Why is low housing prices a problem?

[murray t turtle]

Quote from noob_trad3r:

If housing prices plummet lets say to 1980 prices wont that make the wages people earn tolerable?

If wages are deflating over the decades, dont assets need to deflate?

If the average wage is 34K, then the average home should not cost 500K it should cost 70K

And that would be better for our economy since amercians wont be house poor and would have much more discretionary income left over for spending.


http://money.cnn.com/2011/01/25/real_estate/november_home_prices/index.htm?hpt=T2

==================
nT3;
Its not necessarily a problem for a buyer[good question];
could be a problem for those that wrongly assumed REALTY uptrends were predictions, or even worse '' precise predictions'' If trends were predictions, then the more leverage the better...

No, because cost does not equal value; but you have an excellant point on 34k running into trouble on a 500k house;
especialy since the nationwide averagehome price is 1/2[about 50% +/of that].LOL

Lower volume could be an even bigger problem.......

Even though cost does not equal value[even RE appraisers admit that], you are right on the hou$ing trend, its down, has been mostly down [averages] for the past 3 years.......Food/grocery, silver, gold .......prices uptrending for the past year/years.

One REALTOR admitted ''low prices & low volume'' Should get even more interesting. River property has held up in many cycles, but a United Country Realtor along the TN river called the huge increase in lisings a quote ''flood'' And TN had a 14 inch rainfall/flood in May[ average rainfall is 4 '' per month]

 

[antitrust]

the cult of modern day economics confuses asset inflation with wealth creation. how many times during the housing boom did greenspan say "wealth creation". He also subscribes to the false reality that wall street creates wealth. apparently inflating asset prices at the expense of production is the new junk economic curriculum pushed in academia

 

[noob_trad3r]

Quote from nutmeg:

I'm not sure what or why people expect this to happen.

There's plenty of neighborhoods where the house prices have dropped to reflect income. A former blue collar neighborhood where house prices have dropped, taxes are usually higher relative to more expensive homes. You can get a nice house but taxes are high.

If you're hoping to pick up a 500k house for 70k because of some macro situation based on wage levels, I just can't see that happening.

Actually there are neighborhoods where those 500K dropped down to like 120K because the developments were already overpriced.

and 120K is still to high for those McMansions when the area they were built has a low 28K average salary.

 

[Random.Capital]

Quote from noob_trad3r:

If housing prices plummet lets say to 1980 prices wont that make the wages people earn tolerable?

There would be a harsh adjustment period, and it would require mortgage reform to remove the enormous gov't subsidies (else it will immediately reflate), but yes, there is much logic to doing exactly that.

I had hopes the Fannie/Freddie reform proposals would start things down that path, but it appears those may have already been compromised by overwhelming political issues.

 

[rew]

Quote from Tucker Robinson:

20% down should be standard business practice. Rent until you can afford a sizable down payment.

I agree. The entire mortgage crisis would have been averted if banks, individuals, and politicians had stuck to this rule. (I say politicians because they played a large role in creating the laws and entities like Fannie Mae and Freddie Mac that pushed for EZ credit, low down payment mortgages.) Houses would not have been bid up so high in the first place if the 20% rule had been adhered to and far fewer people would be underwater.

If you can't afford to save up 20% then you can't afford to pay down the remaining 80%. In our trading it is common for the people here to use leverage ranging from 2:1 to 40:1 but we use stops (at least those of us who intend to survive do) whereas it's very hard to put a stop on a house.

 

[antitrust]

Quote from rew:

I agree. The entire mortgage crisis would have been averted if banks, individuals, and politicians had stuck to this rule. (I say politicians because they played a large role in creating the laws and entities like Fannie Mae and Freddie Mac that pushed for EZ credit, low down payment mortgages.) Houses would not have been bid up so high in the first place if the 20% rule had been adhered to and far fewer people would be underwater.

If you can't afford to save up 20% then you can't afford to pay down the remaining 80%. In our trading it is common for the people here to use leverage ranging from 2:1 to 40:1 but we use stops (at least those of us who intend to survive do) whereas it's very hard to put a stop on a house.

Securitization is key here

William black found that in 80% of the cases fraud was induced by the lender. Banks have a very refined system of figuring out who can and can't pay. In fact they no better then most individuals on the odds of defaulting The notion that illiterate blacks and non speaking immigrants out smarted the entire MBA accredited "masters of the universe" has got to be the most ridiculous argument there is. If the banks had to hang on to the loans none of this would of happened

 

[Eliot Hosewater]

Quote from achilles28:

Using mark-to-model accounting, most US banks would be rendered insolvent with low home values. Under mark-to-market, another leg down would stimulate a wave of distressed selling and foreclosures, forcing banks to make big writedowns on their asset and capital ratios.

The Fed has a solution to that problem.

Buy the crap mortgages at face value from the banks, hold them for a year or two, then disappear them from their accounting books.

Solved!

 

[logikos]

For those that made good decisions upgrading their properties, such as I , decreasing prices mean lower equity. I am not rich by any means, but took advantage of the 2002-2003 slump to expand my ranch-homestead at rock bottom prices, and the ensuing housing appreciation expanded my home equity 3-fold.

I'm not going to cry like a baby if I have to give a little bit of it away when I sell (it is up for sale right now), but to have it all go away would be a big, big problem.

 

[sprstpd]

Low housing prices would reward prudent savers and that goes against current USA policy. Consider the fact that banks and the Fed still have billions of exposure to the real estate market and you know the real reason there is a concerted effort to keep real estate prices high.

 

[S2007S]

Low housing prices are a problem because people cant go out and borrow against them like they did a few short years ago to buy useless garbage to make the economy go round and round. Thats why they are trying as hard as they can to prop them up higher so the cycle can begin all over again, the only way this economy thrives moving forward is through the creation of asset bubbles, anyone else telling you other wise is lying straight to your face.