I came across this wonderful little piece by RealtyTimes editor Blanche Evans this morning, it’s entitled “What Causes Housing Price Declines?” It’s a rather amazing piece, she really digs very deeply into the underlying causes and dynamics of home price change. She goes out of her way to analyze the impact of local wages, job gains or losses, and what can only be described as a smörgåsbord of microeconomic variables. Who needs economists when we have Blanche?
Actually, Blanche doesn’t even bother to answer the question she posed in the title. Analysis? No. Data? No. Microeconomic smörgåsbord? Not a chance, this is RealtyTimes we’re talking about. Plenty of fluff and circumstance. Let’s take a look anyway:
What Causes Housing Price Declines?
by Blanche Evans
Real estate normally appreciates one to two percentage points above inflation, but between 2001 and 2005, real estate increased 50 percent, an abnormally high return that benefitted homeowners and sellers across the nation.
So what you are telling us Blanche, is that we experienced a national real estate bubble? Right? Not at all concerned that perhaps the irrational appreciation we’ve seen might be somewhat speculative in nature? Nah, of course not.
Then in 2006, prices and sales began to return to a more normal rate of return, but still far from historical norms resulting in the third best year for real estate sales ever.
Whew, good time to throw that paragraph in Blanche, you might have actually scared someone who read that first paragraph.
It was the first year of national median price declines since the National Association of Realtors began keeping figures in 1968. And the NAR predicts that 2007 will also be a year of decline, which raises an interesting question — what causes home prices to decline? Are buyers being pushed to the sidelines by the media or fundamentals?
Ok Blanche, let’s explore the issue, what exactly causes home prices to decline?
First, there is no “national” market. Sales figures must be local in order to be meaningful, but that doesn’t mean that buyers don’t retreat out of fear as well as market realities such as job loss, population outflows, and overbuilding.
First, if there is no “national” market, why did you even bother to quote a “national” market statistic in the opening paragraph? Irrelevant I suppose, but you didn’t answer the question.
According to the Joint Center for Housing Studies of Harvard University’s “State of the Nation’s Housing 2006,” overbuilding and job loss are preconditions for metro area housing price declines. Between 1975 and 1999, the percent of times that overbuilding and major employment loss led to price declines was nearly 8.3 percent and 4.5 percent, respectively.
Blanche, I’m sorry to be the one to tell you this, but you fudged it. From the source you cite:
State of the Nation’s Housing 2006
Still, over the past 30 years, nominal house prices have in fact fallen by five percent or more at least once in about half of the nation’s 75 largest metros. In most cases, it takes significant job losses—or a combination of overbuilding, modest job losses and population outflows—to drive house prices down substantially. In terms of magnitude, price declines associated with episodes of major job losses alone average 4.5 percent, while those occurring in and around periods of overbuilding alone average 8.3 percent (Figure 11).
What the authors are saying is that during periods of overbuilding or major job losses, home prices have fallen, on average, 8.3% and 4.5%, respectively. On to the rest of the piece, I’d like to see where you take the remainder of your analysis.
Significant baby boomer wealth was poured into upsizing homesteads and purchasing second homes. GenXers came into their own with white collar jobs and stock market gains and were able to buy homes with less money down due to generous loan programs never before provided by lenders to previous generations. Government subsidies continued in the form of low interest rates, hovering at 30-year-lows since 1998. Homebuyer demographics also changed with more households forming, including record legal and illegal immigration. Single women homebuyers are now 22 percent of the market, up from 15 percent in the 90s.
So what your saying, Blanche, is that it’s different this time? Still, I don’t understand what these have to do with price declines.
Those positive conditions haven’t changed, but homebuyers are moving to the sidelines nonetheless, most likely in reaction to double-digit price gains in many metro areas. Not only did affordability hit a wall, particularly in California, but buyers simply lost patience with ever-escalating home prices. That’s when a variable comes into play that has nothing to do with fundamentals — attitude.
