Am I the only one happy about housing prices dropping?

[MRod305]

OK. I'm happy about this. I'm probably going to buy a new home within a few years, and I am ecstatic about the idea that prices are not growing as fast.

Why? Well, I think the whole reason that prices went up as ridiculously as they did was artificial - sub-prime lending bringing, real-estate prospectors, etc. In the end, 90% price growth in a few years is NOT NATURAL. It is clearly artificial.

I only shed crocodile tears for those who are only facing 1% growth now. Why? Because it averages things out. The low growth now, combined with the past gains, in the end still results in above average gains overall.

So...whats the problem? Someone didn't get a 80% return? Boo-hoo! Like other investments, 4% gains is conservative, 10-15% is aggressive and lucky. So I don't care that they expected to double money in a few years. Home owners should be content in a lower return. The expectations in real estate have been unrealistic, and they need to become realistic again.

Those of us (most people) who have been priced out are finally seeing light in that prices might be more affordable. Low prices = regular people being able to buy homes. Is there a problem in that? And am I the only person who's happy?

[mendelman]

I'm with you, MRod305. I'm happy we didn't buy last year, and will be looking to buy next year. I hope the prices drop another 10%.

[DetroitPlanner]

Nuts to both of you!

I am currently sitting on a vacation home I cannot sell. In addition, there are several abandoned homes in my neighborhood that are quickly becoming eyesores.

I suppose I should be thankful that I am in reasonable shape fiscally. Not everyone in this state is these days.

That being said, I can't stop looking at houses drolling over prospect of buying them on sale. I feel like a squirrel too afraid to leave his nut to find a nicer one!

[jaws]

Would anybody be happy if the price of milk or gas went up 90%? What if it went down?

Only the speculators are getting kicked in the nuts. That's what it means to live the life of a speculator.

[mendelman]

Would anybody be happy if the price of milk or gas went up 90%? What if it went down?

Only the speculators are getting kicked in the nuts. That's what it means to live the life of a speculator.

No, there are actually alot of "regular" people getting screwed too. Some for taking a calcuated risk on an Adjustable Rate Mortgage (ARM) or because a mortgage broker mislead them/lied to them.

That being said, I can't stop looking at houses drolling over prospect of buying them on sale. I feel like a squirrel too afraid to leave his nut to find a nicer one!

Dude, don't move yourself. Buy up the empty houses for cheap and become the neghborhood slu....er....landlord.

[jaws]

No, there are actually alot of "regular" people getting screwed too. Some for taking a calcuated risk on an Adjustable Rate Mortgage (ARM) or because a mortgage broker mislead them/lied to them.

How were they not recklessly speculating?

[mendelman]

How were they not recklessly speculating?

Yes, if one uses the basic defintion of "speculator".

But, by that token, isn't anyone that gets any type of mortgage a speculator? Or only if they are "reckless"?

[jaws]

Yes, if one uses the basic defintion of "speculator".

But, by that token, isn't anyone that gets any type of mortgage a specualtor?

If you get a mortgage because you expect to pay off your house over several years, you are not a speculator.

If you get a mortgage because you expect to sell off your house at a higher price and bank the profits, you are a speculator.

Since the very idea of an "exotic" loan like ARM, IO or NEGAM is contradictory to permanent ownership, anyone who got one must be a speculator.

[biscuit]

If you get a mortgage because you expect to pay off your house over several years, you are not a speculator.

If you get a mortgage because you expect to sell off your house at a higher price and bank the profits, you are a speculator.

Since the very idea of an "exotic" loan like ARM, IO or NEGAM is contradictory to permanent ownership, anyone who got one must be a speculator.

Quick, somebody mark the date and time because I actually agree with jaws.

Unless you lived in a completely unaffordable market like many parts of California I can't fathom why anyone would take a chance on ARM or IO. Even then, not being able to afford a home the "traditional" way is probably a good indication that you're not ready to be a homeowner and should stick with renting until you can.

Yes, it would be nice to get some fat 20% return when we sale our home in a few years but I'll be happy with breaking even at this point. After putting the work into it to make it the home we want and pulling money out of it to help with some other financial matters, I few our home as shelter and an emergency fund, not as a high risk stock portfolio.

