From Bloomberg:
Value of city homes may decrease by half
Homes may lose as much as half their value in some U.S. cities as the housing bust deepens, according to Yale University professor Robert Shiller.
“The examples we have of past cycles indicate that major declines in real home prices — even 50 percent declines in some places — are entirely possible going forward from today or from the not too distant future,” Shiller wrote in a paper presented Friday at an economic symposium in Jackson Hole, Wyo.
Depreciating real-estate values may undermine consumer spending by spurring households to save more and by preventing them from tapping home equity. Residential property prices slid by the most in at least two decades in the second quarter as sales declined, a private report showed this week.
Because price gains were larger and more widespread this time compared with past speculative booms, the risk of “substantial” price declines is greater, wrote Shiller, also the chief economist and co-founder of MacroMarkets LLC.
“The implications of this boom and its possible reversal in coming years stands as a serious issue for economic policy makers,” Shiller said in his presentation to the conference, which is organized by the Kansas City Federal Reserve Bank.
The home-price gauge that Shiller and Wellesley College economics professor Karl Case established based on research from the 1980s fell by a record in the second quarter. The S&P/Case- Shiller index dropped 3.2 percent in the period after falling 1.6 percent the previous three months. The series goes back to 1987.
Shiller noted that 50 percent declines in the worth of some cities’ homes wouldn’t be unprecedented. Prices in London and Los Angeles fell by almost that amount from the late 1980s to mid-1990s.
U.S. home values, adjusted for inflation, rose 86 percent from the end of 1996 to early 2006, the peak of the most recent housing boom, Shiller said. Economic factors such as rents and construction costs don’t appear to explain the jump in prices, suggesting “speculative thinking” and a “boom psychology” was at work. “Extravagant” expectations for future price increases since the late 1990s fueled the bubble, Shiller said.
From the Boston Herald:
Economist eyes home value dive: Others skeptical of 50 percent decline
Think the subprime mortgage meltdown was frightful? Now consider the prospect of your home losing half its value.
An esteemed economist suggested yesterday that “real home prices” in some parts of the country could drop by as much as 50 percent, posing yet another worry for beleaguered homeowners.
…
As a result, Shiller argued, “the situation may well result in substantial declines in real home prices eventually.”If a home’s price simply stays level for five years, its “real price” could fall by more than 20 percent during that time because the home value fails to keep pace with inflation.
“He’s sort of like the Al Gore of real estate economics,” said Tim Warren, chief executive of The Warren Group, the Boston-based provider of real estate data. Warren noted that Shiller provocatively “talks a lot about the possibilities of what the future might hold,” as Gore does with global warming.
From the Citizens Voice, PA:
Focus again is on lending oversight
Turmoil in the housing market is focusing attention again on the state’s role in regulating mortgage lenders and brokers and others in the real estate business.
Pennsylvania needs to exercise stronger oversight over mortgage companies, acting state Banking Secretary Steven Kaplan told lawmakers last week.
“Too many people have been getting mortgages they simply can’t afford,” said Kaplan at a House committee hearing. “Clearer disclosures and better documentation will help all parties focus on loans that are safer and more realistic.”
The banking department has proposed regulations requiring lenders to disclose all features of a loan, include a potentially troublesome balloon payment or adjustable interest rate. Lenders would also be required to accurately evaluate a borrower’s ability to pay back a mortgage loan.
The department is also pushing a package of bills giving state officials more power to stop predatory lending practices.
These measures would update a 1974 mortgage lending law, allow the department to publicly release information on pending enforcement actions against mortgage brokers and bankers, require employees of mortgage companies to have a state license, increase civil penalties for appraisers who improperly inflate home values and require lenders to send mortgage foreclosure notices to the Pennsylvania Housing Finance Agency.
Mortgage lending reform has been an issue in Pennsylvania since the beginning of the decade when a wave of home foreclosures hit the Poconos.
The problems in the Poconos began with sales pitches aimed at aspiring home buyers in the New York City area who lacked the financial resources to afford a home.
A banking department study found that one-third of the foreclosures in Monroe County involved properties with inflated sales prices. The use of subprime loans with higher rates and penalties than conventional mortgages was another factor in the Pocono foreclosures.
I agree and they should fall. The boom in housing market was based purely on ” speculative greed by many”.
The fall in prices’s would bring values of homes to reality.
“Yale University professor Robert Shiller”
I am a fan of Shiller, but he does tend to an alarmist.
With that said, I would put more stock in Shiller over Otteau anyday!
SAS
Bush Cites New Tax Relief for Homeowners
http://tinyurl.com/2xwnrq
sas
I disagree with this bloke, I think in the longer run, rents will decrease as well as house prices. Short term, rents will go up slightly, then skyrocket down.
