How much further do you think house prices will drop?

[Sparohok]

Quote from Smart Money:

Generally, if prices are lower than what you owe, you try not to sell.

You might just foreclose though, get out of your underwater investment. Then the bank has to get the property off its books in an auction or forced sale. Housing might not be just like stocks, but it's still a market and behaves like a market, where prices can go down as well as up.

Also, generally when you sell a house, you buy another one. Can you imagine how the stock market would do if there were always new people buying stocks all the time and nobody cashed out?

Um, dude... there are always new people buying stocks all the time. On a net basis, nobody cashes out. Every share that is sold is also bought. Prices can drop precipitously in the stock market even though the total number of shares does not change. The exact same thing can happen in housing.

Martin

 

[Voodoo-king]

Quote from Smart Money:

Houses aren't stocks. Generally, if prices are lower than what you owe, you try not to sell. Not so with stocks. Also, generally when you sell a house, you buy another one. Can you imagine how the stock market would do if there were always new people buying stocks all the time and nobody cashed out?

SM

The stock market would go to the moon, or businesses would be able to suck in an endless stream of cheap money that would be invested in a not so good way like to pay CEOs way too much money or to chase whatever all these money were made available to chase.


Personally I hate to sell stocks, I do my best to avoid it. If u don’t trade very short term then what is the point, u have to know what happens next way better than what it is reasonable to expect anyone to be able to do to make it worth while, taxes and the upward bias is the reason why for me. Maybe with inside information things would look differently but that is to cheat. I will just borrow against when I plan to cash out.

 

[blackjack007]

it's too hard to predict the national r.e. market so i won't.

but for certain bubbly areas: i would say las vegas and central california will bottom in 2011-2013 due to the massive over-building. who the hell wants to live in the desert out in the middle of nowhere (like bakersfield). it'll take many years to clear the current inventory.

the second question is when prices will recover to their 2005 peaks. i say 2020-2025 in bubbly places like bakersfield. the bigger the bubble, the longer the recovery.

looking at the number of single-family building permits issued versus population & income growth paints a gloomy picture for las vegas and bakersfield. irvine isn't as bad off because it's a desirable area and didn't overbuild like the others.

 

[jem]

when a large percentage of people can qualify for the home their income merits you will see the bottom.

Now that loans are tied to income. Houses have to be tied to income - plus a Sun tax or resort living tax.

So when people in the 3rd decile of income for an area can afford to live in the 3rd decile of housing in the area prices will be close to the bottom.

Then if you live in a very desirable place you should factor in the traditional bump. Which might be the formula above plus 10%.

All you have to do is talk to mortgage brokers - to know how truly screwed prices are. People can't afford anything close to the home they are living in - and people can't buy them out.

Liar loans have people paying 60 to 70 percent of their earning to the mortgage.

Not going to keep happening when they realize the price of the house is not going up in two years.

 

[thesharpone]

Quote from blackjack007:

...looking at the number of single-family building permits issued versus population & income growth paints a gloomy picture for las vegas and bakersfield...

that is the type of data i'm looking for

number of households vs number of homes available within a particular area (city, state)

why? (you might ask)

isn't free markets mainly about supply vs demand

let's say we have 200 households and 230 homes within a city, that hardly leaves any room for a price drop

now in another case, say we have 500 households but 1400 homes, that means about 900 homes available for purchase or rent, then the housing market is pretty much screwed in that area,

the reason seems clear, the only way the number of homes could exceed the number of households with such great difference would be when a group of people looking for a way to invest their money were buying, building and selling properties as if they were barrels of oil, quickly consumed after they were sold in the market

 

[Smart Money]

Quote from balda:

Can you do dollar cost averaging with housing?

With a Reit you can, but then you don't get the benefit of 10 to 1 leverage and a tax write-off on the purchase. If you buy outright, you can receive the asset now, and pay for it over 30 years. My father in law is still purchasing a house at 1980 prices with 2005 interest rates that he's writing off.

 

[Smart Money]

Quote from Sparohok:

You might just foreclose though, get out of your underwater investment. Then the bank has to get the property off its books in an auction or forced sale. Housing might not be just like stocks, but it's still a market and behaves like a market, where prices can go down as well as up.


Um, dude... there are always new people buying stocks all the time. On a net basis, nobody cashes out. Every share that is sold is also bought. Prices can drop precipitously in the stock market even though the total number of shares does not change. The exact same thing can happen in housing.

Martin

Agreed, but I'm driving home the point that these markets don't behave the same and aren't comparable.

BTW, I get what you're saying about the idea that people are always buying stocks all the time...and you're right over the long term. Ever think about if it reversed? I mean, I think its humorous that if you got to a "Financial Planner", and tell them you want to invest your money, they start talking about mutual funds. If you tell them you want to diversify, they start talking about foreign mutual funds. This is group think.