[cch]

We are at the point where we both worked elsewhere when we bought our house, but now we live sort of far from our jobs, but not too far to commute. So, we are in "waiting for the perfect house to come along" mode and open to the idea of living closer to work. I've found a few contenders, at great prices. But, then there would be the obstacle of selling our house. We bought it 3 1/2 years ago, with a 30 year mortgage, but it should be paid off in 6 years at the pace we are going. So, we might as well hang tight, get it completely paid off, live mortgage free for awhile, and then possibly build our dream house or something. If it wasn't such a "buyer's market" right now, we would be more eager to move right away.

[Mud Princess]

Since my sister is in the process of house-hunting, I would love to see housing prices decline. I think a lot of houses are way overpriced right now. There aren't enough homes in her price range that are also in decent neighborhoods. Her house has been shot at (it wasn't the target, and fortunately no one was injured) and burglarized... I want her to move as soon as possible!!

[wahday]

Since the very idea of an "exotic" loan like ARM, IO or NEGAM is contradictory to permanent ownership, anyone who got one must be a speculator.

ARMs are also pitched to people considered "upwardly mobile." The logic being that as they earn more income, they can afford bigger payments (though somehow it rarely works out that way...). Many will also refinance before the fixed rate shifts and as their financial situation improves (both credit and income). The gamble is that the lending rate on a new mortgage may go up over that time, but its a risk many are willing to take.

There have been a great number of lenders that misled people who otherwise could not afford to buy into believing they can achieve (and sustain) homeownership using these sub-prime mechanisms. Many of these folks were not doing so to turn profit, but to live in a home they own. So, while these types of loans are not consistent with permanent ownership, it does not mean that the buyers entered the deal with the intention to sell and profit from the housing market. Plenty did, but not all.

Personally, I am also happy to see the market slowing. We are buying a house right now, in fact, in downtown Albuquerque, after over a long year of looking. While I hope things don't go south too far (causing us to be haunted by the feeling that "if we had just waited..."), I would like to see prices level out and the area remain as close to affordable for other moderate income folks as is possible (the market is still out of reach to many here and its definitely a stretch for us). We plan to be in the house at least 5 years, but probably longer, assuming we can continue to stuff the kids into it then.

The City has a goal to increase the downtown population by several thousand by 2010, but the last 3 to 5 years of monstrous increases in house values, this has proven to be a more challenging task.

[nrschmid]

I agree with CCH's view. Whatever happened to just putting money down on a house and paying off the mortgage, getting equity, and just LIVING there?

[HeartlandCityBoy]

I'm happy about it as well, high house prices only encourages sprawl and only encourages more investment in houses rather than people actually buying houses to live in them. Houses are to live in, not to use as money. It also doesn't encourage affordable housing in inner cities trying to get back up on their feet.

[cch]

ARMs are also pitched to people considered "upwardly mobile." The logic being that as they earn more income, they can afford bigger payments ...

I know it seems you don't agree with what the banks do, wahday. But I just want to point out that if you can afford bigger payments, wouldn't you rather put a bigger dent in your principal, than just throwing away more interest?

My brother-in-law got an ARM cause it was the only way the bank would finance the bigger house his unemployed fiance talked him into. I've got so much advise for young first-time homebuyers: Don't ask the bank how much they'd lend you, cause it is probably a ridiculous amount that is over 30% of your total income. Instead pick a reasonable amount and only ask to get approved for that. Make it small enough so that you can easily swing paying an extra $200-$300/month. You'd be shocked how such a little bit of extra can really help you pay off your mortgage fast. Like I mentioned, just that much extra has basically turned our 30-year FRM into a 10-year. And man, it is going to be sweet to pocket that mortgage money every month, in just a few years. Then, if/when we do sell down the road, we'll get to pocket the entire amount we sell for (minus realtor's fees and that stuff), and assuming our house appreciates a good deal, we won't have to borrow hardly anything to get a really great house in the future, or build one, which we'd really like to do.

[wahday]

I know it seems you don't agree with what the banks do, wahday. But I just want to point out that if you can afford bigger payments, wouldn't you rather put a bigger dent in your principal, than just throwing away more interest?

Well, yes, definitely, and I think what most people whose income increases do is refinance the whole loan once they are in a position to do so (hopefully before both the prime and adjustable rates go up), locking it in at a fixed rate. Their ability to do this may be a question both of what they earn (I got a raise - hurrah!) and what their credit score is, which may change/improve over time. The ARM, which can be configured to stay at a certain rate for a specified number of years, buys the borrower time to reconfigure the loan before the payments balloon. This is actually what we are doing with the house we are buying. We are also taking out a second mortgage until we sell our other house (which will then wipe out the equity loan and leave us with a line of credit should we ever need it). The strategy is to keep the principal loan amount lower (borrowed amount minus the second mortgage), since the interest you pay is based on the original borrowed amount and not what remains. Within the next two years, we will refinance the loan, though the rate stays level for five. The hope is that the prime lending rate does not rise too high before we can refinance the loan. Its all very confusing.