So was it affordability or attitude? Declining affordability is a radically different animal than attitude. Affordability primarily hits first time buyers, which tend to cripple the move-up or move-out market. When a first time buyer doesn’t buy, it’s not just one transaction that doesn’t take place, but quite a few, especially in areas that do not see much new construction. As far as attitude goes (I prefer to call it psychology, Blanche, I’m not sure why you don’t believe it has something to do with fundamentals. In fact, over the past 6 years, I’d argue that psychology was one of the primary fundamentals driving the real estate market. Sometimes it really boils down to psychology in these types of stand-off situations, especially when the asset being purchased has such a significant emotional component.
Realtor Mary O’Keefe says one of her clients refuses to take her advice when making offers. He prefers to listen to his Wall Street buddies who don’t live in Dallas and aren’t familiar with sold comparables. “They’re telling him that he should offer $50,000 less than the asking price,” says O’Keefe, who has been showing the buyer townhomes. “Consequently, he’s lost out on two great properties with low-ball offers, but he just won’t accept that it’s his expectations are unrealistic, not the sellers. Properties are selling out from under him.”
Wall Streeters lowballing? No, it can’t be. We’ll table that discussion for another time.
Some buyers aren’t going to be happy unless the seller’s blood runs in the streets. It’s about winning, not buying a home.
This quote here is about you guys, perhaps even me. The folks at RealtyTimes read this site.
Common sense dictates that when prices decline, that’s the time to jump in. It’s why consumers love department store sales, year-end car and truck clearances, and stock market fluctuations. Buy low and sell high is what we all wish we could do, even if we don’t buy in at the lowest low or sell at the peak.
Wait, Blanche, how did we get to the part where prices are already declining? Did I miss the part where you explained, as the title asks, “What Causes Housing Price Declines?” Didn’t you just say that attitude wasn’t a fundamental? If so, why are you trying to influence it?
For home sellers, the name of the game may simply be patience. There’s a point when others begin to recognize a good deal and they’ll make the offer that the seller will accept. The more that happens, the closer the market is to turning from a buyer’s market to a seller’s market.
Translation: Please don’t lower your price, just wait, eventually a sucker will come along. The last thing we want to do is screw up the comps and market statistics.
Realtors working with buyers should be letting their clients know a basic economic fact of life: if fundamentals aren’t supporting a market decline, then it’s not going to decline for very long. If the nation and individual communities are adding jobs and population, a market decline is destined to be short-lived.
.
I seemed to have missed this chapter in economics, the one that guarantees that all markets are perfectly efficient and rational.
Price is a legitimate concern, but with growing inventories, buyers should be taking advantage of an abundant selection to improve their vantage points. In other words, you may pay a little more for the house on the hill, but think of the alternative. In a buyer’s market, pickings are slim and if you want to buy, you take whatever’s on the market. There’s something to be said for getting the best home available for the money.
I had to re-read this paragraph a number of times. At first I thought it was because I haven’t had any coffee yet, but now I realize it has something to do with the cognitive dissonance caused by it. So what you are saying is you should pay a higher price when inventories are high? And that when prices fall, that inventory will fall as well? Or is inventory up causing higher prices? A buyers market has lower inventory than in a sellers? Oh bother, I’m confused, you’ve just got it all wrong Blanche.
So what exactly causes home prices to decline again?
Caveat Emptor,
jb (aka grim)
Blanche Evans = Tokyo Rose
CPI due out at 8:30.
jb
Blanche, are you traveling with our contingent to China???
“Real estate normally appreciates one to two percentage points above inflation, but between 2001 and 2005, real estate increased 50 percent,”
She hit the nail right on the head in the first paragraph. She’s telling us that this[2001-2005] is not representative of normal markets, we are in unchartered waters. What she really meant to say was she can’t explain these abnormal markets; they in no way,shape or form align with the underlying fundamentals. In other words, Oh S*it, watch out below
Off topic, but I’m always happy to PR for a friend:
Sopranos star to visit Morris Plains
MORRIS PLAINS –James Gandolfini, star of the HBO television series “The Sopranos,” will appear at the GameStation store in Morris Plains on Sunday from 11 a.m. to 2 p.m.
Gandolfini is making the appearance on the one-year anniversary of the release of “The Sopranos” videogame used with the Sony Playstation 2, according to Marc Frega, a spokesman for the store at 1711 Route 10.
