Unbelievable graphic on housing prices

[n2doc]

Looks like prices need to drop 50%to return to historical norms.

[marmar]

1. It's going to be a very painful next few years...

:scared:

[bananas]

15. article link

http://www.nytimes.com/2006/08/27/weekinreview/27leonhardt.html

Read Between All Those For-Sale Signs
By DAVID LEONHARDT and VIKAS BAJAJ
Published: August 27, 2006

REAL bubbles pop. They are fully formed one moment and gone the next. Financial bubbles rarely meet with such a definitive end, which has always been the biggest problem with the metaphor. They let out their air in unpredictable bursts, and it’s usually impossible to figure out whether they have finished deflating or are just starting to.

Still, the latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.

The number of building permits being issued is falling at a rate usually seen only in recessions. In July, 11 percent fewer existing homes were sold than were sold a year earlier; 22 percent fewer new houses were sold. After the new-house data was released last week, Capital Economics, a consulting firm, wrote an e-mail message to its clients that began, “New day, same depressing housing market story.”

The fate of the housing market will influence whether the economy will merely slow over the next year, as the Federal Reserve forecasts, or fall into a recession for the first time since early 2001. Lehman Brothers, the investment bank, said Friday that “for-sale” signs had replaced gas-price signs as the most important indicator of potential trouble.

<snip>

[joeunderdog]

23. It's been painful the last 5 years. The next few should be better...

if you're a potential buyer like me. Up in the NorthEast, the housing market's been a holdup, plain and simple. Insane. Who wants to be house-poor plunking down a half-million bucks for a decent house? I got married 2 years ago and we just figured that renting--even at $17K/year!--was more cost effective than buying. People like us who wanted to buy and settle down had to put that off in the interest of making a sensible longterm decision. It was a better hardship than buying into an inflated market.

This current correction wasn't really all that unforseeable. No one HAD to buy their house (not that I don't feel for anyone taking a big hit) so I don't get all the pity for the sellers. Most of the sellers around here are gonna make anywhere from alot to a killing.

[Perky]

24. The growth of suburbia and the loss of liberalism

Part of this is due to suburban sprawl. There was a time when people commuted ten miles to the center city for their jobs. They shopped downtown. They went to movies downtown. Now each center has five to ten minicenters growing up around them and the edges of suburbia are being pushed further and further out. And Downtowns are increasingly ghost towns after 7 pm.


The increasing suburbanization winds up creating a generational disaffection for the poor who are left in the center. You used to see them, you had to deal withem, your house of worship ran a soup kitchen. Your folks were involved aand cared more because it was their community too.

Now because of suburbanization, the need for space, the fact that hardly anyone works downtown any more there is nothing to draw suburbanites to a liberal viewpoint. This is the harsh reality of the political calculus that liberals have no easy answer for.

Surburban worldviews so not easily connect with the city center where the community needs commands a more progressive outlook.

[sweetheart]

2. "when theres blood on the streets buy property."

- jodie foster

[ComerPerro]

33. i just saw Inside Man the other day

was a good movie

[n2doc]

3. I do have a question, though

I wonder how much of the current oveershoot is an artifact of underestimating inflation? Given that the chart is in "inflation adjusted dollars" if inflation has been underestimated (I think it has) then the overshoot would in reality be less. How much, I don't know. :shrug:

[Nabia2004]

21. Good point - Hasn't the dollar dropped 30% to 40% over the last 5 years?

I wish I could find a full analysis on the devaluation of the dollar.

[high density]

4. They probably will drop 50%...

And then those mortgaged up to the hilt are going to be badly screwed.

[JuniperLea]

5. All those 100% and 125% mortgages...

The banks WILL get their money back...


And then there's California... in my neighborhood, the median price is $650,000...


In 1970, my parents put $2000 down on a house worth $28,000... that house is now worth over $700,000... and trust me, the neighborhood isn't posh by any means.


Nutty.


My house is on the market... I'm pocketing the cash and forgetting I have it... although I have been tempted to follow Cheney's lead and put it all in Euros...

[Greyhound]

8. What makes you say that the banks will get their $$ back?

I don't think it is possible. From fraudulent appraisals to the RE industry's "conspiracy of silence" there just isn't enough $$ to pay back the loans.

[CelticWinter]

9. not sure what will happen

and maybe i am wrong for seeing it like this but I feel that with the amount of foreclosures that are now on the increase and the bankruptcy laws changes thanks to *. People will be paying off a portion of home loans for years on homes that dont own.

[Greyhound]

14. I was just wondering because in my case the holder of the first is going

to lose about $80 - $120K and the holder of the second is out the whole $120K. If they hold the property for 5 - 10 years, they might get what they have in it back, but mortgage companies typically can't hold properties that long. So, it looks like they will lose up to $240,000, and that doesn't count the interest and penalties they though they would get.

[JuniperLea]

19. Yes... sad but true

Blood from turnips...