“New Study Shows Renters Are in Trouble Too”
http://tinyurl.com/247dc8
SAS
Mr. Bernanke, please fill in the following blank:
Lowering interest rates created the problem so now lowering interest rates will _________.
*lol* Gary!
Shiller’s estimates are mild compared to what John Templeton said a few years ago (the dollar would eventually drop 30% and house prices by up to 90%)!
Outofstater Says:
September 1st, 2007 at 8:58 am
I know you guys all love NJ and you’re just a short train ride to the city but for everyday quality of life, you might want to look south. Atlanta has a good economy with jobs that pay enough to afford a nice lifestyle because the cost of living is so low.
Owta-staeta: Most of us understand your point, but I think it is pretty clear than nationally Atlanta is held in pretty low regard, so if we turn up our noses, don’t think us NJ snobs. The stereotype of Hotlanta is traffic on par with DC-area [which is a trick], a hollowed out downtown, and an ad hoc approach to development causing an endless morass of sCRuburbs.
#4
I don’t think rents will follow the same path as home prices did. Rents never did really skyrocket and follow a parallel path to housing prices over the past few years, so I don’t think they will fall as much, if at all.
Out of curiosity, why do you think they will fall? The supply of rental units will remain pretty much unchanged, but it seems like demand for rentals will simply increase. Also, with taxes continuing their ever-increasing path, landlords will need to continue to keep pace.
I don’t really see why landlords would need to lower rents, unless there was low demand for rentals or lots of competition.
I disagree with this bloke, I think in the longer run, rents will decrease as well as house prices. Short term, rents will go up slightly, then skyrocket down.
I agree
Rents are rising due to the recent increase in demand for rentals housing as more buyers sit on the sidelines and more former owners return to the rental market. This is coupled with the fact that many rental units were converted to condos over the last few years, putting pressure on rental supply.
However, if you look at vacancy rates, you can see we now have an overall oversupply of housing units. Many of these are vacant owner occupied units. As the demand for owner occupied housing falls, many of these will hit the rental market depressing rents.
Additionally, as housing prices fall, the advantages of renting will dissipate & demand for owner occupied housing will pick up again.
#10
Where can you find these kinds of statistics? I’d like to see the trends for vacancy rates and rental prices. I really don’t think the rental market is as volatile as the housing market due to the “contractual” nature of renting.
Anecdotally, I’ve never really seen rents decrease year over year. But, without the stats to back that up, it can only be taken with a grain of salt.
I think people that are ‘looking South’ are in for a surprise. Many of those communities are overdeveloped now…losing whatever rustic feel they might have once had. You are talking about lots of strip malls and new homes with questionable construction. The older sections of these towns are OK, but hard to ‘get into to’….jobs are a real wild card in the south as wages are not too great, unions non-existent, and service industry as the main employer. The grass is not always greener.
http://bigpicture.typepad.com/comments/files/longorshort_capital_dear_valued_client.pdf
I grew up in the sprawling character-less suburbs of Miami, which from my experience are very similar to the rapidly-developing suburbs of the South’s big cities. Living in Northern NJ now I see absolutely no comparison in terms of quality of life. The things I can walk and drive to here are unbelievable. Not to mention neighbors I can have an intelligent conversation with. I do wince at the cost of living, but at the end of the day I think it’s worth it because I genuinely believe my baby girl will have a richer life for growing up here. All of these people advocating for a move to the middle of flavorless nowhere are too focused on the monetary bottom line. There is more to it than that.
are these the headlines we talked about seeing before todays sellers actually start to lower prices? i saw one open house today – must be the labor day lull…anyways, 1950s 4 bd, 2bth cape colonial (its really a cape!) the 86 year old that lives there really skipped a whole lot of remodels over the years and everything is original 1950s…even to the carpet! how can a carpet really last 50+ years! this one would be a total remodel – and i mean total! asking price 499K!!!! i couldnt believe it! obviously this POS Cape’s owner has no idea what is going on in the market today! even in 2006, i dont think anyone would pay 499K for this POS..
anyways, at the end of the ‘tour’ the realtor asks me what i thought and i told him that i wouldnt pay anymore than 400K for this POS at which he said – ‘ok, then put an offer in for it!’ what? put an offer in for 400K for a POS thats has an asking of 499K?
hmm…maybe i’ll put in an offer for 350K and see what he says cause he didnt seem shocked at all that i said its only worth about 400K!!!!
“why do you think they will fall?”
Unsolds, especially condos, will recycle into the rental markets as well as for sale markets. Puts major downward pressure on rents.
SAS
Shiller’s chart — no cause or alarm, he’s just like dreamer Al Gore? Not.
http://graphics.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
but, I don’t think rents will decline nearly to the degree as housing prices…
Then again, if this Fed ruins the dollar anymore, and runs the printing press like there is no tomorrow. All bets are off.
