Please vote in this poll using the sidebar.
Seattle-area residential real estate is...
- still way overpriced. (64%, 126 Votes)
- still slightly overpriced. (24%, 48 Votes)
- more or less fairly priced. (7%, 13 Votes)
- slightly underpriced. (3%, 6 Votes)
- way underpriced. (2%, 4 Votes)
Total Voters: 197
This poll will be active and displayed on the sidebar through 10.31.2009.
Sniglet » Oct 25, 2009 at 11:42 am
My vote is definitely for “way overpriced”. It’s not so much that I believe there is a particular measure, or yard stick, for determining value which is out of whack (e.g. rent to ownership ratios, average regional incomes, etc).
Rather, I believe that on a macro economics level the world is entering a lengthy deflationary depression and we will see all asset prices fall dramatically in the coming years. Yes, by many measures Seattle real-estate is still over-priced, but these indicators don’t tell the full story. Our perspectives, and historical data, are inadequate as tools to help us grasp what is in store.
The entire post WWII era has seen one of the greatest bullish economic expansions in human history, and few people alive toda have any real understanding about what a deflationary depression means, or the dynamics that drive it. Much as Japan has seen asset prices continue to decline for 20 years (yes, two decades), I believe the US and most other nations are going to see a similar phenomena take place for years to come. The “historical” data we use for determining price trends are useless since they are largely based on post WWII transactions.
As I’ve said before on this blog, I believe we will see at least an 80% drop from average Seattle area peak prices by the time we hit bottom. Along the way I wouldn’t be at all surprised to see prices rise 5% for a year or so, before plummeting to lower lows.
http://bit.ly/YlmXD
Scott Weitz » Oct 25, 2009 at 12:39 pm
RE: Sniglet @ 1 –
Not quite as bearish as sniglet, but close. I think we’ll end down around 50-60%.
This doesn’t get ugly until people give up the notion that Real Estate is a great investment. Most still value home ownership. I think we’ll have a stretch where home ownership is considered a waste of money, and I think that stretch begins in about 9-12 months when the “recovery” does not come to fruition.
AMS » Oct 25, 2009 at 12:47 pm
RE: Sniglet @ 1 – “As I’ve said before on this blog, I believe we will see at least an 80% drop from average Seattle area peak prices by the time we hit bottom. Along the way I wouldn’t be at all surprised to see prices rise 5% for a year or so, before plummeting to lower lows.”
It’s usually a bumpy ride no matter what overall direction the market is headed…
For various reasons, many of which are similar, but many are different, I generally agree with Sniglet.
To support high prices we need high wages, and I don’t see such being sustainable into the future. What group is getting substantial wage increases?
(I still have not completely ruled out a substantial devaluing of the currency over time–boomers are seeking to consume)
Jillayne » Oct 25, 2009 at 12:51 pm
There are lots of foreclosures in the pipeline. We’ll have another leg down in 2010 when inventory starts rising.
But before then, I’m sure inventory will seasonally decline in some neighborhoods leading to more “now’s a great time” statements from agents.
Scotsman » Oct 25, 2009 at 1:08 pm
Way overpriced? That’s what I chose, but it’s not that simple. Transactions are taking place, people are happily buying and selling, so for some there is a market price that works. It all depends on what your future expectations are.
Since we are in uncharted waters economically, it’s too early to tell what will happen going forward. The economy is in flux in part because the rules that folks have played by for decades don’t seem to apply anymore. A new set of values and calls for expediency, forced outcomes without consequences, have overruled laws (both natural and federal, etc.) that people expected would be enforced. Favoritism and political connections have taken advantage of lax regulation and/or incompetence to start us down a road we haven’t been on before. So it’s hard to know exactly what the economy will be doing in a year or two. If the old rules were evenly applied, we could expect deflation. With the new rules and a concerted effort to defer debt and real losses while simultaneously forcing lower interest rates, who knows what the outcome will be? These tactics may lead to inflation, or could bring about a complete collapse as trust and systems break down.
When I was a Boy Scout, the rule if you got lost in the woods was to “sit down and stay put” until others could find you. I’m economically lost in the woods, out of the markets, not buying anything, waiting for things to break one way or the other. I’m still a believer in fundamentals and math, and have every right to expect a deflationary spiral, but it may be a decade before that happens. I do believe that long term, say ten to twenty years, real estate will never be the investment it’s been in the past. It will be more like a whole life insurance policy, a crappy return, but at least you have something, even if it’s only a third of what you invested, at the end.
Cheap South » Oct 25, 2009 at 1:21 pm
RE: Sniglet @ 1 –
I agree with the whole post; but particularly with the third paragraph. Our 2 preceding generations enjoyed unprecedented economic times.
As AMS stated – I can’t see wages going up; they’ve been going down (or stagnant) for a decade now. Let’s see what MSFT does in the next 3-5 years; will they keep the headcount they accumulated during the booming 90s? They might not be the only game in town anymore; but nobody relocated as many people to the region as they did.
And then, there are the foreclosures….
Dan » Oct 25, 2009 at 1:59 pm
I voted for “Way Overpriced”, although at some point I might have to rethink my position. After all, things are worth what people are willing to pay for them. It may be that in Seattle, people are so desperate to own that they are willing to pay a huge premium to do so. Ratios of buying costs / renting costs may stay permanently high.
I personally would like to own, but I can’t imagine paying a 50-100% premium over what it costs to rent a similar unit.
Although, with interest rates at historic lows, I have actually considered buying. Getting a 30 year loan at a 5% rate might seem like a great deal in another few years. Who knows – inflation might be higher than 5% – and it’d be like the bank paying me to take their money.
AMS » Oct 25, 2009 at 2:24 pm
RE: Cheap South @ 6 – After watching what has happened with the domestic auto industry, I am very concerned about Boeing. Do you see Boeing paying its workers more, either in the short-term or long-term?
Sniglet » Oct 25, 2009 at 2:52 pm
Microsoft has long past it’s peak and it is exceedingly unlikely the firm will see any significant growth in the coming years. Moreover, it’s corporate culture and business model doesn’t lend itself to the new products and technologies that will be the next big engines of growth.
I am not suggesting that Microsoft will go bus in the next decade, but I do believe it will continue to see it’s share of the market (in numerous categories) shrink. Moreover, it’s core products are going to come under extreme pricing pressure as they struggle to compete against different business models (e.g. where the OS or apps are free since the money is made elsewhere).
Lastly, as we’ve already seen, the depression (which has just begun) will impact Microsoft in a big way. This is not to say Microsoft is particularly vulnerable, it’s just that most corporations (I actually believe Google and Apple are going to suffer far more than Microsoft in the next down-leg of the depression) will find the going rough as customers continue to cut-back on spending. In the technology space this means that upgrades will be delayed, and a whole new “value-oriented” mindset will prevail.
I fully expect there to be MUCH more drastic lay-offs announced in 2010, and the Microsoft global work-force will be reduced substantially over the next 5 years.
