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Why Home Prices will Fall for Years

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March 27, 2008 – Comments (13)

Because people refuse to lower the prices, even when it's obvious they should.

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation.

That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.

P.S. Readers should ignore the NY Times bone-headed error in reporting that home sales had "risen recently." That's based on a false reading of the NAR numbers, as well as, I would bet $100, some ridiculous editor's concerns about "balance" in the story. Always have to get the other side into the story -- no need to demand that the counterpoint be factual, of course.

Sj

13 Comments – Post Your Own

#1) On March 27, 2008 at 10:52 AM, charlesblazer (98.72) wrote:

Somehow I doubt it's a concern for balance.  They really are just negligent.

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#2) On March 27, 2008 at 11:06 AM, ByrneShill (77.21) wrote:

Part of the problem is that nobody can sell houses short. Let me short Vancouver Condos and you'll see the bubble pop in about 24 hours.

But anyway, once repoed houses/condos flood the market, the "asking price" will drop, and you'll see sellers get back to reasonnable prices (or take their houses out of the market).

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#3) On March 27, 2008 at 11:19 AM, TDRH (99.68) wrote:

Maybe I misread, but the WSJ seem to have an NAR spin as well.   Would be interesting to see a graph of the sales increase relative to the price decrease.  I have been looking for one as I am too lazy to create it.

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#4) On March 27, 2008 at 12:02 PM, TMFBent (99.82) wrote:

Not exactly what you're looking for, but good graphs here at Housing Doom.

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#5) On March 27, 2008 at 1:31 PM, leohaas (32.73) wrote:

Bent, I agree with you, but there REALLY was an increase: Feb sales were higher than the previous month. Sure, this is completely irrelevant: a comparison to the previous month is not useful. The appropriate comparison is to the same month last year (and we are WAY down since last year).

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#6) On March 27, 2008 at 3:13 PM, ByrneShill (77.21) wrote:

I like this quote:

In many ways, it would be better if the housing correction would happen more swiftly and sharply. The pain might be worse, but it would be over quickly. We seem to understand this principle when we’re removing a bandage. Why, then, is it so much harder with housing?

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#7) On March 27, 2008 at 3:41 PM, saunafool (98.86) wrote:

Well, we are seeing exactly what Greenspan told us: housing is not condusive to bubbles because people tend to live in their houses. So, even though the homedebtors were buying into bubble prices, the majority of the transactions were for people to live in the house.

People who have lived in their place for a long time are also reluctant to drop their prices. They looked at the MLS with their realtor (a professional, I assure you) and see the comps that say their neighbor sold for $500,000 just one year ago. They have been to their neighbor's house, it's crap compare to theirs. Surely, even in the slow market, someone will pay at least the same amount. List her at $499,000. Ignore that $350,000 offer (even though it might be $250,000 in a year or two).

Oh yeah, it's going to grind downward for a long time. I'd be surprised if the real bubble areas hit bottom before a decade is up.

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#8) On March 27, 2008 at 4:05 PM, EScroogeJr (< 20) wrote:

Ok, so Mr. and Mrs. Harrison wouldn't pay the extra $300,000 for the home. So during these 3 years they spent renting and hoping, they tossed to the wind some $117,000 out of the disputed sum of $300,000, and the seller still has not come down as much as one cent.:) Looks like the object of the dispute may disappear in the landlord's pocket sooner than the seller "submits to reality" :):):)

--------------- 

"Back in 2005, after Mr. Harrison and his wife couldn’t find a house they considered fairly valued, they opted to rent instead. They pay $3,250 a month for a four-bedroom home, which is a bargain relative to what their mortgage payments would have been.

And that six-bedroom house listed for $1.875 million? The last Mr. Harrison checked, it still hadn’t sold."

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#9) On March 27, 2008 at 4:27 PM, ByrneShill (77.21) wrote:

@EScroogeJr : You're kidding, right?

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#10) On March 27, 2008 at 4:46 PM, dhd1491 (< 20) wrote:

Price adjustment will happen much more quickly than you think, imo.  Much of the housing now coming on the market is exiting foreclosure.  Banks want to dispose of REO properties as quickly as possible.  Also, not every homeowner has the luxury of sitting on their hands waiting for their price, relos for example.  If the slump does "grind on for years", I would posit that it will be due to tighter credit rather than reluctant sellers.

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#11) On March 28, 2008 at 3:56 AM, saunafool (98.86) wrote:

EScrooge,

This notion that rent is wasted and mortgage payments are not is mathematically unsound. Both pay for a place to live and there is value in both. The question is, how much of the money is wasted?

If all the money on rent is wasted, then certainly property taxes, property insurance, mortgage interest, and PMI are also wasted. On a $1.875 million home, those payments add up to something like $8,000 per month if you assume 1.25% property tax, 6.5% fixed 30 year mortgage, and no PMI.

So, given the same numbers, during 3 years, the couple saved about $5,000 a month ($180,000 total) in money that would have otherwise been "wasted". If they have truly been saving that much money every month, within 5 years, they will have put in the bank $300,000 of "equity."

If the price of the house has neither risen nor fallen after 5 years, do you think they would have built $300,000 of equity?

Obviously not. Renting is a much better option.

When folks don't understand why renting is a better deal, they always seem to assume that the people spending less money per month on rent are not saving the difference.

In a period of declining prices, we rentlosers are sitting on and continuing to build piles of cash. Eventually, when the price is right, depending on where we live, we're going to be the "strong buyers" of the desperate sellers' dreams. 

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#12) On March 28, 2008 at 12:28 PM, chk999 (99.98) wrote:

Bent, you are absolutely right about this. I remember the local real estate downturn in the middle 80's and it took about 5 years to really work through the backlog. Prices didn't fall as much as I would have expected, but sales really slowed down.

People in mortgage pindowns did really strange things. One co-worker offered me her condo for $1 if I would assume the loan. I had to turn her down due to the negative cash flow that renting it would have produced and my own poverty at the time.

I'm assuming there will be better bargains in the RE market in another year or two.

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#13) On March 28, 2008 at 4:55 PM, Bigfootzx (< 20) wrote:

http://www.fool.com/investing/small-cap/2008/03/20/a-nation-of-enrons.aspxI liked the Nation of Enron's story, by Seth Jayson !! Good reading!!  Want to know how all the foney mortgage paper was written without disclosure ?  It starts with 3 men and a dream!Please peruse the full articles and write a story and share this information with the world.I don't blame Clinton and Rubin, but we all know Sandy Neil founded Citibank and we all know Citibank recently paid a $1.8 Billion law suit settlement because they helped/taughtEnron executives how to cook the books and hide the losses.  Citibank is also to blame forthe mortgage crisis.  I copied and pasted a portion of the articles , click the hyperlinks for the full stories.Repeal of The Glass Steagall Act, thanks Robert, Sanford and Bill Clinton!!! How did the mortgage crisis begin, well we know it started with uptight real estate agents dogging appraisers and pushing mortgage bankers to close a loan so the agent, the banker and the appaiser could all get paid. And it mushroomed from there in the 1990's and started innocently and by the end of the century former Fed Secretary Robert Rubin, Sandford Neil and President Bill Clinton figured out a way to sell more mortgage notes on the bond exchanges and make billions for Citibank and all the money center banks as well.

Citibank which was founded by Sandford Neil.  Good ole Robert Rubin now works at Citibank where crime does pay and it pays quite well!!!  Did Bill Clinton know what he was doing when he agreed to repeal the Glass Stegal Act,  I hope no, regardless he looks like a complete sucker today!!!  Read the 2 articles in full, quite an interesting story.
As for Robert Rubin, he now says we need to regulate the financial markets. Thanks for the input Bob, never thought about that solution!!! Somebody call Uncle Benny's Pawn and Loan, aka the Federal Reserve Bank!!!

There is now a 'financial Chernobyl effect in the markets'.
Fortunatley, prices will recover!!!

http://my.opera.com/richardinbelling...ow.dml/1796860
The CFR is The Sovereign in North America's commerce, investment and governmental activity and endeavors. The CFR, through its agents, primarily Sanford Weill, Bill Clinton and Robert Rubin repealed the Glass Steagall Act.

The repeal was the foundation, that is the keystone, that provided for non transparent financial manipulation and use of leverage to revolutionize the activities of investment beginning in 1999, to amass huge fortunes for the investment bankers who designed, marketed and oversaw the use of leveraged investments, and to generate awesomely speculative endeavors at hedge funds, which have gone unregulated by government oversight.

The repeal has produced an oligarchy of power and elite, in intertwined media, retail banking, investment banking, home mortgage sectors, via interwoven board of director memberships of the Federal Reserve, corporations and government administration, extending into the the White House, via secretary of the Treasury Paulson, former executive of Goldman Sachs.

And the repeal enabled leverage, to be conceived, deployed and expand, not only in the residential mortgage sector, but a host of other sectors as well, such as, municipal bonds, and derivatives such as credit default swaps.

