August 07, 2008
– Comments (11)
Because the bagholders out there are anchored and completely irrational.
I think anything that has appreciated at stupid rates will see drops. Those pockets of homes that have not seen rediculous appreciation will hold steady, or appreciate.
Example, my house was in the fringe (an old Borough), I paid $145K for a 3Br, 1650sq house 4 years ago. In the last three months there were four sales, none taking longer that three weeks, one sold in 3 days. One block up a 2BR, 1500sqft sold for just over 210K. So looks like the population is actively looking for homes that they can actually afford, since the lenders took down the neon "Crack Loans Here" signs. Or they want to buy before the Fed actually puts rates where they should be. I think declines will be strongly apparent in the hyper inflated areas. But the areas that did not see that type of appreciation are the places to be.
Now I agree the 1990 $250K that just sold in 2006 for 1Mil, that may work itself back down to a comfortable $600K, How long that will take, who knows. But a slow steady decline over the floor falling out, I think would be preferred.
Having recently bought a house in the DC area, I can tell you that people refuse to budge downward in price negotiations. No matter how much you show them comparables, etc., they just don't want to admit their house was worth anything less than it was two years ago. Part of the blame has to do with their realtors/mortgage brokers who sold them hook-line-and sinker on the inevitable "price appreciation" of real estate back in 2005.
Here's a property I know very well. Brand new in 96 or so this one was $330k. It is listed for $819k.
I think that is a terrible study, btw. I bet the results would significantly different if the questions had been, what do you think you could have gotten for your home one year ago. What do you think you could get for it today.
And there is a negative feedback loop. Lower real estate prices led to less spending which led to less jobs which will lead to even lower real estate prices, etc....
I think there's actually now a negative reality loop. It's called reversion to the mean. The ONLY reason house prices appreciated like they did was because there was a huge supply of money and terrible underwriting. When it collided with the age-old snake-oil salesmen hawking real estate as an "investment," it lead to irrational exuberance.
Now we're just beginning to head back to normal. Buying in my neck of the woods is still about 3x as expensive as renting the same house. I'll post the graph below.
That's a $750,000 house near where I live now, where one can rent the same thing for $2,500 a month. (We rent smaller space for less than $2k ourselves...) And these aren't big places, just 30 year-old split level ranch starter homes.
The numbers assume a 10% down payment (which I doubt most people just coming into these starter homes have) plus the usual $8-9k per year in gouging taxes, and $350 per month in maint. and extra utilities.
One thing that really scares me about the future realestate market is the pending death of baby boomers. Not to sound to synical, but everyone dies and when the baby boomer generation starts dying off in massive numbers what will happen to their houses? There kids will most likely inherit them, but by that time their kids will already have houses for the most part. This is going to lead to a huge supply of houses. Simple supply and demand shows that when Supply goes up and demand stays the same or goes down....prices will fall. This will affect all markets, not just the big metropolitan areas....I forsee this causing a decrease in home values all across the country. Any thoughts on this aspect of falling house prices?
Interesting thought. Couple that with the continued overbuilding, and what do we get?
We get lots of extra houses. Perhaps some capitalizing entepreneur can figure out how to pick up a house and put it on a ship bound for Asia. They seem to have the need, and probably the cash too.