Scotsman » Oct 25, 2009 at 2:57 pm
RE: AMS @ 8 –
Wages should be flat to down, certainly against a world standard as the dollar continues to devalue, and probably in nominal terms. Interest and debt repayment will continue to take a larger portion of whatever pie is available for some time, leaving less for wages. Significant, almost magical increases in productivity are the only way out in the long run, and I don’t see them happening at this time since again, interest and debt repayment will also take funds from research and development on a macro scale.
Tim » Oct 25, 2009 at 4:27 pm
RE: Sniglet @ 1 – Sniglet, 80% down from 2007 peak levels? At least locally, I disagree with that sentiment. Every home sale taking place presents a value building block supporting prices in a specific neighborhood. As sales take place with more volume, the more sound the argument becomes that the market is gaining stabilization and buyers move into the market creating more of a foundation. The foreclosures and more REO’s coming to market will pressure prices but they will be gobbled up as very good buys for both routine buyers and long-term investments.
The only way I see an 80% drop (across the board)is another enormous crippling economic shock or global war, each of which may trigger the other. I can’t control that people are making offers on homes locally, regionally or in another state and that in some cases multiple offers are occurring again driving up home prices. Is is absurd? Yes, but it is happening.
And this is what I talked about a quite a while ago: the idea that with the speed of information, this correction may be devastating to way over levered households saddled with debt, but it could recover much sooner than expected. Does recovery mean back to mania? No. After last Fall’s Wall Street panic and this past March lows, would I have dreamed that the DOW would be up as much as it is? Nope. Is the market manipulated by rates and other incentives? Yes. I am reading, learning and watching and participating in this market along with everyone else.
From my vantage point on the front lines of the market where our office is closing refi’s and sales (even though I don’t come close to the volume of title companies), people buying today are 1) credit worthy, 2) have healthier down payments 3) are not overly concerned with “how much equity” they will be gaining in the near future; those conversations are largely absent.
This is a huge psychological swing from what I witnessed from 2004-2007. Is there still distress out there with throngs of people upside down? No doubt. People who have entered the market and looking at a better affordability situation along with these low rates are buying with confidence. There are some very good buys becoming more commonplace.
AMS » Oct 25, 2009 at 4:57 pm
RE: Tim @ 11 – Selling prices ($) have been falling and total gross sales volume ($) has also been falling. If you want to use ongoing sales as a support level, then the market will need to hit the point where falling prices increases gross volume ($).
AMS » Oct 25, 2009 at 5:08 pm
RE: Scotsman @ 10 – The international aspect make the discussion a bit more interesting.
I actually see the dollar falling on the world market, but all goods purchased within the bounds of the United States are purchased with dollars. Clearly homes will not be leaving or entering (excluding some rather unusual situations), thus the homes will always be purchased and sold in dollars. Does the world value of the dollar matter when your home is purchased and sold locally with dollars?
I do agree, however, if the world value of the dollar goes low, then imported goods will get very expensive, as will overseas travel.
Herman » Oct 25, 2009 at 5:08 pm
I used to work for a global firm. I saw people hired people in engineering centers on every continent. And the very most expensive employees on earth are located in: Seattle*.
They used to come to me after some job changes, discontent and ready to quit, and ask me to prove to them that we would keep the Seattle office open. My typical response was to turn it around and ask them to prove why they were worth 40% more than their peers. They didn’t know because they didn’t get out of the bubble much. But I did think about it.
The main reason US workers are paid so much more than a similarly educated peer, on a global scale, is because we’re located in the biggest market (economy) in the world. If you want to launch a new product at scale, you don’t launch it in Bolivia. You launch it in the US. That’s where the money is. And we’re right here, connected to the buyers, in their culture, native speakers.
But that only lasts as long as this is where the money is. The Boomers brought this money in by borrowing it from the years 2010-2025. They spent it on disco, drinks, drugs, pottery barn faux art, and wal-mart flatware. They are the most selfish generation. The fiscal policies of the US have been designed to serve them, placate them, and buy their votes since 1970, with short-terms gains and ruinous long-term consequences for their children.
Now the borrowed money is gone, wasted. No longer employable and with rising expenses and a sense of entitlement, the Boomers have only one course left, and that’s to print dollars to give to themselves. Lending to the US will decline as it becomes clear that we can’t/won’t pay it back. We’ll start to mix “quantitative easing” with borrowing more and more, and the printed money will be handed back to the Boomers in the form of stimulus checks and inflation-based cost-of-living adjustments on their social security payouts. The assets they have to retire on, in their homes will be protected as much as possible by US inflationary policies and RE stimulus. Boomers will grow to love inflation as a means to drive up their home prices and the size of their entitlement checks.
Eventually, with inflation rising and the economy faltering, the global Market (capital M) will move elsewhere, to where the buyers and their money are, maybe to China or even the Mid-East. At that point, their employees will start to command the “buyer proximity” wage premium. This will accelerate a decline in US wages toward the global median, with a decline in the US standard of living to match. Plan your life accordingly.
This process has already begun.
*Same as SF/Bay area.
** BTW, the best engineering value is in E. Europe and Russia. More expensive than India/China but the quality equals that of the US, I think because of the right cultural disciplines and infrastructure.
patient » Oct 25, 2009 at 8:01 pm
Way overpriced. Remember we are floating on a couple of trillion dollars borrowed money. If you are in financial trouble and borrow a million from the bank and spend it in a year you will feel pretty good. When the money is gone you are left with paying the bill, not so fun anymore. Wait until unemployment is above 10% and the Dow is back to 8000, then we can see who is talking about good values. A good value in this economic environment is far,far,far below historic average, keep that in mind.
Scotsman » Oct 25, 2009 at 10:36 pm
RE: Tim @ 11 –
Just because your buyers are blind to the coming economic environment doesn’t make them right. I see it all the time, folks who currently have “good jobs” and have been relatively isolated from the current mayhem, thinking that nothing will change, or more generally, just being oblivious.
Unless you work with economic issues and a macro focus you have little chance of being fully aware of the changes and consequences that are slowly but surely building within the system. I expect that within a year or two we will see failed state and local budgets and the layoffs that follow. Next to go will be pensions, equities, and other hard assets, as the incomes that support them fade away. These losses will work their way back through the system as reduced consumption, leading to a second round of contraction. Many who think their jobs are secure, either through seniority, position, or governmental necessity will be rudely surprised to find that they too are not just unemployed, but unlikely to ever be re-employed at anything close to their original income level. We’ll see.
Hector » Oct 25, 2009 at 10:36 pm
Way overpriced. The future makes me sick to my stomach.
Scotsman » Oct 25, 2009 at 10:37 pm
RE: Herman @ 14 -
Nice post.
mukoh » Oct 25, 2009 at 10:50 pm
Don’t think it is way overpriced. Depending on the area. It has pockets of crap prices and yet areas of good prices, of course depending on your income. If you want to own in Madison Park earning only $150k, good luck to you. Keep dreaming of bubbles popping and people running to hand you over keys to a home you couldn’t afford.
