Please vote in this poll using the sidebar.
Falling Home Prices Are:
- Doom and gloom, terrible news for home "owners" (10%, 21 Votes)
- Good news for first-time buyers (and by extension, most everyone else in the market) (90%, 183 Votes)
Total Voters: 204
This poll will be active and displayed on the sidebar through 04.05.2008.
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43 responses so far ↓
1
Sniglet
// Mar 30, 2008 at 1:15 pm
Why can’t falling prices be both? They can be bad for existing home-owners and good for new buyers.
At a higher level, I would have to say that significantly falling prices will be bad for the world’s economy as a whole for the short term (i.e. the next few years). A crash in housing prices will lead to bank failures, and massive losses for pension funds, municipalities, etc. People with money in a money market fund that goes bust certainly won’t feel as if falling house prices were good for them.
Further, when unemployment grows due to contracting credit, and the inability of businesses to get financing, then many people will find themselves out of work. I doubt very much the unemployed will think that crashing home prices are good for them either.
In the LONG run, however, a thumping correction in house prices will be good for everyone, and finally clear out mal-investment and set the global economy on a firmer foundation.
2
Ira Sacharoff
// Mar 30, 2008 at 3:13 pm
If you’re not planning on selling your home anytime soon, why would falling home prices be bad for existing homeowners?
3
Sniglet
// Mar 30, 2008 at 4:40 pm
Well, it could be bad for existing home owners if they wind up losing their jobs when the local aircraft manufacturer closed due to a collapse of orders as Chinese airlines went bust when their exporters could no longer sell goods to Americans making HELOC withdrawals.
It also doesn’t help the existing home-owner to find out that they have negative equity, and are unable to do a cash-out refi to help pay for their kid’s college.
Oh, and let’s not forget that the city and state an existing home-owner lives in might start cutting services dramatically, and raising taxes, because of a short-fall in real-estate revenue.
Unfortunately, a massive decline in house prices will impact everyone…
4
Sniglet
// Mar 30, 2008 at 4:50 pm
I wonder just how significant the implications of bankrupted local governments might have on existing home-owners. It’s one thing to cut back on health care and welfare services, but when local schools are getting shut down, and the drinking water is contaminated due to poor maintenance, residents might start to take notice.
I recall reading some cases where home-owners in some Colorado hamlet were saddled with $80K bills when their town defaulted. I wonder if there are situations where home-owners find themselves liable for the pensions, or bonds, of their municipality or state that goes belly up? I gather that legislation makes it tough for creditors to sieze municipal assets, but a default certainly wouldn’t make it easy to raise additional funds.
How sad it would be to see prudent home-owners, with clear title, become victims of bankrupted governments looking to extract every last bit of cash they can from residents. It’s not like you can just pack up and move your house when your become upset with how the local government is run, and who would want to sell in the midst of a crashed economy?
5
Ben
// Mar 30, 2008 at 5:18 pm
Falling home prices are good for people who want to purchase more real estate (like renters wanting to buy, or people wanting to trade up to a bigger house).
They are bad for people wanting to sell more real estate (like people who want to move from owning to renting, or people wanting to trade down to a smaller house).
6
Sniglet
// Mar 30, 2008 at 5:27 pm
Really? I would have thought that falling prices would be a terrible thing for people looking to invest in real-estate. Who wants to buy an asset that will be declining in value, year-on-year, for many years? Isn’t it better to buy a home when prices are in an upward trajectory, so you can enjoy appreciation?
I have read stories of Japanese home buyers who bought after prices dropped 40%, only to find themselves under-water (and unable to move again) as prices dropped another 40%.
No, the time to buy is when prices are going up.
7
Ira Sacharoff
// Mar 30, 2008 at 5:55 pm
The graphs recently displayed showing various cities had Boston falling, then going up before falling again, which it is continuing to do. So some folks might have concluded that prices were going up again, and that it was a good time to buy.
There is no easy answer. When prices have dropped for an extended period of time, it might be a good time to buy. Or when sales have slowed so much that practically nobody is buying might be a good time to buy. People were buying when prices were going up, but some of them bought at the top.
