
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