The fact remains that some lenders engaged in shady, misleading and illegal dealings that led uninformed people (foreign nationals with poor English skills, lower income and less educated folks, elderly, etc.) to feel that they could own and keep a home for their family on their current salary. I get calls on the phone from these kinds of people trying to get us to refinance our existing home loan and get "extra cash" in the process and sometimes I engage them to see how exactly how they are trying to manipulate things. Some of these lenders are so incredibly aggressive its scary. Fortunately I know better, but there are so many who don't and these guys can be so pushy and misleading that people get swept up in the momentum and the next thing you know their house is being foreclosed.

[jaws]

The fact remains that some lenders engaged in shady, misleading and illegal dealings that led uninformed people (foreign nationals with poor English skills, lower income and less educated folks, elderly, etc.) to feel that they could own and keep a home for their family on their current salary. I get calls on the phone from these kinds of people trying to get us to refinance our existing home loan and get "extra cash" in the process and sometimes I engage them to see how exactly how they are trying to manipulate things. Some of these lenders are so incredibly aggressive its scary. Fortunately I know better, but there are so many who don't and these guys can be so pushy and misleading that people get swept up in the momentum and the next thing you know their house is being foreclosed.

Good news, those lenders are all bankrupt now.

[the north omaha star]

Even though I bought a house only a couple of years ago, I'm watching the prices for the next couple of years. I need to get the kid into a certain school zone.

[Masswich]

I'm not happy about prices dropping because I think that is an indicator of how crazy the overall market is around here. I do think it all evens out but wish there was some way of keeping the increases more constant (lower than the last few years but not negative.)

Decreasing housing prices penalize those who want or need to move, and also people who took risks on strange mortgage products. Some of those people were dumb, some needed to minimize their costs in order to buy a house. They probably should have rented but its hard to judge why they made the decision to own.

In any case, prices here are still very high and the decreases seem to only bring prices back to 2004-5 levels. I assume that will level off and increases will start again.

But the $100,000 question I ask is:

WHY DOES HOUSING INCREASE AN AVERAGE OF 10 PERCENT A YEAR WHEN COST OF LIVING DOES NOT?

Is it a matter of limited supply and barriers to entry?

[jaws]

But the $100,000 question I ask is:

WHY DOES HOUSING INCREASE AN AVERAGE OF 10 PERCENT A YEAR WHEN COST OF LIVING DOES NOT?

Is it a matter of limited supply and barriers to entry?

Capital structure. Housing is a "long-term" good, in that it takes a long time to save enough capital goods to build a house. How long would it take you to save up the whole amount needed to buy a house? Decades. How long would it take to save enough to buy a car? Years. How long would it take to save enough to buy a hot dog? Minutes. The longer you need to save, the higher up the capital structure the good is.

Because people want to buy houses today and pay for them over the course of their career, other people who have saved some money can lend it to them at a profit. This market is brought into equilibrium by the interest rate. However we no longer have a market for savings and loans. The government through the Federal Reserve (substitute your own central bank if you're not American) controls the interest rate by subsidizing loans through money printing.

Imagine I have a job that allows me to afford 10,000$ a year in mortgage payments. At the natural rate of interest, suppose that allows me to finance the purchase of a house that costs 200,000$. However, if the government subsidizes interest rates, I can now afford a house that costs 400,000$ with the same 10,000$ a year payment. But the thing is that everyone else can also do the same, and there aren't any more houses that physically exist for them to buy. The bidding war drives up the prices of existing houses, which drives up the prices of home construction and the materials and labor necessary to build them, but not the price of hot dogs. It doesn't appear as though the Federal Reserve has created inflation since all it tracks is the price of hot dogs.

99% of PhD economists do not understand this, which is why we are in this mess.

[jresta]

Inventory grew here (in the city) but prices are up 8% over last year. Some of the suburbs took a hit (really the exurbs) but they're still up 3%. That's one of the benefits of living in a mediocre market. No booms and no busts.

I think housing prices having been going up for a lot of reasons and they all make the "headlines" on Planetizen:

Immigration has doubled since 1990.