8
Dave0
// Mar 30, 2008 at 6:44 pm
I think there is an easy answer to when to buy: when months of supply starts decreasing. That is a clear sign in my mind that the bottom is near and about to start going up again.
9
Sniglet
// Mar 30, 2008 at 8:43 pm
Maybe. However, I think that just a couple months of inventory decline aren’t enough to make a complete trend. Bull and bear markets alike rarely move in a straight line. If anything, we should expect brief upticks in real-estate to keep convincing bulls to jump back in. Just the fact that there are still efforts under way to raise capital for “vulture” funds is evidence that we are FAR from a bottom. We will hit a bottom when almost no one is licking their chops for the opportunity to get a bargain. I find it interesting that some investors have already lost their shirts in trying to buy distressed mortgage securities earlier this year. How could mortgage securities fall anymore after they’ve already lost 50% of value? A lot, apparently, since some securities have now fallen 90% or more.
10
old timer
// Mar 30, 2008 at 8:59 pm
Falling prices sometimes happen even though some people forget that.
Why does the poll answer have to be either/or something and not include this perfectly neutral response?
11
Sandy
// Mar 30, 2008 at 9:30 pm
I’m with oldtimer, I think it is a neutral event. It is a market action, markets are neither good nor bad, they just are.
I’m going to go rake my zen rock garden now.
12
FreedomLover
// Mar 30, 2008 at 9:39 pm
I can’t understand how local governments are teetering on bankruptcy when tax receipts are at an all time high. The Federal budget alone will hit the $3 trillion mark. This is insane, where is all the money going?
13
The Tim
// Mar 30, 2008 at 11:41 pm
I thought about providing a neutral option, but false dichotomies and bantering about the extremes are just too delightful to pass up. :^)
Honestly though, it’s obviously essentially a rigged poll, framing the question like this, but I did it that way on purpose to point out the ridiculousness of people that constantly refer to falling prices as “doom and gloom.” It’s something of a parody, I guess.
I like parody. Maybe I should start a whole website dedicated to it…
14
Jeff
// Mar 31, 2008 at 4:04 am
You’ve already achieved self-parody with this one.
15
Darby
// Mar 31, 2008 at 8:13 am
I’m trying to become a first time buyer right now! It’s intimidating with all the conflicting reports of the housing market, but we know the market is in our favor. However if we buy now and the prices really start to drop, it will be a while before we get any equity built up. That’s a concern since we’ll probably be buying a fixer for our $250K price range in Snohomish county and will need to do some home improvements fairly quickly. Our thought is this: if it’s the right house for the right price, it’s a good time to us to buy.
16
Buceri
// Mar 31, 2008 at 9:28 am
Darby - how much is your current rent??
17
Sniglet
// Mar 31, 2008 at 9:53 am
This is great advice. Buy a home when you can afford to put down a significant down-payment, with a debt load that absolutely does not exceed 2 times your annual income. You can learn a lot by looking at Japan’s housing bust in the ’90s. Too many Japanese people jumped into buying homes they couldn’t really afford and found themselves trapped as prices kept falling. Many people jumped into the market after prices had dropped 40% in value, only to see them drop another 40%. This would have been fine if their debt was low, but the vast majority of Japanese buyers had less than 80% equity in their homes, and had mortgages that far exceeded their annual incomes, making them virtual prisoners to this day (i.e. they cannot sell since they owe more on their homes than they can sell them for).
As long as you make sure you could easily pay off the debt in your home with a couple’s year’s income, then buying shouldn’t be too big of a problem.
18
Ira Sacharoff
// Mar 31, 2008 at 10:08 am
Darby,
I wouldn’t say the market is in your favor. Yes, inventory is way up giving you a lot to choose from and prices have been dropping, but there’s no sign that these price drops are going to stop anytime real soon. And mortgage payments are still going to be much higher than rents.
But if you find a place that you really like, and it’s priced lower than comparable homes for sale, and you can afford the payments without any problems, and you intend on staying there for years and years, then maybe. And it can’t hurt to look and see what’s out there. Be patient.
19
Ben
// Mar 31, 2008 at 10:22 am
Sniglet - I think you misunderstood my point.