Sniglets comments are always great and economically sound if you look only at fundamentals. I really like his train of thought, however if the markets were only based on fundamentals DOW would be at 4K if not less. The market has long come out of being fundamentally adjusted as it has become a “market”.
johnnybigspenda » Oct 25, 2009 at 11:02 pm
i read a quote some where that said something like, “the Great Depression could not have been designed any better to inflict the maximum amount of damage to the maximum number of people…. even the prudent saver who may not have been wiped out by the initial crash was lured in by the apparent ‘values’ that were to be had… little did they know and even bigger drop in the markets was ahead of them…. and if you weren’t wiped out by that one, yet another came…”
Pretty low odds of escaping the value traps that will be presenting themselves over the next year or two or three…. I see things like a 50%+ run up in the stock market over the past several months and the blatant truth that the fundamentals were never fixed… this thing is a time bomb. I think Sniglet said it… it could end up being years until it unravels again… in the mean time…
Anyway, that’s my underlying hypothesis right now. Stay more solvent than 98% of the population and be very calculated about any debt or ‘investments’ that I choose to take on.
That said, I’m just smart enough to understand most of the macro-economic issues that are in play… but not smart enough to extrapolate the various scenarios that could play out. Seems like everytime we have an ecomonic downturn everyone thinks ‘this is the big one’…. I’m pretty convinced that it ain’t a ’small one’… we’ll see where it goes. Its probably ‘the bottom’ right now, just based on the fact that I think it can’t be.
Jonness » Oct 25, 2009 at 11:19 pm
It’s commonly claimed that house prices should be about 3x income depending upon the area being studied. Currently, houses are considered affordable at higher ratios because of all of the artificial stimulus imposed by the government. The problem is, when this stimulus is removed, the house you buy today will lose value. It’s much better to pay a lower price for a house with a higher interest rate than a higher price for the same house with a lower interest rate. This way, when you want to move in the future, you’re not trapped underwater.
As mentioned above, the 3x income rule varies by area. For instance, homes in Olympia and Tacoma have been historically cheaper than Seattle. Here is a look at values starting just after the previous housing bubble burst in 1990 and progressing to to current. (I had to use 2 charts because the data is too wide to display in a single chart) Taking this data into account, it appears the Puget Sound area is in danger of a potential further correction of 25%. However, it should be pointed out that this area has a relatively low foreclosure problem compared to other areas that have greatly adjusted downward, so that probably provides it a certain level of immunity from rapid correction.
http://housingcorrection.com/misc/MPtoMHI1.jpg
http://housingcorrection.com/misc/MPtoMHI2.jpg
Median household income data is from http://www.ofm.wa.gov/economy/default.asp. I used 2008 data for 2009 as it is not currently available.
Median Price info is 2nd quarter data from OFHEO that has been corrected by Global Insight to offset errors caused by periods of strong refinance activity.
Jonness » Oct 25, 2009 at 11:32 pm
OK, it looks like I can post the data as a single image after all :)
http://housingcorrection.com/misc/MPtoMHI3.jpg
AMS » Oct 25, 2009 at 11:49 pm
RE: Jonness @ 21 – Oh come on, it’s always favorable to pay a lower price. I guess you are really trying to get to the NPV computation, but who wants to pay more?
Why not pay a lower price at a lower interest rate?
Note how you are playing with the whole “held to maturity” concept. Whenever you change durations, there is added risk, and I have suggested that we discuss duration/interest rate inflection points, which are critical to the banking industry.
Tim » Oct 26, 2009 at 12:07 am
RE: Scotsman @ 16 –
With all do respect though, I find that terribly ironic and somewhat humorous. I don’t have a Ph.D. in Economics where academics and people IN FINANCE study markets for a living. How could these folks that work with economic issues and a macro focus be so terribly “out of touch” in my opinion? I own a tiny small escrow company and could see this train wreck coming full steam ahead in late 2006. I’ve been on this Blog discussing the issues for nearly as long as Tim Ellis started the blog. I see financial ruin very frequently, up close. I also see some very sound buying going on and the building blocks for market stability.
Are we out of the woods? No, there are issues that need resolving and it’s a sentiment shared with me and others very tied in to our industry. (I had good long discussion tonight over a cup of hot chocolate regarding the market and in particular the commercial issues going on with a long time Seattle developer who is a recent past President of the King and Snohomish Co. Master Builders Assn. and a current board member.)
Scotsman » Oct 26, 2009 at 12:21 am
RE: mukoh @ 19 -
” however if the markets were only based on fundamentals DOW would be at 4K if not less”
True enough- we’ve got diverging “realities.” In the long run, only one of them can be true. My money’s on Dow 4,000, not Dow 14,000. Like the dot-com bubble, market exuberance and self-sustaining and reinforcing buying can drive prices higher and higher, constantly drawing in new money from the sidelines, or pulling it from other investment alternatives. But eventually, there has to be real value there, and the expected returns have to materialize… or the money leaves, and the bubble bursts. When will that happen? I’d put it at well within the next 12 months, but we’ll see. It may be 3 years, but it will happen. Don’t get caught!
AMS » Oct 26, 2009 at 12:38 am
RE: Tim @ 24 – I keep wondering why nice homes in Detroit sell for $25k, yet the same home in Seattle would very likely sell for $250k, ten times as much.
AMS » Oct 26, 2009 at 12:40 am
RE: Jonness @ 21 – One more comment on this:
“It’s commonly claimed that house prices should be about 3x income depending upon the area being studied. ”
Using this theory, What happens when incomes are falling? What happens when the unemployment rate is increasing?
Scotsman » Oct 26, 2009 at 12:48 am
RE: Tim @ 24 –
Tim, to be clear, I’m not referencing you, but your buyers- in all of my comments, so please don’t be offended. Like Ira said in the open thread, just because they have money doesn’t make them smart. And just because they are the president of this or that doesn’t necessarily give them a leg up on reading the tea leaves and discerning the future. In fact, I think close involvement in an industry can be a negative when it comes to honestly assessing and reacting to future trends. In fact, sometimes the always positive, GO! GO! GO! guys are the worst. For an example, I don’t have to look any further than the developer who lives on my street in a multi-million dollar home who just got foreclosed on his last build, and is fighting for his own home. Or these links- all smart guys, who still didn’t see it coming, and certainly don’t see the future as clearly as some here. Remember these issues from the recent twitter links post?
“5,000-acre flopped development in Pierce made front-page news in the Tacoma News Tribune today: Chapter 11 for Cascadia”
“PSBJ: Mastro Properties is in worse financial condition than “many creditors imagined.”
I really like the attitude evidenced in this tid-bit: we don’t want to hear no stink’n news!!:
“What the heck? Moody’s purged execs who questioned ratings”
One advantage I have is that I study the issues as a point of interest only. My income isn’t dependent on pushing a certain point of view, or on getting some prediction right or wrong. I have the knowledge and tools to do the work, and just want to get to the truth. And my best guess is that it will get much, much worse before it even levels out, let alone starts to improve.
The reason I post here is to help people understand that they will be much better off if they prepare for the worst, and are wrong, than to count on some turn-around that never materializes, and be wiped out. That’s all. I’m not selling anything, remain completely anonymous, and have nothing to gain financially. Take it as you will.