[Julius Civitatus]

48. Evil stuff, isn't it

The new Bankruptcy Laws that the Republicans passed with the help of a bunch of willing Democrats are a true atrocity. The consequences of those laws are already impacting the middle class, but we won't see the worst of it until we hit a recession. When the economy takes a nosedive, we'll see a large chunk of the American population indebted for life on stuff they don't own, bankrupt yet unable to forfeit the debt, in servitude to their creditors.

This is going to be ugly.

[JuniperLea]

16. How many people will be able to file bankruptcy under the new laws?

Banks are in the 'brotherhood'... they will be protected no matter what. They will be leverage... most are owned by other countries... it's scary as hell when you think of how big and powerful they are. They own us... or will.

[Greyhound]

25. As more and more people find themselves in the same position I am in

that is, off the grid financially (no longer a tax payer, BTW) and judgment proof, there is no recourse.

[Julius Civitatus]

45. The new bankruptcy laws will destroy the middle class

These horrendous new credit card and bankruptcy laws are like a bear trap set up in the path of the middle class. In the next recession, those very laws will destroy not thousands, not hundreds of thousands, but millions of families, kicking them off the middles class and into debt servitude.

Notice how all the economic and social regulations set up by the Bush administration amount to a huge recipe for economic disaster. It will bring the USA closer to what Brazil is today.

:scared:

[skids]

12. The banks already have their money.

It is through Fed "system repos" the banks were allowed to issue these loans. In other words they were given money for free, based on over-valuations of their own "property." Whether they get 50% of the money loaned back, or 10% they still come out ahead.

Meanwhile, not having such a source of free money, the average Joe just sits and watches his dollar's value get closer and closer to that of the paper it is printed on.

So the banks end up with all the real property, and those few of us with savings, worthless paper.

All is going perfectly to plan. The new era of indentured servitude is dawning.

[AX10]

6. That is a massive increase.

[yellerpup]

7. How do we get from that 200 level

back down to a nice, squishy "soft landing"? I don't think so.

[sandnsea]

10. My parents CA home was $25,000

3br 2ba ranch on 2 acres in California, 1970, $25,000, so I don't even know what homes they're talking about in this graph to begin with. Homes for most of the country weren't costing $100,000 until the last 15 years or so.

[1932]

29. It's not saying that the average price is $100,000 over time.

It's saying that IF the price of home were 100K in 1890, over time, its value would be the y axis in the corresponding year on the x axis.

[sandnsea]

34. And $25,000 being a quarter of that

Would indicate a current boom price of $50,000 OR SO - which is nowhere near reality anywhere in the country, so I'm still having a hard time finding any significant value in the graph.

[Leopolds Ghost]

36. ADJUST FOR INFLATION

Inflation has been spiraling out of control thanks in part to people
using real estate investment to make up for declining real earnings.

Inflation is grossly under-estimated because Greenspan insisted that
computing power is a deflationary metric.

In other words, it doesn't matter that gasoline is twice as much at the
pump, because you can purchase 10X the computing power with your dollar
as 10 years ago.

That's why we're in zero inflation. I shit you not. This was covered in Harper's years ago.

[sandnsea]

38. It says it's inflation adjusted

So please explain the computing power deflationary metric as it relates to this graphic and a $25,000 house in 1972. And explain it otherwise because I've known something was whack about how they calculate inflation for a very long time now.

[1932]

42. Yes, the graph adjusts for inflation. You're not adjusting for inflation

when you think of your parent's home costing $25K in today's dollars.

The 100K isn't meant to be an average price of home in any year this graph covers.

[sandnsea]

47. Oh I see

It's saying a 1972 $25,000 house would be a $110,000 house, adjusted for inflation.

I'm not that stupid, honestly. I don't know where my brain went. :dunce:

[Poppyseedman]

11. Graph is completely meaningless without factoring in

new home construction.

It's pretty interesting looking graph, but new construction plays a very important role in overall home values. If the new development down the street can sell for $180,000 because of good times and low interest rates and it basically the same type, size, home you bought 10 years earlier for $100,000. You sell your home for what you can get, probably around $165,000.

If you notice the largest increase came when the economic booms occurred, which would include housing .

[1932]

30. It takes into consideration the new home on the resale, but not the

initial sale, I suspect. I guess the first sale is too arbitrary to give a meaningful indication of investment value (what do you compare it to?)? But the next sale tells you which directiong the house's value is headed.

[sandnsea]

35. I actually see the reverse

Housing goes down in boom times because nobody puts their money in real estate, the housing booms come right before a crash. Look at the late 70's and late 80's, and the 20's. If true, we're in for one hell of a bottom.

[Historic NY]

13. Foreclosures, foreclosures, foreclosures...........

check your daily paper legal notices. The bust is about to happen, but it is not going to be the price of houses so much as the amount people have borrowed against those houses.

[Greyhound]

17. The RE industry is propping up the prices as much as they can,

but eventually they will collapse, there is no escaping it. BTW if anybody is holding stock in a mortgage lending institute, SELL NOW!

[slackmaster]

20. It will happen at the end of the year

After the election, before New Year's Day IMO.