When home prices are falling, and you want to buy up, then things are working in your favor. Something that you plan to buy is becoming cheaper for you to buy every time that prices fall more. Obviously, to capitalize on this you need to time things well. I agree that the best time to buy is at the beginning of the upswing of the next bubble, but that would be a very difficult thing to time. Watching for fundamentals is what I plan to do.
Most of the people I see on SB follow this philosophy. They are renting, and plan to buy later. House prices falling gives them a benefit, because the price of what they plan to do goes down constantly.
When buying is again comparable to renting, it becomes safe to buy again IMO.
20
Sniglet
// Mar 31, 2008 at 10:24 am
While this isn’t altogether bad advice, I think it is far more important to make sure you could easily pay off the house in a few years time if necessary. This is why I keep harping on keeping your debt loads to within 2 times your annual income. Even if you follow Ira’s advice and buy a home that is priced less than comparable properties, and are able to easily make the payments, you don’t want to wind up in a situation where your house becomes a prison you can’t get out of if prices should drop dramatically lower.
Ask yourself this before buying any house: would a 50% price drop from what I am paying now cause me to face any serious financial, or mental, issues? If you feel that a 50% price drop from your purchase price wouldn’t be too big a deal (i.e. because your debt load was low, etc), then go ahead and buy.
21
Sniglet
// Mar 31, 2008 at 10:31 am
It is absolutely better to buy when rents are comparable to owning. However, it is still far more important to make sure you don’t wind up with a large debt-load that could turn your home into a prison with declining prices.
As I said earlier, if you can’t stomach a 50% price drop on a home you are considering purchasing, then don’t do it. It’s that simple, regardless of what the rent/own ratios are, or how far prices have declined from peak values, etc. It’s all about avoiding over-extending yourself.
22
Ira Sacharoff
// Mar 31, 2008 at 10:54 am
Have house prices ever been priced at 2x the average salary?
Face it, none of us really knows for sure what the future will bring regarding home prices. We all, myself very included, have some very strongly held beliefs, and maybe a few of us are more cooly analytical and have nothing to gain either way, but….
if you believe that there’s a decent chance that home prices will fall 50%, you probably shouldn’t even consider buying right now, even if you can pay all cash for your home. If you believe prices may fall 50%, follow Sniglet’s advice.
I’m more optimistic. I see maybe another 15% decline, followed by a couple of years of flatness.
Either way, now’s not the time to get into a bidding war for a cutely staged home with granite countertops.
23
Darby
// Mar 31, 2008 at 11:50 am
50% price drops seem unrealistic to me… though I have no crystal ball! We locked in a lease 2 years ago at $1050 per month, for a 1200sf house, big fenced yard, and in a great location for us. Renting a similar house right now we’re looking at least $1400/month, which is just a few hundred dollars less than a house payment. We have little kids. I don’t want to move them around every couple years when our leases end, so buying is appealing. We are actually looking into purchasing the house we are renting. That would be great. We should be able to get it pretty close to our desired price. We know the house, we wouldn’t have to move, we love the area and the schools, daughter starts kindergarten next year… it sure seems like the right time to buy……….
24
Sniglet
// Mar 31, 2008 at 11:51 am
People buy cars knowing full well they will have massive depreciation the minute they drive them off the lot, so I don’t see why it would be any different to buy a house that one expects could face significant depreciation. There is a lot off personal satisfaction, and benefit, to owning one’s own home that might well offset possible deprecation (just like the joy some people feel in having a new car).
If your life-style, and/or savings, won’t be significantly impacted by a possible 50% deprecation of a home you want to buy, then I think it is perfectly fine to go ahead and buy. Again, this is why I keep coming back to the mantra of just never over-extending yourself with debt that can’t easily be paid off. So long as your debt is low, possible significant depreciation shouldn’t bother you.
25
EconE
// Mar 31, 2008 at 12:09 pm
fun quotes from above
“I have no crystal ball!”
“We have little kids. I don’t want to move them around every couple years when our leases end, so buying is appealing.”
“we love the area and the schools, daughter starts kindergarten next year… it sure seems like the right time to buy……….”
Where have I heard quotes like this before?
26
Darby
// Mar 31, 2008 at 12:19 pm
EconE: “Where have I heard quotes like this before?”