Jonness » Oct 26, 2009 at 12:57 am
One of the most basic problems involving probability outcomes is the old show “Let’s Make a Deal.” There are 3 doors, one of which contains a wonderful prize. The contestant gets to choose a door. At that point, Monte Hall opens a door not chosen by the contestant, and reveals it does not contain the prize. The contestant is then given a choice to keep the door first chosen, or switch to the other unopened door.
It seems at first glance, the odds of winning when switching doors is the same as keeping the original door–50:50. Thus, it’s a coin flip, and one’s choice should be left to intuition or luck. In reality, keeping the original door results in a 1 out of 3 chance of winning, and switching to the other unopened door doubles your odds of winning to 2 out of 3. Thus, unless you are psychic, you should always switch doors. You effectively get 2 doors instead of 1.
In a similar manner, we can be helped by math when judging the economy. In fact, the math will always work to our favor and give us a better than 50:50 chance of returning a profit. The problem is currently confounded by the government manipulating and controlling the function at unprecedented levels.This makes it difficult to guess how the formula will change as we progress, and this makes it more difficult, but not impossible, to do the math.
I believe it is imperative to forecast government psychology when attempting to determine the function. Government agents are simple-minded puppets whose strings are pulled by corporate America. Their thoughts are geared toward progression of their careers, which means, doing the right thing for America is not on the drawing board. One has to choose which corporations have the most power to control the puppets. This will provide insight into how the formula will change as we progress into the future.
IMO, inflation is in the greater interest of the puppet masters than deflation. This does not mean horrific deflation will not occur. I think it does, however, provide some insight into what game the government will attempt to play as we progress forward.
We need not judge the long-term future outlook, because the government is working in the extreme short term outlook. IOW, it is working in a reactive manner as opposed to a proactive manner. If we can understand what the reactions will be to upcoming problems, we can better our odds of playing winning hands. I believe the greatest thing one can currently do is invest in liquid assets. Thus, buying a home is currently the same as closing your eyes and throwing darts at a dart board. As long as one understands that decision, it might be OK to buy a home. But if a person believes the way to riches is to buy a home, they need to take some basic probability courses, which will teach how to better gamble with their money.
Jonness » Oct 26, 2009 at 1:01 am
By AMS @ 27:
The 3x income rule is meant for study of value in the current market. You are bringing up parameters that should be studied using probability theory. IOW, you are building a function based upon the probability of incomes and unemployment in the future. If you have insight into where unemployment and incomes will be in the future, then you should build them into your function. But you should not use these measures purely based upon your belief of where they will be if you in fact have not performed an informed and disciplined study of these market aspects.
The reason is, of course, indicators change direction through time. How do you know an increasing or decreasing trend has not reached a top or bottom? It requires more than intuition to predict these indicators in a consistent manner.
Scotsman » Oct 26, 2009 at 1:22 am
RE: Jonness @ 29 –
“IMO, inflation is in the greater interest of the puppet masters than deflation”
I’m not so sure. I too have spent a fair amount of time on this issue, and have come to the conclusion that if the bankers are the “puppet masters” a period of deflation may be in their favor. With deflation, debts are repaid with ever more valuable dollars, giving bankers additional effective wealth or buying power. Bankers really don’t want to own their collateral, so the falling value of homes, cars, etc. doesn’t really bother them, especially when they are back-stopped at book value by the federal government. The back-stop is key to this analysis. So a couple of years of deflation could be to their advantage. Eventually though, they do need inflation to grow the money supply and fund ever increasing interest payments.
I don’t think we’ll see to much complaining from them about a short term deflationary environment- with the backstop, it will increase their effective percentage of the nations wealth. And when the time comes to try and pull out of the deflationary spiral, we’ll see what the gov/fed has. My guess is they can’t print fast enough to re-inflate- they may slow the fall, but that’s it. Too much credit and value has been lost to simply be replaced by fiat dollars. We need real net increases in asset values, productive capacity, and available (and utilized) credit to put some air back in this economy.
Jonness » Oct 26, 2009 at 1:28 am
By AMS @ 23:
Many people claim it’s a great time to buy because interest rates are currently low. Unfortunately, when rates go up, house prices will go down. IOW, most people pay per month as opposed to lump sum. Increasing rates mean less money is available for principle.
Well, I think we agree this is even better. It is stating the obvious though.
I get the feeling you believe my reply was to a post you previously wrote. It is not, as I have not read this thread in its entirety.
Robert Shiller recently stated the housing market is at great risk for not increasing in price over the course of the next 5 years. Since people generally move every 7-9 years, if they choose to pay more for a house in order to get the current low interest rate, they are in great danger of being trapped underwater. This of course is due to paying about 6% to NAR interested parties and 2% or so to Uncle Sam. On top of this, you have holding and maintenance costs. That’s why the general public should stay away from flipping, and anyone considering buying a house to live in right now should probably choose to rent, unless they plan to stay longer than the typical family.
mydquin » Oct 26, 2009 at 6:07 am
There will be another wave of foreclosures when the Alt-As reset. Prices will drop a bit more in 2010 and then start rising into 2012.
@1 – Comparing the US bubble to Japan’s is a bit absurd. Things got crazy here, but not nearly as crazy as what happened in Japan. The govt response has also been better this time around despite its flaws.
@12 – Have home sales not outpaced 2008 4 months in a row now?
Have rent ratios not returned to historical levels? (See Tim’s post)
@13 – Does the falling dollar not make US real estate more attractive to foreigners? Last I heard, large bank accounts in China and many other developing nations are still not safe.
It appears to me that current prices have returned to the 2000-2003 trend line set before the MBS ratings fraud took off. (See Tim’s 9/30 post)
There is good reason to think we are not quite at the bottom, but the end of the world scenarios are over the top. Late 2010 is the time to buy if you are just out to maximize your return. Folks who are more interested in their families and careers are already starting to buy.
JS » Oct 26, 2009 at 7:24 am
This poll takes credibility away from your blog. Of course, there will be “adverse selection” here.
David Losh » Oct 26, 2009 at 8:21 am
RE: Tim @ 24 –
Down payment and credit worthiness of the buyer means absolutely nothing in a Real Estate transaction. The only thing that actually matters is the value of the property.
There was a statement in a comment here that said a property is worth what some one will pay for it and that’s just not true. Another myth that builders are promoting is that because they stopped building there will be a shortage of supply in a few years and that’s not true.
The elephant in the living room, one of several at this point, is that builders over built every market place they could get loans in. The point was the loans, that’s where the money was. People buying the finished product was the transfer of the loan. Every body made money and the people who ended up buying those finished products have to pay it back.
Why pay back a mortgage on an over priced asset? In many cases the Note, the mortgage, is $50K to $100K over valued. Now hard working Johnny and Jane need to pay that Note off while huge corporate builders and developers bankrupt an LLC or two, or three.
Banks are making money, builders made money, mortgage, escrow, and title made money, but Johnny and Jane are the ones paying.
Real Estate is a business. You make money by beating the bank. That’s the way it has always been. You don’t make money by paying off a thirty year Note no matter how low the interest rate.People, like Johnny and Jane, need to make hard financial choices that include paying off a mortgage. They can’t sell for what they paid. Prices will continue to decline and the market place is saturated with housing units and many, way too many, are set to go as soon as the permits are applied for.
Over supply of crappy housing units will continue to drag on the market for decades to come.
AMS » Oct 26, 2009 at 8:32 am
RE: Jonness @ 30 – No, I am not using probability here, I am asking what happens when wages go down. I am not asking if they will go down, or any probabilities.
Matsayswhat » Oct 26, 2009 at 8:40 am
I think we’re going to see a flattening of prices closer to downtown with decreases in the suburbs as population density in Seattle proper increases. If energy prices increase significantly, which barring some kind of huge innovation or change in infrastructure I think they will, it’ll mean big drops for all of those new and relatively new houses in North Bend, Auburn, and Marysville/Arlington.
AMS » Oct 26, 2009 at 8:43 am
RE: Jonness @ 32 – More generally, you are pointing out that when interest rates rise the value of a bond goes down, but with a little twist. The twist is that home values are tied to bond values.
In a period of rising interest rates, bonds will continue to go down in value. In fact, they go down in value just enough to bring them to a current market yield. Of course there is often a risk factor, but even risk-free bonds, such as US Treasury Bonds, must be repriced.
There are plenty of bondholders who “hold to maturity,” so these holders do not care what the present value of the bond is, since it will be paid in full anyway. The “held to maturity” issue is what some homeowners suggest is the reason to buy now–lock into a low rate.
If we look at history, housing prices have a long history of rising, even in a period of fluctuating interest rates.
If you purchase something to hold long-term, and then the value falls, and then you sell, clearly it’s not a good deal. I do agree that any home buyer should price the risk of changing life circumstances where a move will happen sooner than anticipated.
Fran Tarkenton » Oct 26, 2009 at 9:13 am
By JS @ 34:
Do you mean “self selection,” since there’s no market transactions occurring here from which adverse selection could occur? Either way, I’m not sure how asking people what they think affects a website’s credibility, unless it’s something like a push poll. Please elaborate.
—-
As for the topic at hand, I’m not sure whether housing is fairly priced today. If you want to say that housing isn’t fairly priced today because there’s a high probability that it will be priced lower in the near future, then I agree. My parlor game guess all along has been that we’ll be off 40%+ in real terms peak-to-trough. If that’s going to come true, we have a ways to go.
Tim » Oct 26, 2009 at 10:14 am
- RE: Scotsman @ 28 – good points, discussion and no offense taken. And, I completely agree with your last paragraph. I do think it is inaccurate to characterize buyers taking advantage of today’s home prices, bank REO’s and foreclosures with incredibly low rates as not the best decision. It will be interesting to see how they have fared in a few years. I see the market moving in real time, not in the rear view mirror and I think that is sometimes lost on people who fall all over themselves predicting housing prices being reduced to 80% of their bubble highs.
When two thirds of the closings coming through our office for purchase transactions were nothing down during the bubble days, it caused me to be alarmed enough to start discussing in late 2006 the idea of a crash, which several people we work directly with did not appreciate. My integrity cannot be sold out to the real estate machine in which I work.
RE: David Losh @ 35disagree about the idea of down payments and credit worthiness being of little consequence. We are experiencing the result of loaning to people with lower FICO’s and no down payments. People with substantial down payments are probably more likely than not to have other areas of their financial lives in order, including other investments/savings that can help them sustain themselves over the long haul. There have been studies done for a long time about an issue: most foreclosures occur with homes that have mortgages. ;>
AMS » Oct 26, 2009 at 10:34 am
RE: Tim @ 40 – “There have been studies done for a long time about an issue: most foreclosures occur with homes that have mortgages.”
Can we call not paying one’s taxes a ‘foreclosure?’
Sniglet » Oct 26, 2009 at 10:44 am
Actually, I don’t think this is true. It is MORE important for the policy makers to be able to continue financing the national debt than it is to have inflation. Or, to put it another way, when policy makers have to choose between utter destruction of the dollar within a week, and prolonged deflation that keeps dragging the economy down for a long period of time, I believe they will choose deflation.
In short, I believe the policy maker’s hands are tied. if they really start “printing” money in any significant quantity, interest rates will skyrocket, and demand for T-bills will collapse (i.e. which forces up interest rates) which is completely unacceptable to policy makers (i.e. since voters will get rid of them at the earliest possible moment).
Look at what’s happened in Japan over the last 20 years. The policy makers there did NOT want to see deflation, and did everything they could do to prevent it (including MASSIVE stimulus spending, etc), but they wound up with deflation nonetheless.
AMS » Oct 26, 2009 at 11:01 am
RE: Sniglet @ 42 – I think the range of possibilities extends beyond the two options presented:
1. Utter destruction of the dollar within a week
2. Prolonged deflation
.
.
As I have suggested in the past, inflation does promote current spending, as assets will cost more in the future.
David » Oct 26, 2009 at 11:02 am
Seattle now has the third highest prices after San Francisco and San Jose. There is no way this place is more “special” than New York or San Diego.
Seattle has historically started a housing bubble at a later time than other major cities, and fallen much harder as a result.
Boeing WILL move some production to South Carolina, and Microsoft India will continue to steal jobs from here.
There are also too many Alt-A mortgages too that will reset in the next two years.
patient » Oct 26, 2009 at 11:22 am
RE: Tim @ 40 – Tim, what you are indicating is encouraging to us who are patient and wait for the exubarent prices of the bubble to become a black mark in history. If buyers today have much stronger finances and are more prudent it will as you say increase the probability for future stabilization. However that future is years out from now, it is the buyers ( and cash out re-financers ) of the last 10 years that will dictate stability the next couple of years and there are many of those with 2,5,7 years i/o:s that will recast bringing their payments up to a level that can be hard to handle financially ( and mentally if you are under water ).
Sniglet » Oct 26, 2009 at 11:52 am
AMS » Oct 26, 2009 at 11:56 am
RE: Sniglet @ 46 – Let’s take the printing money case. The amount that is printed can be varied from a very small amount to a very large amount.
If a very large amount were printed in a short enough period, I agree the dollar’s value would plummet. However the amount of printing won’t necessarily come that large or that quick. A large amount of printing spread over a long enough period is much different than a short period of time.
Cheap South » Oct 26, 2009 at 1:08 pm
RE: Herman @ 14 –
Fantastic post. I have posted in the past that I think this country has a culture problem; not a political problem. In other countries someone eventually comes along and says: “this will be surgery without anesthesia; it will hurt like crap, but it will save us.” No politician here will risk the present and future bribes (sorry, “campaign contributions”) for the country.
MSFT – mind blogging that in the year 2009 they still have anyone doing programming in Redmond. Raj can do the same for 1/4th the salary and live like a king at home in India.
Boeing – is a matter of time. Not too along we only trusted other nations to make things like coat hungers for us; today, it’s everything, and planes are no different. Yes, Chinese toys had high levels of lead; so what was the reaction? Are we making toys here?? Planes are in the way out. Most growth is in ASIA, and planes will be made there. Either by Boeing, Airbus, or “Airboeing” (the Chinese shop that will copy both designs).
