Data this week confirm the fact that a long awaited, inevitable and totally healthy event is taking place. Housing prices are stabilizing. On Wednesday we saw sales of Existing Homes fall 4.1%. AP described this as a "plunge." Without getting into semantic quibbling that strikes me as a drop but not a plunge. I like the NYT description better "Sales of existing homes fell in July to an unexpectedly low rate." That is good because it is accurate. A smaller drop in sales was expected.
What we are seeing is the effect of long-term serious inflation in values. Many people are going to put their homes on the market hoping to get top dollar but many of those homes will not sell. While this creates the appearance of a market headed lower it is simply not the case with housing. Folks are not distressed to sell their homes they are simply willing to cash out if the price is right. The vast majority of those who cash out will be buying another house with the proceeds.
As we have been cautioning for a year the risks are in those places where there has been speculative buying of non-owner occupied homes. Those will be hard hit. Especially hard hit will be condo projects with speculative buying. As always, values will be impacted in those areas where one industry dominates and that industry is having cutbacks. The savaging of values in certain cities in the Midwest will continue. If there are no jobs for would- be buyers values have to fall enough to make homes attractive to someone. The Midwest also suffers from not being a retirement destination.
Builders are going to slow down in the construction of new homes and that will most certainly affect GDP and certain industries and businesses: building materials, Home Depot etc. With rates having gone up on mortgages and purchases slowing our humble mortgage industry will have one of its secular shake outs - fewer loan agents and processors.
With values having gone up so far so fast it is probably inevitable that values will actually fall in some places but I have long held the belief that a prolonged period (say, 5 years) of flat housing values would be a healthy thing. The simple fact is that the cost of owning a home has gotten to darn high. This 1) makes them unaffordable for some and 2) means that folks have less to spend on other things. So my point is this: do not complain about flat housing prices for the next 5 years. This is overall beneficial to the economy and to people's lives in general.
Values are not going to collapse for a couple of reasons: 1) these is not technological change which is suddenly going to lower the construction cost of housing . That won't happen unto we have nanobot carpenters and plumbers and 2) folks are not going to dump their houses and start living in tents, motor homes or cardboard boxes. House are not like Internet stocks - people actually need them and they have tremendous utility value. It would take a major shift in the relative cost of renting vs. buying to cause many folks to give up being owners for an economic advantage of renting.
Chicago Fed President Moscow said "We currently are seeing a good deal of softening in housing markets, and home prices are increasing at a slower rate. Even if prices did decline nationally, history suggests that the impact on consumer spending would be modest and gradual."
Taking another point of view the chief economist at Merrill Lynch said that the slump in housing has raised the chances the economy will fall into recession next year to at least 40 percent. Of course if Merrill Lynch says so then one can count on the opposite being true.
Speaking of misinformation I have been troubled by a radio commercial I have been hearing in San Francisco for the past several weeks. It (I think) is a pitch for a seminar based on the idea that one can make money in the coming "real estate shakeout." If you attend you will be informed by (and I swear I am not making this up) George Foreman, Mark Burnett (the "Survivor" dude) and Bill Walsh. Now I will admit that all three of these gentlemen probably own a bigger house than I do but I don't think that they are really wells of information as to what is happening in the real estate market.
The humor aside higher home values have spurred economic growth by creating activity in the home building and related sectors and the higher values have afforded folks the ability to borrow more and spend more. That party is ending and it remains to see what the aftereffects are.
Dick Lepre
Dick's comments are incisive and on the mark. But do not underestimate the effects of stock market values on residential real estate prices. Recall the crash of 2000 and the essentially sideways movement of the market since.
A home is a repository of value. If homes are rising and stocks are flat, where is the smart money of the young professionals going to flow? I suggest that it is this mindset that will sustain housing prices until there is a serious sustained rise in stock values.
All I know is that I purchased houses in the early seventies for 3% of their current value. Essentially I bought Microsoft.
Posted by: John Rowe | August 25, 2006 at 04:31 PM
Regarding Mr. Rowe's comment:
I see your comment as only being relevant to that set of folks who bought for speculative purposes. Take away any noticable appreciation and those folks will stop buying real estate for speculation no matter what equities are doing.
Removing speculative purchasing will stabilize values in a healthy manner.
Posted by: Dick Lepre | August 28, 2006 at 02:14 PM