[slackmaster]

18. This qualifies as a "gee-whiz" graph because bottom of scale is truncated

Why does it go down only to 60 and not 0? Obviously to make it more visually interesting.

I'm not sure about the validity of calling a standard house built in 1890 comparable to one built today. Construction codes are far stricter, costs of materials and labor may be way higher relative to other things in the economy, things like plumbing and electrical wiring are a lot more elaborate now than they were then.

[jpgray]

22. Eh, what are you talking about?

If the scale remains the same throughout, cutting off the graph at a point that still displays all data makes zero difference to the graph. You would feel comforted by a few extra dash marks delineating blank space?

[slackmaster]

28. Comforted? Certainly not.

No information would be lost by having the bottom line represent 0 instead of 60. In fact the graph would provide a more objective therefore more honest depiction of the data.

[1932]

31. But you'd never pay $0 for a house.

It's starts at $100k just to give people a place give people a reference point that makes sense.

You wouldn't start at $1M either, and even $500k isn't an appropriate number unless you live in CA where that's an average to low price.

[slackmaster]

39. The scale is percentage of an index, not actual dollars

I'm just pushing for complete honesty in graphical displays of data.

[Leopolds Ghost]

37. Quality of Construction

I'm not sure about the validity of calling a standard house built in 1890 comparable to one built today. Construction codes are far stricter, costs of materials and labor may be way higher relative to other things in the economy, things like plumbing and electrical wiring are a lot more elaborate now than they were then.

Not really.

* Framing was a lot more elaborate and labor-intensive back then. Walls were plastered with lathing and the plaster was made to hold up for many decades. Very exacting and labor intensive.

* Electrical wiring from back then is mostly crap, but only because
they used cloth insulation and too-tight electrical boxes (3" instead of 4"). There isn't much difference otherwise.

* People think new homes are high tech because of steel framing, drywall and what-not. They'd be surprised if they knew how cheap, cheesy and shoddy it's gotten. Million dollar homes with brick on the
front only and plastic mantlepieces and fixtures made to look like wood that exude carcenogenic furans and formaldehydes.

One of the main drivers for the housing boom has been turnover driven by scarcity of quality, older construction and livable, walkable neighborhoods (which are mostly illegal under modern subdivision ordinances -- thank your local fire chief.) As a result, people are continually moving out of 5-year-old homes to make way for multi-family immigrants paying double the original sale price in suburban hellholes that do not age gracefully.

[Dora]

40. Houses from 1890 are still standing.

Whereas houses that were built in the 90's are falling apart in Central Texas.

I daresay this is likely true in other parts of the country as well.

This country has always been a sucker for the "new is better" snake oil pitch.

[Dunedain]

46. I like em' old

I have one now, it was built in 1853, five years before the territory entered the union.
Before that it was one from 1920, and the one before that was from 1889.

[Matariki]

26. It would also be interesting to juxtapose population growth with this

[1932]

43. and the increase in the supply of homes, but that would probably make

it a wash.

[necso]

27. It's possible that housing-prices will fall

to a level that reflects some different metric of inflation than the government's. That is, if the government has been underreporting inflation, then housing prices might "bottom-out-and-plateau" at rather higher levels than this chart might seem to indicate.

Moreover, housing-price increases have not been uniformly distributed and looking at the overall picture may be distorting. For example, some geographical-areas have climbed relatively little over this time-period, and therefore may have a smaller distance to fall -- while others may have reached heights that border a deep precipice.

Personally, my feeling is that speculation (deliberate and unintentional speculation -- especially induced unintentional speculation: ie, many folks may have essentially gotten conned into buying or refinancing) has played a rather larger role in housing-price increases than commonly appreciated, and this speculation may lead to greater volatility -- including considerable "floor"-overrun (that is, on the way down, prices may overshoot the "sustainable floor", because of the panic typical of major speculator sell-offs, and stay there for some time).

For those of us who have no such "investments", this could prove interesting.

Of course, any major drop in housing-prices promises difficulty for the economy, and with the refinancing and nontraditional-loans done in recent years, many people could be put in a situation where their houses are worth less than is owed. And with the new bankruptcy law in effect, many of these people who end-up losing their homes may (effectively) never escape the debt that they have incurred -- incurred while filling the coffers of those speculators who have pulled out in time (or who pull-out in time).

And again, geography will probably play an important role, with different areas keeping different amounts of their "increased market value".

[Lithos]

32. Good post!

And I agree, very interesting!

L-

[JNelson6563]

41. Bubble? What bubble??

I am astounded there are still folks out there who deny this.

Julie

[Julius Civitatus]

44. The SLIDING DOWN from that spike is going to be PAINFUL

Notice how every spike in the chart is followed by a sliding back to balance. What goes up, comes down.

The falling from this over-inflated 200% point is going to be horrendous, and may bring the economy down with it. This is very, very scary, and it has been made worst by land speculation, abusive lending practices, flexible mortgages that turn out to be impossible to pay in the end, and refinancing scams.

We are in for a painful, hard smash against a hard wall of reality.

It ain't gonna be pretty!

:scared: