Sunday, December 17, 2006

On the Way to Half-off

DECEMBER 25, 2006
BusinessWeek
Housing: Curb Your Enthusiasm About A Recovery

[All emphasis added]
Housing booms are short and exciting. Housing busts, on the other hand, are long and painful. So don't put much faith in those oft-heard assertions that the worst is already over. Prices are likely to fall further in many markets in 2007. In some others, prices may rise, but at less than the rate of inflation. A BusinessWeek analysis of the past three decades shows that if history repeats itself, it's likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.

For residential real estate, the outlook for 2007 ranges from mildly positive to awful. The major markets that do least badly will be "revenge of the nerds" cities like Dallas and Houston that the boom bypassed. Even if all they generate is low-single-digit price gains, they will look good by comparison. Seattle and Raleigh, N.C., with healthy job growth, should also do O.K. The biggest losers will fall into one of these groups: cities like Detroit that are suffering economic contractions; cities like Los Angeles, San Diego, and others in California where prices are extraordinarily high and have barely begun to adjust; and cities like Miami, Las Vegas, and Phoenix that have a huge overhang of unsold houses or condos.

Advice to homeowners: If you need to sell and you're not getting much interest, cut the price by an extreme amount. If you make halfhearted cuts, you'll remain overpriced and you'll follow the market all the way to the bottom. Advice to buyers: Bargain hard. Many sellers are still asking for too much. "As tough as our market's been, the toughest thing is to get sellers to understand that prices aren't going up 18% to 20% a year anymore," says Ned Redpath, head of Coldwell Banker Redpath & Co. Realtors in Hanover, N.H.

[...] That said, right now is not the ideal time to buy or move up, even with the recent price declines. The inventory of existing homes shot up 34% from October, 2005, to October, 2006, and now stands at nine months' worth of condos and seven months' worth of single-family houses at the current rate of sales. That backlog will take a long time, and a lot of price-cutting, to clear out. One housing bear, Ian Shepherdson, chief U.S. economist of High Frequency Economics in Valhalla, N.Y., guesses that prices nationally could fall 5% to 10% from the end of 2006 to the end of 2007, going by the Office of Federal Housing Enterprise Oversight housing price index. Using that same measure, Goldman, Sachs & Co. predicts a 3% decline from 2006 to 2007. Before 2006, the index' worst performance since its origin in 1975 was a 0.3% increase in 1990.

[...] Housing prices were pushed up in part by get-rich-quick speculation. Now real estate has lost its grip on the public's imagination. Says Richard J. DeKaser, chief economist of National City Corp. in Cleveland: "We're looking at several years of weak home prices. It'll return to the time when no one is talking about real estate." Oh, well. You can still take a flier on Google...



Yale economist Robert J. Shiller points out that nationally, real estate prices would have to drop by 40% to bring them in line with the historic trend line going back to 1890.

5 Comments:

Blogger Hey Skipper said...

Oroborous:

The inventory of existing homes shot up 34% from October, 2005, to October, 2006 ...

What does that mean? The wording apparently says the total housing stock in the US grew 34% in one year, which doesn't sound right. Did the author really mean to say that the number of homes on the market is 34% higher this year than last?

The biggest losers will fall into one of these groups: cities like Detroit ...

Instead of "will fall" the author should have said "is falling". Just my luck to live in Detroit and have a house I need to sell in June.

The inventory of existing homes ... now stands at nine months' worth of condos and seven months' worth of single-family houses at the current rate of sales. That backlog will take a long time, and a lot of price-cutting, to clear out.

Lemme guess how long: 7-9 months. That doesn't sound particularly long to me. Is it just me, or do those two sentences fight each other?

... High Frequency Economics ... guesses that prices nationally could fall 5% to 10% from the end of 2006 to the end of 2007

Quite possibly true, but useless, since I can neither buy, nor sell, a house nationally.

December 17, 2006 7:50 AM  
Blogger Harry Eagar said...

And Bank of Hawaii economist Paul Brewbaker points out that the appreciation on a house that cost $5K in 1955 and $500K in 2005 is less than you'd have got on a passbook savings account.

I don't know how you compare 1890's housing with 2006 housing. Where do you go today to buy an uninsulated frame house without central heating and with one knob-and-tube electrical circuit?

I also don't know where the idea that housing busts take 15 years to recover came from. Not in my considerable experience of selling into down markets.

I was talking to a local businessman Thursday who mentioned that in the mid-80s he went bottom-fishing in Dallas and picked up commercial real estate for $15 a square foot. He now owns 1 million square feet of the stuff. What do you suppose it's worth?

December 17, 2006 10:25 AM  
Blogger Oroborous said...

"Inventory of existing homes" for sale. In other words, there are now more sellers, or fewer buyers, than there used to be.

Other sources make clear that it's mostly fewer buyers.

So yeah, the author is trying to say that the number of homes on the market is 34% higher this year than last.

"The inventory of existing homes ... now stands at nine months' worth of condos and seven months' worth of single-family houses at the current rate of sales. That backlog will take a long time, and a lot of price-cutting, to clear out."

Lemme guess how long: 7-9 months. That doesn't sound particularly long to me.

Well, nine months on the market is a long time, if the previous norm over the past few years was that people got multiple offers in days, as was true of some hot markets.

In some places buyers used to throng to homebuilders' events where some of those present would be chosen by lottery to be allowed to buy homes or condos that weren't even built yet.

The key to determining how many months' worth of inventory exist is as I've bolded above. It's a backwards-looking measure that is most useful if the rate of sales stays fairly constant. If sales are rapidly increasing or decreasing, the measure mostly indicates that something big is happening, as inventories shrink or swell rapidly.

Since right now sales are plunging, in a year the exact same number of homes for sale might be described as a "12 month supply", or perhaps an "18 month supply". In some locales such as Key West, based upon the number of homes currently listed for sale, and the number of sales over the past four months only, they have a twenty year supply of homes for sale.

[guesses about future prices nationally are] useless, since I can neither buy, nor sell, a house nationally.

They're mostly useful to people trying to guess how the economy's going to react to a certain level of sales at a given price level.

Since the economy was well-stimulated by high numbers of sales at rising prices, and especially by people who neither bought nor sold, but who instead got consumer loans against the perceived growth in equity in their homes based on what comparable homes were selling for, it takes an extraordinary argument to be convincing if one wishes to defend a position that the reverse won't be true in the coming years: That many fewer sales at lowering prices, and consumers unable to get lines of credit against their homes, whilst having to service the loans already outstanding, will strongly decrease the rate of economic growth.

December 17, 2006 11:02 AM  
Blogger Oroborous said...

I also don't know where the idea that housing busts take 15 years to recover came from.

15 years in real terms - or inflation-adjusted. In the real estate bust in Southern California that began in the early 90s, for instance, some locales took twelve years before again reaching their previous inflation-adjusted peaks.

There have been slowly-declining markets in Florida that took over twenty years between comparable real peaks.

December 17, 2006 11:10 AM  
Blogger Harry Eagar said...

Come to Maui. Through September, prices were up 7%, year to year, and sales levels were about the same.

It seems pathetic, since the increases in the previous 4 years were 23, 23, 25 and 25%. Just because that can't keep up indefinitely doesn't mean we're suffering.

All analysis of real estate needs to take account of the fact that national interest/inflation policy -- to the extent there was one -- was implemented by squeezing/expanding housing credits.

Ever since that stopped, the escalator has gone only one way.
Surprise, surprise.

December 17, 2006 3:21 PM  

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