From MarketWatch:
Consumer prices flat in November
U.S. consumer prices were unchanged in November, as lower energy and car prices offset increases in costs for homeownership and medical care, the Labor Department reported Friday. Core prices – which exclude volatile food and energy prices – were also unchanged in November, the lowest core inflation since June 2005. Economists expected 0.2% gains for both headline and core inflation. The CPI is up just 2% in the past year, following 0.5% declines September and October and November’s flat reading. The core CPI is up 2.6% in the past year. Core inflation has risen at a 1.6% annual rate in the past three months.
Full release from the BLS.
http://www.bls.gov/news.release/pdf/cpi.pdf
“The core CPI is up 2.6% in the past year”
Bernanke had told us that they are targeting a band of 1-2% core. If they lower rates with the CPI outside their comfort zone, watch out.
http://www.philly.com/mld/philly/16247589.htm
Alright you NYC folks thinking about moving to the Poconos. Watch out. Them’s scary times in ‘Tucky.
I can’t stand Blanche Evans. I cannot believe she actually published that load of nonsense. I also had to reread the last paragraph. The only comfort I take is that the normal American probably wouldn’t bother reading Realty Times.
By the way, I could just picture the annoyance on your face while you were reading that article Grim!
How about this:
Bubbles, Booms, and Busts
jb
Grim,
Would you believe Gandolfini was voted best looking in his graduating year. BTW he is from Park Ridge. I found out from my nurse at the orthopedics when I broke my kneecap 4 years ago. She dated him and is still pretty he is well…Tony Soprano.
Where o’where has common sense gone? O’where o’where did it go?
Ask the Biz Brain
I am the father of two elementary school children and I want my wife to remain home instead of going to work. We’ve borrowed heavily (home equity and credit cards) and have run out of credit. Is there any hope for us, short of selling our home, to pay off all the debt?
Here, J.B., maybe this will help you get over Blanche, even if you’ve already seen it:
http://www.youtube.com/watch?v=TM9JVAywknk
Did she *really* just say that in a buyer’s market you have fewer choices that that you need to pay a higher price? Holy crap. Then what the hell happens in a seller’s market?
That’s just pure snake oil. I understand that these people want to make as much money as they can just like the rest of us, but Jesus, have some common decency and treat your customers right.
Again, my profession shoots itself in the foot and makes all of us charlatans by association. Ms Evans’ article is pure swill.
How can this be a buyers’ market when probably 70% of all possible buyers have to sell their current home in order to move? Cancellation rates at new home tracts are running at 50%!!!! Anyone in RE who speaks in terms of “buyers” and “sellers” markets should be ignored. The use of that terminology should warn you that you’re dealing with an idiot.
A “SHILL”.
TAKE ADVICE FROM SOMEONE WITH A VESTED INTEREST IS RISKY BUSINESS.
THINK FOR YOURSELF…..IF THESE SHILLS SAY APPRECIATION =’S INFLATION = 1OR 2%
WHAT HAPPEBNED OVER THE PERIOD 1998-2005?
NOW IT’S NORMAL?
THANKS GRIMSTER FOR REBUTTING THESE “SHILLS”.
BOOOOOOOOOOOOOOOYAAAAAAAAAAA
Bob
The use of that terminology should warn you that you’re dealing with an idiot.
I think it is more than being an idiot. It is being a sleezebag.
USE SOME COMMON SENSE! YOU DUMMIES!
Yes, what exactly is the catalyst for falling prices?
What prompted previous declines?
http://graphics10.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
The current raise in the stakes makes all previous booms pale in comparison… why? Large generation? Industrial boom? Global productivity? & then who or what ‘called’ during the previous poker games? Who or what will call now?
Prices have jumped 50%, even if they reverse 1/2 that, so what, big deal? Wages haven’t risen.
150K household income barely buys a fixer upper “starter” home in an iffy-neighborhood.
It seems if you can’t invest a million straight up cash, you’re not middle class.
Jim,
I like that you have started interjecting some of your wit into your blog, its what makes another FB by socalmtgguy so funny. He’s where I started when I happenend this blog
As far as this article I would have to say that was a mistake she had to have meant to say seller’s market, in that last sentence.
KL
independent Newtown broker Susan Washburn. ‘When I attend open houses, frankly I’m shocked at some of the asking prices still out there.’”
