Tuesday, November 27, 2007

"Why are declining home prices bad news?"

From MarketWatch:

U.S. home prices were falling in every region of the country in September, according to a closely watched index of home prices released Tuesday. Home prices fell in September in all 20 major cities covered by the Case-Shiller price index, even in cities that had been holding up before the August freeze in mortgage markets, Standard & Poor's reported.
...
For the first time in this housing cycle, prices in all 20 cities dropped from the previous month, with the biggest declines in the former bubble cities of Miami, Phoenix, San Diego, Las Vegas, Los Angeles and Tampa. For the 20 cities, prices fell a record 4.9% year-over-year. Meanwhile, prices were down 5.5% year-over-year in the original 10-city index, the largest drop in the 10-city index since 1991.
From the LA Times:
Some analysts, including UC Berkeley professor Kenneth Rosen, believe the severity of the downturn will vary by region. Areas such as the Central Valley and the Inland Empire will be the hardest hit, he said, because these attracted a higher percentage of new buyers with shaky credit, and many of them are now defaulting on their loans. He believes values in these communities could fall by 15%.
Many price measures already show more than a 15% decline for the Central Valley's largest housing market.
But "in areas where there is very little new housing, where it's hard to build and a lot of wealthy people live, there will be little decline or maybe none at all."
...
But others call this wishful thinking, saying low prices eventually work their way to even the most affluent areas. "Every place takes the hit in the long run," said Christopher Thornberg of Beacon Economics, a consulting firm in L.A. If prices in high-end markets do not bend while prices fall in adjacent areas, many buyers will at some point choose the cheaper neighborhood, he said...Such movement eventually drags top-end prices down, he said.

Data gathered by Edward E. Leamer of UCLA's Anderson Forecast back that up. Since 1989, Leamer has tracked housing prices in the 20 least expensive and 20 most expensive ZIP Codes in Los Angeles County. He found that all areas fell by about the same percentage when they hit bottom in the 1990s downturn.
If anyone has historical data about how East Sacramento/Land Park/Davis/yada yada yada fared in the last housing bust, please do share.

From the Sacramento Bee:
Cities' housing nightmare

The deepening housing crisis will cut economic growth by more than 25 percent in 143 U.S. metropolitan areas next year and by more than a third in 65 metro communities, according to a new forecast for the U.S. Conference of Mayors. The new report [pdf] prepared for the mayors by financial forecaster Global Insight warns of cascading problems caused by falling home prices, an expected 1.4 million foreclosures and the pending reset of millions of adjustable-rate mortgages.
...
The cities with the biggest-percentage losses are Myrtle Beach, S.C.; the California cities of Merced, Madera and Napa; and Sarasota-Bradenton, Fla.
From Daniel Weintraub's California Insider blog:
Why are declining home prices bad news? Not only bad news, but a public "nightmare." It is great news when the price of energy, food, transportation, health care and consumer electronics drops. But for some reason it is bad news when the price of shelter drops.
...
So now that housing prices have stopped soaring and in some places are dropping, shouldn't that be good news? Shouldn't we be seeing stories filled with anecdotes about formerly priced-out middle-income families finally getting their chance at the American Dream?...I'd like to hear some of their stories. [dweintraub~at~sacbee~dot~com]
From the Modesto Bee:
Becky Ellis spent nearly 20 years in the mortgage industry, but the recent housing crash proved to be too "depressing" for someone who loves helping other people. "I wanted something cheery," said Ellis, 36, who considered switching to a banking career, but decided to get out of the industry and give retail a shot.
...
This year saw a swell in the number of job applicants for the holiday season, retailers said, a likely result of the housing fallout, economic crunch and rising unemployment figures in the Northern San Joaquin Valley.
...
J.C. Penney hired about 150 seasonal workers this year, a comparable number to last season, said Sarina Pescetti, assistant store manager. The most striking difference she noticed wasn't the number of applicants, but their backgrounds. "We had a variety of people who had worked in the housing industry," Pescetti said.

19 comments:

Patient Renter said...

"He believes values in these communities could fall by 15%."

"Many price measures already show more than a 15% decline for the Central Valley's largest housing market."

Exactly. I am constantly blown away by the inability of these guys to recognize what has ALREADY transpired.

BTW, do we have any historical quotes from this Kenneth Rosen guy to put the value of his predictions into context?

Patient Renter said...

"Becky Ellis spent nearly 20 years in the mortgage industry"

"...said Ellis, 36"

She got a pretty young start, or maybe one shouldn't count making coffee as "industry experience".

Diggin Deeper said...

"Data gathered by Edward E. Leamer of UCLA's Anderson Forecast back that up. Since 1989, Leamer has tracked housing prices in the 20 least expensive and 20 most expensive ZIP Codes in Los Angeles County. He found that all areas fell by about the same percentage when they hit bottom in the 1990s downturn."

Hmmmm....the real estate BS that Sippn's been pushing is that these "moated" areas are not subject to the same price declines as other areas are. Maybe it just won't happen here as these zips are really fortified.

sacramentia said...

The(your) analysis on these blogs is so much more current than the newspapers and research articles. No surprise that the papers are having trouble making money.

The high-end is suffering too but reminds me of the riddle: "If a tree falls in the forest and nobody is around does it make any noise?"

If nobody sells, there is no decline in value. Just like an L3 asset at a bank!

smf said...

"Maybe it just won't happen here as these zips are really fortified."

I have done a little research in these 'nicer' areas, and you all can do it if you want.

A LOT of homes in these new areas were remodeled to be bigger and better, with an incredible profit margin thrown in for good measure.

