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Property values to decline below 20 years ago?



June 16, 2009 – Comments (9)

I opened this post to read hours ago and only got around to reading it now.  It was written by Andy Xie.   Some quotes from it:

stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.

People who jump in now will lose big.

The Fed is caught between a rock and a hard place.

 The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems.

 Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.

The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. 

 It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.

 Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn't hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.




9 Comments – Post Your Own

#1) On June 16, 2009 at 9:51 PM, PedoBear (< 20) wrote:

I agree that property and home values will steadily decline (after factoring in the dollar index), for the simple reason there's a high degree of corralation between real estate valuations and economic prosperity (real or perceived).  Even when unemployment levels drop, which could be years away, will those people be earning more or less than they were before?  I'm guessing less, so how will people come up with $30,000 for a down payment?  What kind of monthly payment will they be able to take on factoring in future interest rates?

An interesting question to ponder over is what happens to overkill homes?  I grew up in a 3 bedroom suburban town house that my parents paid <50K for.  Later, when we were in the process of moving, I remember looking in the newspaper at all these newly built homes in the 180-220K range.  I believe the town house sold for about 90K, and on the face of it these new homes probably should've been 2-2.5x the value, on the basis of land, square footage, condition, etc.  These 180-220K homes eventually shot past 300K, and even if they return to prior valuations, is that low enough to be affordable?  Sure, they may be "worth" that much, but what if no one has the money?

Lets say I drive a Ferrari into a poor town and offer it to anyone who can come up with 100K.  The book value may be 500K, making my offer a tremendous deal, but no matter how much someone may want it, if they don't have 100K, they're not getting it.  I believe the same thing will happen with homes once they hit the actual value (hasn't happened yet, imo), causing prices to drop well below the level of what could accurately be described as fair.  

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#2) On June 16, 2009 at 10:37 PM, TDUBFISH313 (53.36) wrote:

Here's a question maybe someone can answer. There have been millions of foreclosures. This is a segment of society that will probably never get a loan again to buy a home at least for several years. Where did all these people go? Moved back in with parents? There wasn't that much rental property out there to cover everyone?

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#3) On June 16, 2009 at 11:03 PM, checklist34 (99.06) wrote:

we may be closer to a bottom in housing that most people realize.  Doug Kass, who has been as consistently good at calling the market and various broader factors as anybody I'm aware of (both down and up) in this whole mess, has said that it is essentially a 100% certainty that we have put in the housing bottom.  In shopping for a house my former business partner found the market to be fairly rapidly hardening in the area he was shopping in just a month ago.  He got a great deal.  Some hedge fund guy had a reasonable argument on yahoo recently that a bottom was in. etc.

As for equities, ... I offer once again that I think we should throw out the massive drop from early February to the march low, and the big bounce from the march low to april options day, where the market hit the low 870s intraday.  If one considers those two events - the big dip from/rise to the 875-950 range, it could be said we've been in that trading range, a big trough, for 8 months now. 

I don't think we'll break out of it yet, but I continue to think that a drop below S&P 800 is highly unlikely as the great-depression-2 scenario just isn't likely to b etaken seriously again, the all-banks-are-done-forever scenario just isn't likely to be taken seriously again, and so forth.  And the credit markets are functioning at least somewhat now, which takes alot of companies off the potential bankruptcy list...  All of those things, along with the oft-touted mobs of money on the sidelines, will help to build a floor under the market.

The markets drop from its intraday highs last Thursday is impressive, the selling has conviction, but the mood lacks the urgency and panic that prevailed earlier in the year. 

happy hunting. 


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#4) On June 16, 2009 at 11:22 PM, PedoBear (< 20) wrote:

When you say a bottom in housing, are you talking about prices or volume?  Lets assume prices have already bottomed, is that because of organic demand or because the sellers/banks were unable to go any lower? 

I expect real estate volume to drop much further and people who do have to sell will be placed into a very unfortunate position.  How do most people make the down payment on a new house?  Well, they use equity/appreciation from the sale/pending sale of their old house, which has of course dried up.  So now they have to come up with the down payment the hard way - taking it out of a bank account, which is of course running lean. 

New home construction will of course tank in this scenario and it will make a lot of sense for existing owners to just stay put.  There's plenty of rental and consolidation options out there for people who can't come up with chunky down payments, let alone pay off their credit cards.    

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#5) On June 16, 2009 at 11:34 PM, ChrisGraley (28.68) wrote:

It's a false hardening checklist34.

Defaults are up on all types of mortgages, not down. (Kinda hidden by the mark to market easing.)

Builders are breaking ground on new homes now that they won't make a profit on. They are doing this to dump land. (hoping for Florida Builder to jump in on this one)

More  mortgage resets coming in September.

Unemployment still going up.

There's lots of unease on what the mortgage rates will be a month from now.

I'm actually looking for a new house myself, but I think better oppotunities will come.



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#6) On June 17, 2009 at 5:14 AM, checklist34 (99.06) wrote:

hey chris, i think its reasonably likely that housing has bottomed by whatever measure is the most important.  Some areas havne't yet bottomed, we'll probably see a first-to-fall, first-to-recover phenomenon.

I was at a shin-dig (i.e., gathering or party) a few weeks back in Minnesota of all places and the talk of the party was buying houses in Phoenix.  Things were 30% of asking price 3 years ago.  When Minnesota is talking about buying Arizona houses, thats possibly at least a bottomish indicator.

And, in general, we won't know when a bottom is coming.  These things always surprise.  We are first surprised by the rate of decay and later by the stabilization.  Thats the nature of these things and of the human animals tendency to assume that what is today will always be, despite the fact, historical and material, that what is today will not always be. 

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#7) On June 17, 2009 at 2:37 PM, dwot (29.63) wrote:

I think a bottom will come a different times for different areas.  Florida started its decline about 2 years ahead of Washington state and I would expect it to bottom about 2 years ahead of Washington state, for example.

I wonder about where I bought a house.  I know that I paid about 1/2 the replacement cost, maybe even less, and the home is in very good shape, however, many of the incomes here mean that the home is out of reach for many.  The housing market is tight here and with the high cost of building here I don't see how that changes when people do not have the money to pay for it.  Those that can afford it tend to be more transient workers in that they know they are only here for a few years so they do not want to buy a house.

The rental income with the cost of buying is way out of wack in the opposite way of the rest of world.  The lost of income on the capital I have in this house is less then what I would pay in rent.

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#8) On June 17, 2009 at 2:54 PM, portefeuille (98.76) wrote:

for the mortgage bond aspect see comment #6 here.

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#9) On June 20, 2009 at 4:22 PM, AdirondackFund (< 20) wrote:

Where do these people go?  From what I heard last night at the local waterhole, they move into tents.  They're actually pretty happy about it too.  I talked to one tent liver last night and he's really enjoying the whole idea of not paying rent anymore.  But it's summertime now.  When I asked him what he was going to do for the winter, his answer was 'well, then I'll get an apartment and split the rent with someone'.  Seems like a good plan to me.  Of course, it doesn't contribute to the economy, but nobody is really too concerned about doing that anymore.   

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