“Ms Washburn is telling her clients that today, they cannot expect to get the same type of price as the highest selling similar home in their neighborhood, even if that sale was relatively recent. ‘And I’m strongly advising clients not to go forward with new home purchases unless they have airtight contracts in place on their existing properties. Today, there aren’t many people in a position to carry the burden of two homes,’ she said.”
hehehhe
She looks as dumb as she writes:
http://www.pareb.com.ph/Img/BlancheEvans.jpg
The government and regulators fairly or unfairly went after Wall Street analysts after the stock bubble. Now I demand that some of these shills like Blanche should be prosecuted in the same way, lenders reined in, the NAR broken up, and the press raked over the coals for not reporting what a bubble we’ve been in.
She’s terrorizing buyers. She’s a T
Can someone put her in Gitmo!
David Lereah would be top of the list. Economics is an inexact science but man that dude shouldn’t be able to hide behind his bs.
“Putting people in a home they cannot stay in is not a business we should be in”
Daniel H. Mudd, CEO of Fannie Mae, the buyer of home mortgages, on the potential of offering subprime and adjustable-rate mortgages to certain buyers.
The comment in #26 comes from a company that was knee-deep in derivatives transactions so complex that no one within the company understood them and was a serial offender in releasing incorrect financial statements.
Wonder what Franklin Raines is doing now?
clot,
I woudn’t worry too much about Fannie Mae. If shit hits the fan with their derivative transactions, the dems who control house and senate will bail them out with our tax dollars.
“China will make its currency more flexible and the U.S. will boost its national savings rate to address global trade imbalances, Paulson said.”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atzWjkTDhS3U
Was this Paulson’s trump card???? The US consumer is his savior??? I’m sure China feels reassured.
Which statement is more bizarre, the US boosting its savings rate or Blance Evans, “In a buyer’s market pickings are slim”???
Read these quotes from an email exchange between my agent and I. She’s acknowledging a lot of what we’re saying here, but also cheerleading her business a bit (which is expected and fine). I wonder if she’d change her tune if we try to really lowball or wait until spring. My comments or clarifications in brackets.
“Real estate is certainly ever changing right now and you are correct about the prices under $500k [not going down much yet]. This [the market I’m shopping in] is still the best market for the Seller since it is the range most [?] buyers can afford.”
“The reason for so many homes on the market is due to the changing market..seems we have an overload of listings… this was predicted last winter. [… by the NAL or by this blog?:)] This is also the reason for lower than asking prices taking the deal and why we are not seeing so many multiple offers. It has become a Buyer’s market…you will notice most of these homes have been on the market for at least a month [all are on the market for at least a few months]…did not happen in this neighborhood last year. “
In post 29 BC Bob quoted:
“China will make its currency more flexible and the U.S. will boost its national savings rate to address global trade imbalances, Paulson said.”
Paulson may be headed for David Lereah territory if he’s not careful.
I really haven’t seen anything that indicates that the Chinese will do anything much different than they are already doing. They are currently taking a pounding on their US holdings because they have let the yuan appreciate 5.7%, and I think they know there’s more trouble ahead, but they are going to take their medicine at their own pace.
His comment on the US savings rate should make your coffee come out your nose.
Lindsey,
Agree!! I don’t know where Paulson pulled that one from.
Deteriorating local economic conditions are the primary cause of housing price declines. Home prices do not decline simply because they went up a lot in the past.
Witness the Detroit area, where prices are falling faster than anywhere else in the United States despite housing prices which are among the most affordable (using the metrics cited frequently on this website) of any metropolitan area in the country. The reason prices are plunging in Detroit is the local economy, driven by the auto industry, is failing.
Ok, a friend bought a house in New Rochelle for 325k in 1999. He made upgrades of 125k by tapping into his equity. The same house was appraised at 700k in 2005, and he now wants to put it on the market. What should be the fair value? I say, with a 3% annual increase from 1999, and adding on the full cost of upgrades, the 600-625k range is about appropriate.
A point to note is that the per capita home
refurbs/upgrades since 2002 was much higher than the historical average. As home equity rose, there were many more homeowners who upgraded their homes. Will this be a reason that a lot of the equity increase will stick to the price?
“Again, my profession shoots itself in the foot and makes all of us charlatans by association. Ms Evans’ article is pure swill.”
Profession?????????
