Home Price Corrections: Is Worse Yet To Come?

Quote from TraderRob:

Let me explain why the decline will continue.... I(mortgage broker) just completed a loan for a client who is purchasing a home that was foreclosed by a bank. The bank foreclosed for $468,000 and my client made an offer for $505,000 which the bank accepted. The appraisal came in at $550,000... as soon as my clients purchase is recorded the comparable homes in her neighborhood will decline by $45,000. Foreclosures for May 07 were 90% higher than May 06.... unfortunately this is going to get much worse before it gets better. The subprime debacle is adding further fuel to the fire.... subprime loans are no longer an option for potential buyers with poor credit or no money for a down payment, reducing the pool of potential buyers.
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I remember in the early 90s things got bad there was a lot of owner financing and lease options and owners willing to hold seconds just not to lose their equity, starting to see some of it now, at least 3 or 4 every week

owners are going to have to take on risk if their unwilling to take a huge discount, the ones with equity they can't get out, looks like it repeating and only will get worse, I think you're going to see a ton of creative financing coming our way
 
Quote from Smart Money:

http://investmenttools.com/median_and_average_sales_prices_of_houses_sold_in_the_us.htm

Hope this link isn't too long, but its so cool. Among other things, it compares the median price of homes to the number of ounces of gold, or amount of stock you'd have to sell to buy it over time. We're at a real low point. Factor in the lower interest rates, and payments are even below that. Indicates that folks are working less hard to make their house payments.

I'm still trying to figure out how big the median house is, so I can figure out cost per square foot based on a $308,000 purchase price.

SM
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The chart is old data. The price of 1 ounce of gold is about to surpass $700.00. Based on the chart, it's making a double top. The average American works more hours to make the same pay.

The fact is there's a ton of housing inventory coming online in the next decade because of US core demographics ( unless they increase immigration which is unlikely). The same goes for the other industrialized economies. In industrialized economies, people are not having kids. Therefore, eventually there will be less number of buyers. Homes have a long multi-generational life cycle, so essentially even if supply stays the same, the prices still drop.

Also, inflation, like everything else, is mean reverting. Which means after years of inflationary growth, the large industrialized economies are about to enter a prolonged deflationary period. Currency expansion has always been followed by a contraction. In fact the deflationary reaction to the current expansion could be as serious as the great depression. Therefore, if you bought a house in recent years, you bought the top of a multi generational top.

<a href="http://imageshack.us"><img src="http://img516.imageshack.us/img516/5354/726pxshillerie2fig21yj5.png" border="0" alt="Image Hosted by ImageShack.us"/></a><br/>
 
Quote from arealpissedgoy:

The chart is old data. The price of 1 ounce of gold is about to surpass $700.00. Based on the chart, it's making a double top. The average American works more hours to make the same pay.

The fact is there's a ton of housing inventory coming online in the next decade because of US core demographics ( unless they increase immigration which is unlikely). The same goes for the other industrialized economies. In industrialized economies, people are not having kids. Therefore, eventually there will be less number of buyers. Homes have a long multi-generational life cycle, so essentially even if supply stays the same, the prices still drop.

Also, inflation, like everything else, is mean reverting. Which means after years of inflationary growth, the large industrialized economies are about to enter a prolonged deflationary period. Currency expansion has always been followed by a contraction. In fact the deflationary reaction to the current expansion could be as serious as the great depression. Therefore, if you bought a house in recent years, you bought the top of a multi generational top.

<a href="http://imageshack.us"><img src="http://img516.imageshack.us/img516/5354/726pxshillerie2fig21yj5.png" border="0" alt="Image Hosted by ImageShack.us"/></a><br/>
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That is a really cool graph. It is food for thought, and compelling. Based on how the numbers fall, the housing price index and build cost are obviously adusted for inflation. But do you know what index they were using to adjust it from?