Scotsman » Oct 26, 2009 at 1:37 pm
RE: patient @ 45 –
it’s quite possible that Tim’s buyer are self selected- those on his doorstep, closing deals, are the only ones who could get financing. It may not be the whole story, but I bet it’s a big part of it. As such, it detracts from the credibility of his assertion that recent sales are true building blocks of value. Financial idiots (from ignorance, not inability) with strong moral values will likely have great credit scores, but don’t necessarily have any appreciation for the mess they just wandered into. It’s the old correlation is not causality argument again.
Scotsman » Oct 26, 2009 at 1:47 pm
RE: AMS @ 47 –
There is currently less than $600 billion of U.S. currency in circulation, the vast majority of which is held outside the U.S.
The U.S. deficit for 2009, counting inter agency transactions, is over $2 trillion dollars. The budget deficit for each of the coming 10 years is currently over $1 trillion, often double that, this time not counting inter agency debt. We are screwed. The government will print, and print heavily. It is the only option they really have.
The questions are: how far, not if, the dollar will fall… and how high will interest rates go? That they still can’t print fast enough to replace the $50-70 trillion in lost asset value and credit is a given, so no hyper inflation. But the combination of falling dollar values, higher interest rates, and a deflationary trend is mind boggling. This is why those who understand get sick in their stomachs.
AMS » Oct 26, 2009 at 1:52 pm
RE: Scotsman @ 50 – Well there is a multiplier, or velocity, of cash, but that issue aside, I agree that there will be some printing. Sniglet suggested that there was only two options (print & instant collapse of the currency, or long-term deflation), and I am suggesting the amount of printing can be varied so there is a range of possibilities. Also the time when the printing takes place can be varied too. The situation is not like being pregnant, like Sniglet suggested. A pregnant lady has little control over the duration of pregnancy, nor does she have much control over how many babies will be born, which is predominately one child per pregnancy.
Scotsman » Oct 26, 2009 at 2:23 pm
RE: AMS @ 51 –
Last time I checked Fed numbers the velocity was about one,maybe a bit less.
The key here is to look at the relative size of the numbers involved. There isn’t anywhere near enough cash out there to cover the deficit spending while credit also continues to collapse, so the presses will be ramped up. As a result, the dollar will tank and interest rates will shoot up. Having more of anything makes it worth less, and having more of something when fewer and fewer want to hold/have it makes it worth less still. Ouch.
But look at the relative size of the federal dollar demand verses the other measures of lost wealth, asset values and available credit. The trillions of new dollars won’t even begin to fill that $60 trillion hole (1-2% replacement rate) at least not initially. After several years of printing they may begin to catch up and have an impact- except that the contraction continues. The hole continues to deepen faster than they can fill it up. Deflation and heart-ache all around.
David Losh » Oct 26, 2009 at 3:23 pm
RE: Tim @ 40 –
Sorry, but you are looking at things from a few years of perspective. The housing bubble started before 2003, it simply stalled in 2001.
There’s no doubt today’s buyers and refinancers will be upset with the continued decline in housing prices and value. The fact is they are stuck with the depreciating asset, they can’t sell it for what they owe.
This is a game changer, but the game is the same. You buy a property with the intent to pay it off as quickly as possible.
Look at it this way: if some one came in with credit card debt of $50K would it be OK because the interest rate was only 5%? No, and if that unsecured debt, because the asset price will not support the value of the Note was $100K, would that be OK if the interest rate was only 5%?
Saying low down or poor credit borrowers are the cause of a global economic melt down is pure hype. The problem is prices far exceeded value. The end user is only a small portion of the over all problem.
patient » Oct 26, 2009 at 3:30 pm
RE: Scotsman @ 49 – I fully agree Scotsman, being a “quality buyer” in terms of credit score and finances has nothing to do with “good values”. It’s two separate topics, I only commented on the notion that more credit worty buyers will have the potential of creating stabilization sometime in the future many years from now. I highly doubt that any of these purchases will be seen as “good values” once the declines are over and done with.
Tyler » Oct 26, 2009 at 4:09 pm
This is a pretty good short video from Yahoo Finance that touches on the inflation/deflation possibilities:
http://bit.ly/3ajnma
Tim » Oct 26, 2009 at 5:59 pm
Lets debate value:
Value is established by people paying a price for property (raw land or improved). Appraisers, and those who are on this board aspiring to be appraisers, verify that the value a lender is willing to loan money on is valid. As long as I’ve been in housing and many year prior, sold comps are what people use to establish values and find a common ground for asking prices when a home is listed for sale.
Sold prices will be used as the data to justify prices going forward. There can be a mixture of both non-distressed and distressed sales that take place creating a value foundation. To argue that even though a sale takes place at a certain price is nothing more than hot air is nonsense. Can overall values continue to slide. Of course, to a point. Locally, we’ve experienced some very sharp declines from peak bubble prices so the threshold of of values moving sharply lower is now very much up for debate. From a pure data vantage point it is not knowable until it is in the rear view mirror. I work in real time and am very much interested in sharing my views when I think the winds of change are blowing in another direction (as I did in late ‘06) or the flag on the flag pole is idle. When inventory is worked through and sold the building blocks of a foundation for neighborhood values are in place.
Dismissing away the positive signs of some good buys (vs. bubble prices) and solid borrowers (cash, credit and capacity) is just as bad as ignoring the low FICO borrowers and 100% loans as if it those ingredients would have no impact on the market. We are in an interesting place in the market today and with today’s news that the Tax Credit may in fact be phased out I’m going to be curious to see how the markets reacts going forward.
David Losh » Oct 26, 2009 at 6:38 pm
RE: Tim @ 56 –
Housing units have the value of housing: shelter, convenience, and amenities.
If you take the cost approach we can see today that the cost of materials is going down, the price of land is going down, and labor costs are way down.
Just because people paid a higher price than actual value, the value of the housing unit, does nothing to change the value.
Let’s take location, location, location. If you build two houses exactly the same, for the same cost, one in Seattle and the other in Ellensburg, will they, or should they, sell for the same price? What about the housing units on the Issaquah Platue; should they sell for the same price as say the units at 85th and Aurora?
Value is different from the price people pay for things. If I buy plywood for $20 a sheet and can sell an end product housing unit for $300K great! If I pay $10 per sheet that’s better, it’s more profit.
If I can only sell an end product housing unit for $250K I really need to have the price of the plywood at $10 per sheet.
So the plywood has a value. It costs $3 per sheet to put in the store. I may tweek the margins, but there are other suppliers. When that same plywood sheet sells for $20 there is a huge profit to some one, probably not all to the supplier. When the sheet sells for $10, it’s less profitable.
The value, the core value, is pretty much set in stone. The profits swirl all around that. We can next talk about the cost of financing the whole mess, but that would take more time.
AMS » Oct 26, 2009 at 7:46 pm
RE: Tim @ 56 – You are putting trend analysis, possibly some fundamentals, against the efficient market hypothesis.
I think we need to get some terminology defined.
Value is the maximum a willing and able purchaser is willing to pay. Each purchaser is going to have a different value, and to make things nice, let’s assume that the value is established independently of other purchasers.