You’ve lost me….did I say something wrong?
27
Greg K
// Mar 31, 2008 at 12:30 pm
I think it’s great that prices are falling, and I ‘own’ a house in Seattle right now. (rather, I pay the rent on the money with a fixed 30-yr mortgage, like everyone)
Why? Because I’m looking forward to buying my next house in a more reasonable market. I don’t want Seattle to become the next San Fransisco, where a 1 bed loft costs $600k. I’m willing to take a $50k loss if it means my next mortgage payment will be the same as it is now.
28
Everett_Tom
// Mar 31, 2008 at 1:03 pm
Somewhat off topic, but this seemed to place to post it.
Zillow has a new set of chats out, which try to give a visual indicator of what’s happening in different market sections.
Here’s the one with Seattle
From their blog, located here
I like the way they’ve presented the data, and suggest it might be a good one to look at adding in the future to SB….
29
FreedomLover
// Mar 31, 2008 at 1:24 pm
EconE:
Why are families that want some stability wrong?
30
Ira Sacharoff
// Mar 31, 2008 at 1:31 pm
Darby,
You didn’t say anything wrong. Many of the people here feel strongly that right now is a terrible time to buy a house, and if you say something that disagrees with that, then either you’re a real estate agent or swallowed the real estate industry Kool-aid or are incredibly naive.
don’t forget that if you buy and your payments are only a few hundred more per month, you also need to include property taxes and homeowners insurance, which might add another 300 per month or so., as well as paying for anything that goes wrong.
Can you continue to rent your existing house and not have the rent raised?
Sniglet alluded to the sense of satisfaction in owning a home, and I understand that a lot. Home prices are very likely to keep dropping. At the very least, see if you can wait a few months before offering to buy your house.
31
Darby
// Mar 31, 2008 at 2:28 pm
Ira - fair enough, thanks for explaining. I’m new to the blog and the real estate topic in general. Naive as some may think it is, my mothering instinct is to provide a stable living situation for my children. I want them to have a house to grow up in. FTR, I’m not a real estate agent, and kool-aid is pretty sugary. :)
I’ve also been thinking of ways to wait a few months and then try to buy it. Our lease is up 4/30. Our landlord has given us two rental options. Either go month to month at $1500/month (that’s if we want to keep house hunting now, so we have flexibility to leave when we want), or sign a lease through August at the current rate. The lease through August is appealing, other than the fact that we’re stuck until then. And at that point if prices have fallen much farther I’d worry he’d decide not to sell. He’s planning on returning to live in the house in August, unless he sells it to us.
Did I mention how much we love that house?
I do appreciate all the feedback. Some times it’s hard to say “wait” when everything in me says “buy!!!”
I’m sure my agent will be calling me if he reads this!
32
Alan
// Mar 31, 2008 at 2:55 pm
My brother told me a story about a house in AZ. Purchased for $850k with $160k down. The $160k came from a real estate sale in Seattle. It was purchased by an unmarried couple and the woman put down the entire down payment.
Six months after purchase, one of the couple lost their job and they couldn’t keep up on the loan payment. They tried to sell if but found that the market had softened and they could only get $650k. The bank agreed to a short sale, but the woman vetoed the short sale because she was going to lose all of her investment.
Several months later the house was foreclosed and sold at auction for $430k.
50% price drop right there. Granted, AZ isn’t as special as WA, but is is very possible to see a 50% price drop.
Prices doubled in a few years. Why would anyone think they couldn’t drop by half in a few years too.
How many people though Microsoft stock would drop by half in early 2000?
There is not a single person here who can see the future. I can’t say that prices will drop 50%, but neither can anyone else say they won’t.
33
Ubersalad
// Mar 31, 2008 at 3:04 pm
Seattle lags behind, so when rest of the country recovers, Seattle will just skip that whole bubble bursting process.
34
Joel
// Mar 31, 2008 at 4:07 pm
80% increases also feel unrealistic to me, but it happened. It may be unrealistic in your area, but I know in my area 50% off would just barely bring the monthly carrying cost of buying in line with comparable rents.