SAS
I think one can pull stats from the NJ Division of Housing
SAS
Tremendous article on commuting and how bad it is nationally, with Atlanta being the worst. Great read.
http://www.newyorker.com/reporting/2007/04/16/070416fa_fact_paumgarten
I’d put more stock in anything Shiller says than Lereah or any of those RE nutjobs. This coming from a guy who practically laughed at Shiller two years ago … and then found this board, and quickly sold my investment property.
Also, Atlanta’s foreclosure rate is one of the worst in the country …. everyone PLEASE look at this
http://www.nytimes.com/interactive/2007/09/02/weekinreview/20070902_FORECLOSE_FEATURE.html
My impression of Atlanta is that if you lose your job and need one, have the savings ready.
Friends of ours (two sets) were transferred to Atlanta burbs. The spouses tried to find jobs. And tried.
One spouse took six months to find a job, and then was laid off in June after a month (subprime issue, of course). This is a person with complete native fluency in a foreign language (GER) and 15 years of experience handling purchasing for a large institution. She’s still out of work.
She’s just glad she has some hobbies.
#9, I think you’re right, RE taxes are increasing materially every year, I would think that would be enough of a catalyst to raise rents.
Question for you pundits –
There is a possibility that the government may bailout all the bad loans (Subprime + Alt A) so that prices don’t fall more than 10%.
How would you react? Throw in the towel and join the craze or start bunker building?
Bear, I’m not a pundit, but I’ve been hoping for more than a year that our elected leaders would be wise enough to deal with this the correct way, without worrying about elections. [Well, the way that I believe would be the best practice.]
This issue, i.e., “saving the sobbing homeowner,” is not going to win elections.
No Rose Garden presentations, charts or diagrams. But quietly and calmly communicating to everyone that this is a learning experience while mixing in some seemingly wise and stern warnings to begin to work hard and save.
I think I’m in for a disappointment, so I’ve been bunkerbuilding for the last six months.
23 – hardly a pundit, but there is no chance the gov’t will bailout ALL bad loans. Zero. Won’t happen. They don’t have the money for that.
Reaction? Patience. Just calm down, stockpile the savings, and keep your job. The buyers know that it’s tough to sell a house from Sept-Feb, so prices will be coming down for sure.
Patience is the key.
We had targeted Dec/Jan as time to seriously look at buying … but we’re pushing it back even further. If a recession hits, the last thing we want to do is buy a house.
“He’s sort of like the Al Gore of real estate economics,” said Tim Warren, chief executive of The Warren Group, the Boston-based provider of real estate data. Warren noted that Shiller provocatively “talks a lot about the possibilities of what the future might hold,” as Gore does with global warming.
Atleast Shiller talks of something that can happen in the next 2-3 years, Gore is talking about things that are 200+ years away, if not 10 times that.
Won’t matter is prices for 100%….unless you are selling. I’m not.
Rephrase that one…It won’t matter IF prices fall 100% unless you are selling.
.. or if you got an ARM and it is resetting, you bought a new place and still haven’t sold your old one, you need to move for work, you lost your job, etc, etc
** Repost from Weekend discusson***
Out-of-stater
What towns, regions would you reccomend in Georgia? Is that where you are currently? for those of us who entertain the idea of getting out of NJ just the idea is overwhelming.
KL
It won’t matter IF prices fall 100% unless you are selling.
whaat?? If prices fall 100% you don’t need to ‘sell’. Let me clarify, you can’t ‘sell’. I mean, what’s the point in trading something that has no value? What do you trade ‘nothing’ with? nothing?
bb 2007]
Interesting collection of commentary.
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vPlQVAdeB5Nk.asf
Essex Says:
September 2nd, 2007 at 7:30 pm
Rephrase that one…It won’t matter IF prices fall 100% unless you are selling.
Oh yeah? Say you paid $700K for your house. It declines to $1. You’re still paying a mortgage month after a month for something that can now be had for a dollar, and it doesn’t matter because you’re not selling. Brilliant…..
Doubt any of the MLS/GMLS guys are around, but we noticed what may or may not be a new listing in Ridgewood the weekend:
2728398
can anyone provide an address and how long it’s been on the market? central ac and the 2-car garage are enough to make us at least want to know a little bit more …
We wouldn’t jump at it – or anything – now, but it’s just a house to add to the ‘watch list’ …
Unlike a stock that goes to zero, a house still provides shelter and all the amenities. You can ride out any market if you have cashflow….Duh.
Arms….well now if you were dumb enough to get one of those I guess you are SOL.
“He’s sort of like the Al Gore of real estate economics,” said Tim Warren, chief executive of The Warren Group, the Boston-based provider of real estate data. Warren noted that Shiller provocatively “talks a lot about the possibilities of what the future might hold,” as Gore does with global warming.