Investment leverage snapped this last week with the $20 Billion Carlyle bond fund experiencing margin calls, where risk/leverage was multiplied by 33 to 1, that is, the underlying assets represented only 3% of the portfolio value; and those assets were illiquid, thinly traded issues: it was reasonable that this fund would be the first of many countless to break causing a sharp sell off in the finance, real estate and banking sectors as investments were sold at fire sale prices to meet the margin calls.


http://my.opera.com/richardinbelling...way-via-increa
Nationalization of The US Banking Industry Is Underway Via Increased TAF And Repos


"Mick P writes that "the Federal Reserve has decided to acknowledge that the Banking system is in total disarray and is now unable to meet its own obligations. Some of you may remember I referred to the banking cartel as being "sub-prime". I also pointed out a couple of weeks ago that the Banks no longer have any capital reserves that are usable. In other words all capital is now employed in current leveraged positions. Losses in those positions that result in margin calls, requiring more capital, are now being met by the Federal Reserve through repos (repurchase) and the TAF (Term Auction Facility). As the stock markets slid into further losses on Friday the Fed announced new measures to attempt to bolster the cash at hand for the banks.

Let me make one thing abundantly clear, this is NOT an attempt to save indebted US citizens"


http://blogs.wsj.com/economics/2008/...-on-mortgages/
Former Treasury Secretary Robert Rubin said “the risks are serious enough to call for substantial additional action in the mortgage arena,” probably requiring public money.
Rubin, now at Citigroup, spoke at the Brookings Institution at a forum sponsored by the Hamilton Project, a group devising policies to promote broadly shared growth.The Treasury document is 22 pages long so I only posted a couple of paragraphs as well as the Wikipedia definition. The bottom line is they unleashed the hounds of hell combining banking and (FDIC) insurance companies which allowed closer relationships and collusion of companies to underwright risky mortgages to sell on the bond exchanges. Non-disclosure writing of bonds that is. Allowing banks and brokerages to merge together.

I do place a lot of blame on the Bush administration since the big dummy should have and probably was advised of the run away train in the mortgage sector. You think his advisers would have reminded him of daddy's S&L bank failure debocle.  Easy money for all in the know!!

Robert Rubin and Sandy Neil should have known we needed the monitoring of people who have authority to underwrite paper with non-disclosure would lead to fraud. Sandy Weill founded Citibank/Citigroup, which announced fines of $1.8 billion for their role in teaching Enron execs how to cook the books.

In the next to last paragraph posted from page 2 of the tresury doc, they suggested companies would be less prone to failure with the repeal. Govt. people can write papers that say anything these days, even war docs.

The Glass-Steagall Act established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms, some of which were designed to control speculation.[

First Glass-Steagall Act
The first Glass-Steagall Act allowed the government obligations as well as commercial paper to be used as reserve in banks

Second Glass-Steagall Act
The second Glass-Steagall Act, passed on 16 June 1933, and officially named the Banking Act of 1935, introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Company for insuring bank deposits.

The repeal allowed commercial & investment banks to consolidate.

http://en.wikipedia.org/wiki/Glass-Steagall_Act
Losses at financial firms from the mortgage collapse may eventually triple to $600 billion as defaults on home loans grow, says Zurich-based UBS AG. One reason banks are losing money is the repeal nine years ago of the 1933 Glass-Steagall Act, which separated commercial and investment banking after excessive risk- taking contributed to the Great Depression, Eveillard said.
The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.

From the US Treasury, link has the full 22 page doc.
http://www.occ.treas.gov/ftp/workpaper/wp2000-5.pdf
Enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitions on the mixing of banking with securities or insurance businesses and thus permits “broad banking.”

Since the barriers that separated banking from other financial
activities have been crumbling for some time, GLBA is better viewed as ratifying, rather than revolutionizing, the practice of banking.
We attribute repeal of these prohibitions to the increasingly persuasive evidence from academic studies of the pre-Glass-Steagall era, the recent favorable experience in the United States following partial deregulation of banking activities, the experience of banking systems abroad with
broader scopes for banking activities, and rapid technological change in telecommunications and data processing.

GLBA generally adheres to the principle of “functional regulation,” which holds that similar activities should be regulated by the same regulator. How regulators will in practice coordinate their efforts so that the safety and soundness of the banking system is maintained efficiently remains to be
seen.

Broad banking companies may produce financial services at greater convenience and lower cost. Increased product diversification may simultaneously make them less prone to failure.

It is unclear, however, whether continuing technological advance or any future banking liberalization will favor “one-stop shopping” via broad banking companies, or perhaps will favor delivery of the financial products and services of multiple companies through an internet portal.

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