Alpha is the difference between a purchaser’s value and the purchase price.
An appraisal is a guess, estimate of a final selling price without knowing any one specific buyer’s value.
The only person who knows a given buyer’s value is that buyer. Even if a buyer says what his value is, that number cannot be trusted.
In general lenders do not value the underlying security, except for contingency planning. Clearly signature loans do not require any professional appraisal; it only takes the buyer’s valuation.
If the lowest price a seller will accept is above the maximum value, then there will be no sale.
If the lowest price a seller will accept is below a buyer’s maximum value, then a sale may take place. If that buyer needs funding from a third party, and that third party relies on another to appraise the asset, then there may be a problem with the sale, as you are well aware.
In summary, it’s impossible to know how any buyer values a home, as each buyer values items differently. It is possible, however, to get the methodology of an appraiser, which may or may not accurately reflect what buyers are willing and able to pay.
Snigliastic » Oct 26, 2009 at 8:39 pm
By Tyler @ 55:
If only someone had a podcast…
patient » Oct 26, 2009 at 10:54 pm
The notion that a home is worth what somone is prepared to pay for it is rediculous. When pets.com was a the top was the stock worth the price? Was a mossy 1500sqft rambler on the eastside worth half a million in 2007? You are confusing value with price. If you can sell it you priced it right but that is not the same as to say that the home is always worth what the buyer paid, not even close.
Jonness » Oct 26, 2009 at 11:19 pm
RE: Scotsman @ 31 –
That’s an interesting point I had considered on a personal level but hadn’t applied to the banks. It seems to me the benefits of better debt repayment through deflation are offset by the decline in the value of assets they hold. I suppose if they can hold the declining assets on their books at full value and hide all the shadow inventory long enough, perhaps they can come out the other end. It seems to me to be a risky bet though, considering, as you say, the fed/govt might not have enough power to push the snowball uphill when the appropriate time comes around.
What are your views on the benefits of deflation to banks vs the hit they take on their devaluing assets, and why do you feel deflation in the short-term provides them the better outlook of the 2 paths?
Thanks
AMS » Oct 26, 2009 at 11:24 pm
RE: Jonness @ 61 – Financial instruments don’t devalue the same in a deflationary period. If the financial assets were risk-free, such as US Treasury financial instruments, then there would be no loss.
The big issue however is how to value the risk of not being paid, and then the question of the value of the pledged security comes into play.
Signature loans, for example, have no hard asset security, but often these are fairly low risk, and thus are paid back.
AMS » Oct 26, 2009 at 11:30 pm
RE: patient @ 60 – “The notion that a home is worth what somone is prepared to pay for it is rediculous.”
I never claimed that it is worth what someone is “prepared” to pay, but rather I claim that it has a market value what a willing and able buyer will pay. Generally, as Tim pointed out, the market value of assets is only seen in the rear view mirror, and as you point out, that does not necessarily predict the future market value.
The value someone places on a given asset at a given time is different than market value, as it is usually the case that people are willing to pay more.
This illustrates why airlines have such crazy pricing: The airlines seek to sell high dollar tickets to those who value the air transportation the most while not giving up the customers that don’t have such high value on the air transportation. If an airline sold all tickets at the same price, some customers would not buy and others would have paid much more.
Jonness » Oct 27, 2009 at 12:04 am
By AMS @ 36:
I suspect you know the answer to that question better than I do, but here goes:
At the most basic level, when people have less money to chase assets, the asset prices go down. If it goes on long enough, historical valuations are undershot. Seeing that Seattle home prices were 3.52x in 1990, 3.57x in 1998, and 5.13x in 2009, further rises in unemployment and decreases in income wouldn’t fair well for home prices. Considering inflation-adjusted incomes have remained stagnant or decreased for some time, and unemployment is approaching double digits, I would say 5.13x is unsustainable even in light of the massive stimulus being used to artificially prop up prices.
Many people claim now is a great time to buy in Seattle, and I’m left wondering what data they are looking at? If one needs a home, it might be a great decision to buy one for personal reasons. But I just don’t see it being a historically great time to buy for financial reasons as is often claimed in the media.
The question is, will the housing market go the way of the auto industry when the stimulus is removed? IMO, govt stimulus results in less than 1:1 velocity, so it can only be thought of as a temporary measure. At some point, the real problems have to be addressed, and I feel the biggest problem is that the debt has to be unwound. Hiding it can only stoke spirits for so long. Can we really just continue borrowing greater and greater sums for eternity in order to rev up the engine? I suppose it’s possible, but I cannot currently perceive enough of the big picture to understand how it is possible. I understand that money can be locally devalued in a manner relative to local assets, but in our case, that typically means increased oil costs, which can nuke a fragile economy struggling to recover. It all seems to come down on the backs of the American consumer, and as far as I can tell, the consumer is not in good enough shape to lead us back to 7x valuations. This makes me believe the best possible outcome is sideways home prices from here to ? And if that’s the best-case scenario, the worst-case is downright scary.
AMS » Oct 27, 2009 at 12:24 am
RE: Jonness @ 64 – I’d answer this in a simpler way.
Let’s say all wages, for the year, are 100 (an index).
When wages go down to 90 (90%), home values will generally follow, as the multiplier remains constant, maybe is even reduced by some other fixed costs.
Of course this can go on and on until a new equilibrium is established.
posthoc » Oct 27, 2009 at 5:35 am
By AMS @ 58:
RE: AMS @ 58 –
I’d pit a fair number of analytic techniques againt EMH, given that the latter is demonstrably false. Whether or not we’ve come up with a valid, empirically supported counter-hypothesis, EMH is wrong enough–and has been proved wrong often enough–that I’m surprised you even bother to invoke it.
Anyway, I think a number of prospective first-time buyers–and some long-time appraisers who have been squeezed out by the recent standards–might take issue with your assertion that lenders pay no attention to “the value of the underlying security.” How many deals have been hopscotched because of bad appraisals–either falsely high so the seller holds out for an unrealistic price, or falsely low so the bank/buyer neg the deal because they think the asset is truly worth less? (And I’m talking at the moment of transaction, so no need to beat me up with statistics about how the market is heading downwards.) Hard to gather statistics on this one, I think, but the results would be illuminating.
Jonness » Oct 27, 2009 at 8:31 pm
By AMS @ 65:
IMO, the multiplier cannot be thought of as basically constant. It only appears that way because many of the influential factors typically remain fairly constant. I agree that lower wages cause lower home prices because the multiplier is multiplied by wages, but I don’t think this tells the entire story.
I’ll demonstrate with extremes. Let’s say in a given (hypothetical) year, average people can afford to spend $5K extra beyond their basic needs. In the following year, average people can afford to spend $500K beyond their basic needs. This increases the multiplier. Falling incomes have a similar effect that decreases the multiplier. Depending upon how far incomes fall, prices can overshoot the bottom of the multiplier range.
I agree other fixed costs such as interest rate changes do weigh in, but the amount of money people have to spend compared to the amount of assets available also influences the multiplier.
For example, the multiplier was 2.84 in 1989 and 5.92 in 2007. Lax credit helped cause this, as the borrowed money competed with real money to purchase the assets.