How about the art of deceit?
An industry of schmucks running around giving advice who are clueless to basic fundamentals.
DO NOT LISTEN TO A REALTOR. Listen to them carefully and question them on every BS statement they make. It is easy and fun to catch them backpeddling and start huhing.
BLEED”EM DRY!
BOOOOOOOOOOOOOYAAAAAAAAAAAA
Bob
“Deteriorating local economic conditions are the primary cause of housing price declines. Home prices do not decline simply because they went up a lot in the past.”
Yes and no. In normal markets I agree. However, this market has been anything but normal. This market has appreciated 80-100% from 2001-2005. At what point in our history did we see gains like this over a 5 year period?? Never!! We are in unchartered waters. To make assumptions, based on economics, after this ballastic move is futile at best. That being said, if everybody receives a 100% pay raise in 2007, then the economics will catch up to the market.
Furthermore:
I feel that if a majority of homes underwent upgrades/refurbishment in the last 3-4 yrs, that alone by itself will ensure that the price declines will be limited to the total of base price + inflation adjustment + cost of upgrade.
Eg:
A 400k house with 200k upgrade will be about priced right at 600k + (inflation adjustment on 400). The difficulty I am having is in setting a base year for the price..ie should we consider 1998-99 as the base price year, since it was the bottom after the last crash, or should it be whichever year after 1999 that the buyer purchased the home?
There are flippers who purchased shacks for ridiculous prices in 2005, upgraded them and have expected a profit out of selling them in 2006. How would the market treat those sales?
This woman is a complete idiot. Where did she study economics? In beauty school? Whatever educational institution conferred a degree upon her should revoke it immediately.
http://www.inman.com/hstory.aspx?ID=60182
Housing still far from hitting bottom
By Lou Barnes
Inman News
Good economic news all week long had mortgage rates headed for an up-side blowout until rescued by today’s word of zero change in November’s Consumer Price Index. Do not be misled: for long-term mortgage rates to hold near 6 percent — let alone decline further — the economy has to sink, and that is not what it is doing.
The killer this week was retail sales, up a solid 1 percent in November, and October revised up. Then came word of falling applications for unemployment insurance and a surge in applications for new purchase mortgages — the first real gain in a year, up 15 percent in just three weeks in a usually quiet season.
The basis for belief in a substantial economic downturn, Fed easing, and justification for a 4.5 percent 10-year Treasury and six-flat mortgages has been housing’s implosion. Overall, the housing market is still some distance from hitting bottom (house prices may begin to stabilize, but loan defaults and foreclosures will rise for a year or more, and resumed price appreciation is a long way off), but there is no sign that housing weakness is undercutting consumers.
He made upgrades of 125K? When were those upgrades made this year, last year, 2, or 5 years ago.
this is another myth that many homeowners have, they amake an approvemnt, and that means they can add the full cost of that improvement on to their asking price.
For Instance, if you redid your kitchen 5 years ago for 40K, how can you add that amount on.
Have you not consumed a portion of that 40K, aplliance use, ear and tear.
From what I have read in the WSJ’s real estate section, as kitchen remodel for instance would return 82% of its oiginal cost if sold with in 2 years from its completion date.
A new roof? gee, I don’t know, but I expect that when I buy a house, that the roof have at least 5 to 7 years of life left on it. If it has more how much more should I pay, the full amount of the cost of the roof?
New Wiring? Sorry I expect the wiring to be up to code, should not have to worry about frying.
Blanche Evans:
“Then in 2006, prices and sales began to return to a more normal rate of return, but still far from historical norms resulting in the third best year for real estate sales ever.”
2007 = 4th best year ever
2008 = 5th best year ever
2009 = 6th best year ever
2010 = 7th best year ever
2011 = 8th best year ever
#28 and 29
Fannie Mae is taking all the risk on this bubble. The key component of this market is that banks can pass back the default risk to FNM and it can put less reserves against the loan than the private sector. I have no doubt that a bail-out is coming, but it still means this game is OVER. Too much fraud, too much opacity in the system, prices out of control and no buyers. This carcass has been picked clean and the Wall Street hyenas are moving to other game.
bklynrenter Says:
The crazy thing thing about the fannie mae fraud is that we are all going to pay for it.
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