US Home prices to drop
More fallout from the bursting credit bubble as the overpriced housing market is set to begin correcting.
The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
. . .
The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
Housing is a commodity like any other and therefore follows the same rules. Once enough people forget that and buy into the hype that this market will somehow be different, its bubble time, and the bursting will be bad.
Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.
So much in one little paragraph. The declines won't erase the gains of the last decade unless the downturn is much worse than economists are expecting? Are these the same economists who predicted that there would never be a national decline in housing prices? I refer you to my post on Friday, where I linked to a couple of folks comparing the situation to a similar bubble in Japan. It's quite possible this will be much worse than those trying to stem the tide want to admit it could be.
The year-over-year value shouldn't matter to those who don't plan to move, but that ignores one of the other big drivers of this crisis; the push for people to treat their houses like a giant piggy bank they could borrow more and more against to finance other spending. Take an example from later in the article:
In the Old Town neighborhood of Chicago, the town house that Ian R. Perschke, a technology consultant, and Jennifer Worstell, a lawyer, bought in late 2004 has appreciated more than 30 percent, they estimated. The gain was big enough to allow them to take out a larger mortgage and renovate two rental units in the house. But Mr. Perschke said he understood that he was “not going to see that appreciation over the next three years.”
These two were smart in that they used the refinanced, bigger mortgage to produce a bigger income stream from the rental units, but many used that money for consumption purchases, and the danger is not that the house won't appreciate more, but that it will depreciate enough that the mortgage winds up being worth more than the property. When that happens, and when it happens to people in the sub-prime category who can't keep up with their payments, the banks foreclosing on the properties can't get their money back, and the large number of those foreclosures in starting to flood the market and driving prices down even further.
Now all of this would be good news for home buyers, except that because of all those defaulting loans and drop in the value of properties, the banks are having a more difficult time finding the money to lend for home buying even for those with good credit.
One of the problems with this whole thing was the perception that housing is always a good investment, that it always goes up, that it never loses its value, and that it therefore a safe and secure way to make money. The truth, as is noted in the article, is that housing over time has historically done little better than basic inflation. The perceived gains were only due to the fact that most people kept their houses for a long time. Over 20 or 30 years, prices rise dramatically as inflation drives things upwards. When the housing prices unhitched from the inflation rate and started to soar, they were moving into bubble territory. They will fall back to at least a level consistent with inflation gains, which is going to hurt a lot of people who bought during the boom.