35
Sniglet
// Mar 31, 2008 at 4:22 pm
I am not saying that 50% price drops are inevitable, but they is a statistically significant chance they could happen. I would give a 50% drop a 20% chance, which is more than enough of a likelihood to give home buyers pause to consider if that would be a problem for them.
As Alan pointed out there are plenty of examples where prices have already dropped by 50% in the US. There are also many examples internationally where prices have dropped by large amounts, such as Japan and Hong Kong in the ’90s (neither of which have recovered peak prices yet, and still have under-water home-owners).
This downturn is unlike any we’ve seen before, with the global nature of the credit contraction, and I think bears a higher risk of significant damage than our local historical record might indicate. Lending was far looser at our peak than it EVER was in this region, making past comparisons innacurate.
36
EconE
// Mar 31, 2008 at 4:26 pm
Yawn.
Same old B.S.
My kids will grow up deformed in a rental.
The house I’m looking at is the ONLY one I like.
If I don’t buy it my LL will kick me out on the streets.
blah blah blah.
new one every week.
37
Civil Servant
// Mar 31, 2008 at 5:22 pm
Sniglet at 9:53 and 10:24: Is your debt-load-not-to-exceed-2x-income your personal advice, or is that a common benchmark for conservative mortgage-assumption? Please understand, I am not asking to be hostile, I am genuinely curious. As a would-be (but no way in this market) buyer I am trying to get a sense of what would be a reasonable, though conservative, debt load to income ratio. I’ve seen friends take on 5:1 and even 6:1, which seems just nuts to me, but on the face of it your 2:1 seems quite strict. Would appreciate any elucidation or recommended reading. Thanks!
38
EconE
// Mar 31, 2008 at 6:34 pm
Darby…it appears that you answered your own question a few weeks ago on your blog. Here’s your post….
“Stress
Lack of Money
Moving Anxiety
Moving decision-making
Lack of Money
Changing daycares
Lack of Money
Want for a nice home for the kids to grow up in
LACK OF MONEY
Do you see a theme here?
Email me to send a donation through paypal.”
Yeah…I see a theme.
Lack of money.
Yet you want to buy a house…go figure.
39
Ira Sacharoff
// Mar 31, 2008 at 8:06 pm
Darby,
If you love the house, and if you’re sure you’re getting a good deal on it, and if you’re sure that making the house payments aren’t going to be a problem at all, and if you’re sure you’ll want to stay there til the kids are in high school, then maybe you should buy it.
But, if you’re thinking that you should buy a house because a real estate agent told you that it was a great time to buy, think again. Most real estate agents spend a lot of money trying to look successful, so they have to make a lot of sales to survive. They’ll always tell you to buy…regarding your options: I’d sign the lease until August, especially if i could still have the possibility of buying at that point.
40
Toad37
// Mar 31, 2008 at 9:51 pm
Unfortunately there are too many “Darby’s” that bought over the last few years that will have a hard time making the mortgage payments due to too many bills coming due as there paychecks don’t go as far as they used too. Perfect storm is hitting many homeowners as many are tied to real estate either directly or indirectly in their jobs… House prices will come down…. Don’t buy yet… absolutely no reason to catch a falling knife right now.
41
Darby
// Mar 31, 2008 at 10:06 pm
Ira- I think you are probably right about the lease until August if we can put off making an offer until then and see what happens. Thanks for the input. Your responses have been clearly stated and helpful.
42
Toad37
// Mar 31, 2008 at 10:24 pm
Darby, I wasn’t trying to stick it to you personally, I just don’t want you to make a mistake. Renting for a while longer until you have saved up some kind of a savings and at the same time watch to see where the economy goes, might be very wise… just in case things go bad you’ll feel less stressed out if you are renting…. Good luck with what ever you decide.
43
Buceri
// Apr 1, 2008 at 8:07 am
Darby:
The landlord threats of moving back to the house is not an excuse to jump at purchasing. Of course, nobody here knows your landlord’s asking price.
It’s never time to buy if you are having money problems.
Just read, read, read. After you put your kids to bed, go on the web and read money news from MSN Money, CNN, Yahoo Finance, etc. Information is power. And “Dancing with the Stars” will not help you make this important decision.
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