Yeah, I have plenty of mutual funds, but when I think about the baby boomers selling stocks, not buying stocks and cutting consumption, I wonder if stocks are the greatest bubble of all time. Pick up any magazine on investing, and it talks about stocks. For a couple of years there, any book on investing was discussing real estate, and look what happened. Food for thought.

SM

 

[Voodoo-king]

Quote from Smart Money:

Agreed, but I'm driving home the point that these markets don't behave the same and aren't comparable.

BTW, I get what you're saying about the idea that people are always buying stocks all the time...and you're right over the long term. Ever think about if it reversed? I mean, I think its humorous that if you got to a "Financial Planner", and tell them you want to invest your money, they start talking about mutual funds. If you tell them you want to diversify, they start talking about foreign mutual funds. This is group think.

Yeah, I have plenty of mutual funds, but when I think about the baby boomers selling stocks, not buying stocks and cutting consumption, I wonder if stocks are the greatest bubble of all time. Pick up any magazine on investing, and it talks about stocks. For a couple of years there, any book on investing was discussing real estate, and look what happened. Food for thought.

SM

An interesting thing about the baby boomers retiring is what will happen to the price of oil. When they cut back on consumption and generally being less active demand for it will decrease. This will act as a buffer for stocks I think, even though the supply of labor and capital will shrink. When people retire do they generally buy a smaller or larger place to live or continue to live where they are, my guess is more will do the first thing rather than the latter. Still some years left.

 

[pitz]

Americans haven't been saving for the past 5-6 years, yet the stock market keeps going up (until recently). Why? Because the private sector is, in fact, doing a lot of saving, and is able to buy back ridiculous amounts of stock by way of share buybacks.

I'd expect that buybacks will at least take care of most of the elderly, in the future, who want to get cash out of the stock market. And stocks will continue to get cheaper, as, at the margin, when savings are scarce, savers reap larger rewards from their investments, compared to when savings are abundant, and smaller rewards are to be expected.

Most major world markets are trading at 15X earnings, which is incredibly considering Fed Funds is at 3%, and the 10-year T-bond isn't much higher. Sure, markets were at 10X earnings in the late 1970s, but that was against the backdrop of 15% long-term interest rates. So on a comparative basis, the stock market is practically being given away right now.

Another way to put this is that the 6.66% that you earn on the stock market (inverse of a P/E of 15) will net you $66,666 for each million invested, in earnings. Million dollar houses in California routinely only yield 3% after expenses, taxes, maintenance, and depreciation. So buying stocks gives you more than twice the yield, and a much better growth profile than housing.

Many oil stocks trade at 5 or 6 times cashflow, and even if not another dime was invested in exploration, could pay for themselves in less than 6 years. At current valuations, a house would take at least 20 years to do the same.

 

[Smart Money]

Quote from pitz:

Americans haven't been saving for the past 5-6 years, yet the stock market keeps going up (until recently). Why? Because the private sector is, in fact, doing a lot of saving, and is able to buy back ridiculous amounts of stock by way of share buybacks.

I'd expect that buybacks will at least take care of most of the elderly, in the future, who want to get cash out of the stock market. And stocks will continue to get cheaper, as, at the margin, when savings are scarce, savers reap larger rewards from their investments, compared to when savings are abundant, and smaller rewards are to be expected.

Most major world markets are trading at 15X earnings, which is incredibly considering Fed Funds is at 3%, and the 10-year T-bond isn't much higher. Sure, markets were at 10X earnings in the late 1970s, but that was against the backdrop of 15% long-term interest rates. So on a comparative basis, the stock market is practically being given away right now.

Another way to put this is that the 6.66% that you earn on the stock market (inverse of a P/E of 15) will net you $66,666 for each million invested, in earnings. Million dollar houses in California routinely only yield 3% after expenses, taxes, maintenance, and depreciation. So buying stocks gives you more than twice the yield, and a much better growth profile than housing.

Many oil stocks trade at 5 or 6 times cashflow, and even if not another dime was invested in exploration, could pay for themselves in less than 6 years. At current valuations, a house would take at least 20 years to do the same.

Good point on the stock buy back. That could help absorb some of the cash outs. Heck, for all I know, that could be going on right now. I've seen lots of companies invest excess cash that way lately to shore up stock prices.

Agree with you on the P/E vs. interest rates. Interestingly, thats part of the reason I'm not so bearish on the economy in general. Money is still cheap and foriegners have a bigger advantage to buy our stuff with dollars devalued. I've heard the northern parts of the midwest does really well from Canadians crossing the borders to shop.

However, for the house analogy, keep in mind that the owner gets leverage. So he's not investing the million dollars. He's investing a fraction of it to get those returns.

SM