I’d like to take a little time to address a few things that keep coming up here and elsewhere in online real estate conversations that are starting to bug me. So that’s what I’m going to do.
First up is the incessant refrain that anyone predicting a decline in house prices is forecasting “doom and gloom” and/or a “housing apocalypse.” How do lower prices translate to “doom and gloom”? Isn’t it a good thing that people will actually be able to afford to buy a house without entering into a self-destructive financial death trap? Are falling gas prices “doom and gloom”? What about falling flat-screen TV prices?
When the cost of something falls, it is a good thing that leads to greater affordability and frees up money for people to spend on other things. Apparently I’ve got it backward. To me, a rapid escalation of prices leading people to make extremely risky financial decisions and putting them in a situation where all they can afford to do is pay the mortgage (if that) is “doom and gloom.”
Convenient Opinion Boxes
This is one I see a lot on blogs, and I’m sure I’m even guilty of it as well: stereotyping opinions. For example, someone comments that they don’t think prices will fall 20% next year, so someone else labels them as a “housing cheerleader” that doesn’t think prices will fall at all, ever. Or on the other side, someone remarks that they expect prices will continue to drop for the next year and therefore don’t intend to buy right now, and the response is something to the effect of “renting forever is stupid.”
The fact is, you can’t put people’s opinions into convenient boxes. The fact that I don’t intend to buy a house right now does not imply that I think nobody should ever buy a house. Likewise, someone who doesn’t have a problem buying now doesn’t necessarily think prices will keep going up.
Let’s try to avoid making assumptions about people’s opinions based on one or two comments. The discussion is much more productive when we actually address what people are really saying, not what we imagine they might say if they were a certain “type of person” that we assume them to be.
Of course I won’t feel silly. First off, what did I say when I started the blog? Did I claim that prices were going to plummet from their current levels? Did I predict fifty cents on the 2005 dollar? Nope.
One thing I do know for certain is that the recent trend of rapidly increasing property values (double-digit increases year-on-year) cannot possibly continue indefinitely. If it did, eventually everyone would be priced out of real estate. There has to be a slow-down sometime, and I think it’s coming fairly soon (within the next 3-5 years). I don’t know if it will take the form of a leveling off of values, or a slow decrease, or a sudden decrease (bubble bursting), but I know it is coming.
By not buying a home in 2005, I have been able to pay all my debt (which was 90%+ school loans), purchase two cars with cash, give generously to charity, and build up a decent amount of savings—retirement, stocks, and enough liquid cash to live over a year with zero income. Why would I feel silly about that?
Furthermore, prices retracting to their 2005 levels in 2008 does not really mean that prices were “flat.” When you account for inflation, it’s actually a decline. In fact, according to the Bureau of Labor Statistics inflation calculator, just to keep up with inflation, a home in 2007 would have to sell for 7.6% more than it did in 2005. You can’t ignore three years of wage increases and savings built up by renting.
That being said, my guess is that prices will fall by at least 20%. I suspect that they will fall further, but even if 20% off the peak is the lowest they go, it still makes far more sense to buy at 20% off the peak with sound financing in 2008 than it would have to buy for the same price with a shaky loan in 2005.
Back to Business
So there you go. Now that I’ve gotten those things off my chest, we can get back to the business of bashing real estate agents and mocking home sellers. (It’s a joke, people.)