He called that internet stock bubble pretty well eh?
Where can you find these kinds of statistics? I’d like to see the trends for vacancy rates and rental prices. I really don’t think the rental market is as volatile as the housing market due to the “contractual” nature of renting.
I don’t have statistics specifically comparing vacancy rates to home prices or rental rates. You could probably create the statistic if you wanted to. The vacancy stats I was referring to can be found here:
http://www.census.gov/hhes/www/housing/hvs/qtr207/q207tab1.html
This shows vacancy rates are at or near record highs.
Anecdotally, I’ve never really seen rents decrease year over year. But, without the stats to back that up, it can only be taken with a grain of salt.
Since rents didn’t increase like home prices did, there is no “rental bubble” to correct. I don’t see big (if any) drops in rents. However, a general oversupply of housing units (see link above), many of which end up becoming rental units, will pressure rental rates as well as housing prices.
Overall (U.S. wide), I would expect rents to remain stagnant. Of course, RE is local, and some markets could see falling rents and others could see rising rents.
Most emailed story currently on NYT website:
http://www.nytimes.com/2007/09/02/business/yourmoney/02village.html?em&ex=1188878400&en=72d230760c886eb8&ei=5087
Here’s a case where a family has cash flow, but with so many foreclosures around them, the neighborhood has gotten dangerous, and they want out.
There is a possibility that the government may bailout all the bad loans (Subprime + Alt A) so that prices don’t fall more than 10%.
The same way I have been reacting, I am getting out of US dollars. Just like all the billions wasted after the Katrina aftermath…. row vs. wade… we’ll get em out, one way or another.
SAS
#30 KL – I posted a reply on Weekend Discussion and last I saw, it was in moderation. Anyway, I would recommend northwest Cobb County in Georgia – Marietta, Kennesaw, Acworth. Paulding and Bartow counties are just starting to grow. NW Cobb has grown tremendously and the people have seen fit to vote themselves a temporary 1% sales tax to pay for new schools so the county has no debt. (The school system as well as police and fire are at the county level.) The county also has ordinances that require new businesses to install nice landscaping with islands of trees in all the parking lots. Marietta has a nice downtown area on a square with shops, restaurants and theaters all of which are busy every night and I have never felt nervous about being there after dark. The downside to Atlanta is the traffic caused by the lack of public transportation but that is only a factor if you work downtown. Another negative is that many of the neighborhoods are not “walkable.” You can’t really send your child to the corner store for a loaf of bread because he’d have to be on a busy street. Another downside is that making fun of southerners seems to be the last politically correct form of bigotry. Sigh. Sometimes I think that I spent the first half of my life explaining to people that NO, New Jersey is NOT one giant toxic waste dump and the second half telling people that the south really isn’t like “Deliverance.” Ultimately, where we live is a personal choice based on what we think is best for ourselves and our families. For us, moving south was the right thing to do.
Unlike a stock that goes to zero, a house still provides shelter and all the amenities. You can ride out any market if you have cashflow….Duh.
Zero valued house. Add property tax and mortgage. Isn’t that worse than renting? DUH!
ok blokes, back to the basics:
Gold and other precious metals are tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible.
SAS
If you seriously believe a good home will have zero value, then you should be able to move out of your parents basement sooner than you think….duh!
Any asset is worth A. what someone will pay you for it….B. whatever value it has for you. Useful objects….like a car and home…fulfill a purpose and address a need.
” RE taxes are increasing materially every year, I would think that would be enough of a catalyst to raise rents”
Or, lets look at it this way, less of a profit for the landlord. THe landlord eats it, because he/she knows they can’t raise rates, or nobody will come to the door.
SAS
SAS….as in the software program?
“It won’t matter IF prices fall 100% unless you are selling”
this bloke is somewhat correct, if your house is paid off in full
But, if you have a mortgage, well…. it matters to your bank, and you are now deemed a credit risk, and they might call your loan.
Depeding on the type of loan you have, details, fine print. etc.
SAS
“SAS….as in the software program?”
Nope:)
Special Air Service Regiment (SAS).
In another life, when I was in service, our team worked close with these guys.
Always enjoyed working with those slimey limeys, learned alot from them.
SAS
Ha….good enough….we got lots of economissed here — I’m just a reg’lar guy from Jersey tryin’ ta live the good life.
Speaking of the UK, I lost my shirt on a flat in London thinking I was a savy RE flipper.
No, I’m not a brit, and no, I don’t flip anymore.
Fool me once, shame on you; fool me twice, shame on me
;)
SAS
sas [47],
this bloke is somewhat correct, if your house is paid off in full
How can paying off mortgage on a zero valued property be good? Didn’t that block of wood in the head loose his principle payments?
Please note, prices dropping to zero was block of wood’s assumption.