Jonness » Oct 27, 2009 at 8:52 pm
Fixed incomes are implicit in the above extreme scenario. The model of course is the increase of buyers during the housing bubble whose incomes did not appreciably increase; yet, they suddenly found they had an extra $500K to spend via the liars loan.
mukoh » Oct 27, 2009 at 10:11 pm
RE: patient @ 60 – Patient, aren’t homes worth what someone is actually willing to pay for it as it is? I.E. a market driven approach. There is fundamental, and then there is market. Value that is derived from fundamentals is rarely at par with market value, just look at stocks.
b » Oct 27, 2009 at 10:38 pm
RE: mukoh @ 69 -
Financing requirements limit the “market value” decision of the vast majority of home buyers. Most home buyers would pay any amount of money as long as the bank would let them, after all it is not real money just some documents to sign. Hence the bubble.
Jonness » Oct 27, 2009 at 10:51 pm
By Sniglet @ 42:
When my statement is taken out of context, your statement appears to disagree with me. But in context, you appear to somewhat agree with me.
“IMO, inflation is in the greater interest of the puppet masters than deflation. This does not mean horrific deflation will not occur.”
AMS » Oct 27, 2009 at 11:17 pm
RE: Jonness @ 67 – I did mention the fixed costs, which you are calling “basic needs.” Part of the problem is that “basic needs” change with the increases in income (in other words, housing costs are not going up in a vacuum). The extra $500k would probably cause demand-pull inflation.
If the fixed costs do remain fixed (i.e. if the cost of the “basic needs” remains constant), then your reasoning is sound.
There are some who suggest that housing should be between X and Y percent of total income. Using this, with some nice assumptions about taxes, interest rates, maintenance, and so on, we could get to a multiplier, and then if the incomes went up, the total value of all the properties in the area should also go up.
Ghost towns, where a mine has dried up, generally have low property values, even if the structures are nice. Total income is near zero.
Jonness » Oct 27, 2009 at 11:25 pm
RE: b @ 70 – In addition, I suspect the stock run up is in part because the banks can borrow money for near zero interest. Given the choice of whether to lend it to unemployed strawberry pickers so they can buy depreciating assets they can’t afford (and have a history of defaulting on), or to risk putting a portion of the money in the stock market in hopes of a higher return than 0.25%, the stock market currently appears to be the better bet. In time, perhaps the stock market might, once again, not seem like such a good place to park the money? But for now, greed rules the day.
AMS » Oct 27, 2009 at 11:30 pm
For those who have the “housing provides shelter, land for gardens, blah, blah, blah” claims, why is it that property in ghost towns has such low values? Specifically, when a mine dries up, or worse yet when governmental regulations shut it down, the values of homes plummet in the area.
There were coal mining towns in the east that went ghost after the federal government required the use of lower sulfur coal. The mines that produced coal with too high sulfur content could no longer sell their product, so total income in the area goes to near zero. All the homes go up for sale at approximately the same time, yet there are few, if any, buyers for the homes located near the former mining operations.
Shelter might have some basic value, but to place it within the context of dollar value, one must go further than to just claim shelter has value. Having a grocery store nearby has value too.
In part this was written especially for David Losh @ 57!
Think it can’t happen to areas as populated as Seattle?
Question:
How far from Ghost is Detroit?
Jonness » Oct 28, 2009 at 12:20 am
RE: AMS @ 72 -
I agree with that. With rising incomes comes rising prices as more money chases available goods and services (and vice versa).
Or if the expansion of money outpaces the increase of the cost of basic needs.
What I’m getting at is, I believe, the sudden availability of easy to get low-down loans increased the amount of money chasing the available assets well beyond the rise in the cost of basic needs or the rise in incomes. This sudden increase caused the multiplier to rise. During this time, a decreasing unemployment rate caused people to feel safe enough to pay a higher percentage of their monthly incomes for housing costs. The decreased interest rate and market exuberance helped push the multiplier over the top of the previous range.
The reverse of this is to remove these loans (and many others) from the supply of money chasing available assets and to increase unemployment. Falling wages would cause a further decrease of the multiplier, even if the cost of basic needs tracked the loss in wages. This is because surplus money would be saved in this fearful environment just as it was spent in the previous greedy environment.
Personally, I don’t believe the multiplier will overshoot the bottom as long as interest rates remain low. But I do believe the multiplier will decrease despite the cheap loans, tax credits, buying of toxic assets, propping up of the banks, etc. And if interest rates go up, all bets are off as to the sustainability of the current multiplier.
I’m not trying to be disagreeable. I’m just trying to express my opinion and work out my thoughts on the issue. It’s something that interest me as a potential home buyer.
patient » Oct 28, 2009 at 12:42 am
mukoh and AMS, the market or trading value is only of interrest to flippers. It’s the claim that buyers are finding”good values” just because they buy below current market value I have an issue with. A “good value” should be a good value proposition compared to alternatives, i.e renting and also in light of market fundamentals otherwise it’s not a good value imo. Just like a pets.com investment should have been graded against other investments and fundamentals to check if it’s good value, market value is not a good masure of actual value to the buyer.
Kary L. Krismer » Oct 28, 2009 at 8:22 am
RE: patient @ 76 – All that’s saying is you think prices are too high. You disagree with the market. That really doesn’t mean much, other than that you will not be likely buying. Other people drive the market, and they determine value. To come to a different conclusion you have to redefine value.
patient » Oct 28, 2009 at 10:36 am
RE: Kary L. Krismer @ 77 – If you look at volumes I’n not sure I disagree with the market. Low volumes normally indicates that the market do not agree with the pricing and we do have relatively low volumes.
patient » Oct 28, 2009 at 10:39 am
RE: patient @ 78 – And it was not all I was saying, I also said that value is not determined of the price relative to the general market, it’s determined from the cost of alternatives and fundamentals. If you determine value from market price you will get caught in every bubble and that’s not value.
Jonness » Oct 29, 2009 at 8:06 pm
By Kary L. Krismer @ 77:
The U.S. government also disagrees with the market. Otherwise there would be no need for massive tax subsidies, trillions pumped into banks, taking over 80% of the country’s mortgages, and numerous other desperate tactics currently being used to support house prices at artificial levels that a true supply and demand market could never bear.
IOW, all the extra money being pumped in the economy to inflate house prices is the “added value” that doesn’t actually exist in the house itself. So when people buy in todays, market, they are not just buying the house, they are buying all that extra value as well. That makes the deal seem better. But even so, I wouldn’t exactly call the current sales rate a symbol of massive value in the housing market.
Kary L. Krismer » Oct 29, 2009 at 9:56 pm
RE: Jonness @ 80 – Hardly. It just means the government understands that markets overreact each direction. If only they’d done as much to prevent an overreaction upward, we wouldn’t have these issues today.
In that regard, I’d again point to my idea of having appraisals not only based on current values, but prior values, such that perhaps FHA wouldn’t loan more than 96.5% of current value, and 90% of value a year prior (or some such numbers). You could do that without involving any tax dollars, and in fact it would have placed fewer tax dollars at risk if done 5 years ago.