Household sizes are shrinking. Fewer people per houshold means more households

The demand for square footage per person is increasing.

People are still leaving rural areas for metro areas.

Too many builders are still chasing cheap land in the exurbs but that's not where people want to live.

Add to that the fact that a lot of builders were behind the curve and overbuilt houses while underbuilding apartments. They're sitting on inventory in the exurbs while rent increases are outpacing housing prices.

[the north omaha star]

I'm not happy about prices dropping because I think that is an indicator of how crazy the overall market is around here. I do think it all evens out but wish there was some way of keeping the increases more constant (lower than the last few years but not negative.)

Decreasing housing prices penalize those who want or need to move, and also people who took risks on strange mortgage products. Some of those people were dumb, some needed to minimize their costs in order to buy a house. They probably should have rented but its hard to judge why they made the decision to own.

In any case, prices here are still very high and the decreases seem to only bring prices back to 2004-5 levels. I assume that will level off and increases will start again.

But the $100,000 question I ask is:

WHY DOES HOUSING INCREASE AN AVERAGE OF 10 PERCENT A YEAR WHEN COST OF LIVING DOES NOT?

Is it a matter of limited supply and barriers to entry?

The answer that I got in real estate school is that land zoned for residential is finite. So that adds to the supply and demand equation.

[jaws]

The answer that I got in real estate school is that land zoned for residential is finite. So that adds to the supply and demand equation.

But that doesn't explain why prices go up nationwide, then down nationwide coordinately. Only demand manipulation can explain that.

Plus land can be rezoned, although communistic structures do not respond to market incentives.

[Luca]

A couple of points.

Adjustable (floating / variable) rate mortgages are not particularly more speculative than fixed-rate mortgages but they are somewhat riskier. Interest-only mortgages are again somewhat riskier, over time. It's somewhat artificial to have a binary distinction between investment and speculation though, at the extremes of the continuum (chap buying the family home over 30 yrs vs. condo flippers) the difference is evident.

Looser credit standards (sub-prime loans, etc.) have certainly affected house prices but so do other factors, obviously (population growth, wealth growth, zoning, performance/perception of other asset classes, etc).

Jaws does not understand at all how central banks work; his disdain for "economics PhDs" is akin to the new -age "crystal healers'" disdain for a med school-trained surgeon. No major central bank has been “printing money” (inflating the relative value of assets/goods through base money supply growth in excess of deflator-adjusted GDP for a couple of decades).

That said, many informed observers believe that the Fed, specifically in the US, held rates too low for too long following the short/shallow 2000-2001 recession (people make mistakes) and thus help fuel an unsustainable run-up in property prices (by making private-sector credit creation more rapid). No-one thinks that was the sole or perhaps even main factor. One of the reasons is that the Fed can only really control very short-term rates. The 30Y rate in the US is much less volatile.

[jaws]

A couple of points.

Adjustable (floating / variable) rate mortgages are not particularly more speculative than fixed-rate mortgages but they are somewhat riskier. Interest-only mortgages are again somewhat riskier, over time. It's somewhat artificial to have a binary distinction between investment and speculation though, at the extremes of the continuum (chap buying the family home over 30 yrs vs. condo flippers) the difference is evident.

Looser credit standards (sub-prime loans, etc.) have certainly affected house prices but so do other factors, obviously (population growth, wealth growth, zoning, performance/perception of other asset classes, etc).

All those other factors have been around before the boom. The only factor that is correlated with the boom is credit.

Jaws does not understand at all how central banks work; his disdain for "economics PhDs" is akin to the new -age "crystal healers'" disdain for a med school-trained surgeon. No major central bank has been “printing money” (inflating the relative value of assets/goods through base money supply growth in excess of deflator-adjusted GDP for a couple of decades).

That said, many informed observers believe that the Fed, specifically in the US, held rates too low for too long following the short/shallow 2000-2001 recession (people make mistakes) and thus help fuel an unsustainable run-up in property prices (by making private-sector credit creation more rapid). No-one thinks that was the sole or perhaps even main factor. One of the reasons is that the Fed can only really control very short-term rates. The 30Y rate in the US is much less volatile.

Your ad hominem fallacy aside, you make no attempt to explain how central banks do control interest rates. If the central banks do not really control interest rates, then what is the point of their manipulating the credit market? The entire Keynesian edifice rests on the idea that the central bank can control the economy against the will of the market.


Here's an economics PhD who understands the problem enough to write a book about it, and who teaches at a legitimate university. You can download the book for free here.