As an aside, I did notice that the index for housing cost went up 85%, and the line jumps to the top of the graph, but the population changed by a factor of almost 400% and yet barely moved. I know that the housing cost index is essentially per-capita, but thats a pet peeve of mine when someone is presenting graphical data. Both graphs should either be linear, or semi-log, but not picking and choosing.

The other interesting thing is that the ratio of build cost to price is fairly well preserved. You can't sell them for less than it costs to make them, so I guess this makes sense. So one question that comes into play is whether the build cost will go down in the foreseaeable future. In the 1890's, build cost was almost 100% a function of the cost of materials you could get here in the U.S. And now, its also a function of exchange rates, transportation costs (fuel), and the cost of materials overseas in a global marketplace that competes for resources.

I guess what I'm wondering is can the graph fall back to the norm if build costs, fuel costs, and exchange rates do not? My contention all along is that cheap loans, and cheap loan payments started the housing boom. Most of us here agree with that. But unlike a typical "tulip bulb mania", something happened along the way and the dollar eroded out from under those prices, essentially (somewhat) justifying them. Similar to the stock market, I guess. We can all disagree on what role the falling dollar plays and how much of a price drop in housing is justified. But if the global economy is buying up all the fuel, lumber and steel and our currency printing presses are on overdrive, what then?

SM
 
It's getting ugly. The word is Uncle Sam using Fannie Mac/Mae will have to ride in and rescue many of the big firms on wall street left holding worthless CDOs. Debt market is going to unwind quickly and take equity market down also as the days of low cost debt for LBOs and HFs runs short.

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755 Percent Increase In Bay Area Foreclosures
Real Estate Professor Warns Of Potential For 'Market Meltdown'


SAN JOSE, Calif. -- New statistics about the number of foreclosures in the state of California are causing alarm among those who keep watch on the real estate market, NBC11's Vicky Nguyen reported Wednesday.

According to DataQuick, a company that provides real estate and land data, the number of homeowners who could not pay their mortgages has hit an 11-year high in the state of California.

There were 258 foreclosures in the Bay Area in the second quarter of 2006. That number spiked to 2,206 in the second quarter of 2007. That's a 755 percent jump, according to DataQuick.


The second quarter includes statistics from April through June.

California-wide the number of foreclosures also skyrocketed. There were 17,408 foreclosures in the second quarter of 2007. The number for the same time period in 2006 was 1,936. That is an 800 percent increase, according to DataQuick.

San Jose City College real estate studies professor Ted Faravelli said the news is starting to have a major effect on the real estate market. He said trillions of dollars tied up in mortgage securities are at risk, because they are tied to the record foreclosure rates.

"There's real potential for major market meltdown that would make Enron or Worldcom seem small in comparison," Faravelli said. "The wild west freewheeling days are no longer with us and there's some accountability now."

The accountability has come in the form of federal investigations, according to Nguyen. One mortgage broker told Nguyen off camera the FBI has raided offices of at least a dozen brokers he knows.

The unidentified mortgage broker also told Nguyen he has faced three lawsuits from banks after borrowers defaulted on their loans.

Faravelli said the market has allowed too many unqualified buyers to get loans on improperly stated income. He predicted the increase in foreclosures might continue into 2009.
 
The reason why we're not gonna see the bottom anytime soon:

All these foreclosure properties that the banks are taking back on their books are gonna start being dumped on the market as REOs.

The banks are in the business of making money, not collecting real estate. So the push onto the market from the bank's side is gonna further drive down prices.

"Ouch!"
 
jan 1991 in london i bought a one bedroom flat for £60000.00.

thats about $120000.00.

that was a lot of money then and pretty much the high of the market for a one bedroom flat.

august 1991 sold it for £30000.00.

thats what happens when a housing market corrects.

a lot of people handed back their keys then and there was not a lot the banks could do.

people just did not have that kind of money then to pay back in any format.

house prices will correct down as they did then.

and yes know one thought it would happen then either.
 
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