Not many of the wealthy want a 7000 sq.ft. home when a well done 3000 sq.ft. home will suffice. But 95864 has plenty of these as an example.

So the wealthy individual who was willing and able to buy a million dollar home in these areas now has to shell out TWO million for the priviledge. And that is NOT gonna happen.

anon1137 said...

I think the specific circumstances of the housing boom and subsequent bust affect how much prices will decline in each area during the bust, so you can't say that since they fell this way during the 90s the same thing will happen this time.

The 90s bust was infuenced by a recession, the closing of military bases and the contraction of the defense industry, whereas this bust, so far, has been all about buyers in low-priced neighborhoods and new subdivisions defaulting on ARMs.

And this boom was different than the last boom. As everyone on this blog knows, this boom was the mother of all housing booms.

Cmyst said...

"Becky Ellis spent nearly 20 years in the mortgage industry, but the recent housing crash proved to be too "depressing" for someone who loves helping other people. "I wanted something cheery," said Ellis, 36, who considered switching to a banking career, but decided to get out of the industry and give retail a shot."

Oh, how I wish they'd stop calling these types of positions "careers".
In order for something to be a career, you have to obtain specialized education for it. These sales clerk and office clerk jobs are just that: jobs.
That's part of the problem, people with low-level JOBS decided that they had CAREERS and bought homes to match their aspirations, but their aspirations were well beyond their abilities.

Bakersfield Bubble said...

Lander -

This is what a posted to you at the HBBlog (re Central Valley prices and UC Berk comments):

I see hits from UC Berkely Econ department and I wonder if it this clown looking at our blogs. He has to be blind or just lying??

Lander said...

Assuming that he is actually looking at the data, there are some possible explanations:

(1) The -15% is in addition to the declines we've already had, rather than a peak to trough prediction.

(2) He is relying on OFHEO's HPI, which is still under 15% from peak (-7%). HPI tends to lag other price measuresments. Q3 HPI figures should be out this week.

(3) The Central Valley as a whole is doing better than Sacramento (not sure that is true anymore).

Diggin Deeper said...

I believe money still rests in the hands of the Boomers. I doubt this segment will upsize but rather downsize with quality and value in mind. That may support your comments, smf. They will likely be attracted to the higher end looking for quality of life, convenient local amenities, a quality product, at a fair price. Most high end areas are delivering these features except value. No one's going to pay $1 Million+ for an outdated, 1800 sq.ft. Craftsman unless they're just recovering from a head injury...there's no perceived value. Boomers have the income, the resources, and for the most part, have been plugged into real estate over long careers. They've built years of equity, and could deploy those equity dollars into the market and become a pivotal part of the "move up" market.

The question is, when will the market signal that quality and value have reached a level where they become buyers again?

smf said...

"They will likely be attracted to the higher end looking for quality of life, convenient local amenities, a quality product, at a fair price. Most high end areas are delivering these features except value."

No, they are definetely not delivering these values. For the most part, even the 'higher' end homes are essentially all following the same template in one way or another.

I have seen thousands of homes in the internet over the past 7 years, and have nothing but disgust over the complete lack of imagination or over-extravagance most of these places have.

If you notice, most of the real classic homes have very simple lines, where some higher end homes have all sorts of goodies all over the place that add nothing but eye candy that will eventually become the avocado green of our decade.

But boomers are more apt to downside than upsize, and there is a terrible glut of very large homes all over the place. And when all these homes follow the same template, none become special enough to pay extra for.

Cmyst said...

Once again, smf, we're on the same page.
Cherry cabinets, stainless appliances and granite counters are going to be the avocado green/harvest gold of this generation.
With energy costs soaring, homes will have to be smaller and closer in. Single level homes are easier to care for and to move around in.

smf said...

"With energy costs soaring, homes will have to be smaller and closer in"

Depends on what the person wants. Unfortunately, size was provided over uniqueness for these 'mansions'. In other words, I much rather have a smaller home that is more unique than a larger one that has the latest in housing style.

We want something that is hard to find in many homes, not the same Home Depot special template that has been used throughout the area for these 'mansions'.

For example, we all have seen the large homes that have a pretty common entry. I mean, if I am to pay $$$ for a house, I want it to show from the entrance onwards.

David said...

"I believe money still rests in the hands of the Boomers."

This maybe true in some respects but I know of bunches of Boomers who have blown all thier potentially large savings on having luxuries now. Some have saved, but many haven't.
My in-laws are a good example. Very good military pension, college paid for by the military, GI Bill benefits, both work, bought thier house in the early 80's. They should be in really good economic shape, but I found out they are upside down to the tune of over $100K (and not even in CA). Thier problem is they have always bought toys like pools, a big RV, gadgets, new cars, etc. Why save for tomorrow when you can have fun today? And they aren't the only ones that I know of. I know it is antedotal, but I wouldn't be supprised if some sizeable chunk (20-30%) of Boomers have blown it over the last 10 years. My parents were very similar with college essentially free, help with thier first house, etc. They ended up thinking it was much more important to go on vacation then help thier three kids get through college.
It is this type of behavior that has gotten many of us in my generation really p%ssed off. It really grates me that they have been given so much opportunity in thier lives and they just wasted it.

And many of the Boomers invested in second houses. So I'm not convinced they have that much money left.

Cow_tipping said...

Houses are all "made in america".
Most of the rest of the crap is made in "Chindia-wan-esia".
Well, if it was made by illegal mexican labor, using made in Canad-chindia made materials is it still made in america ?? OK as long as the bulk of the $$ is profit for an american corporation or some greedy landowner, I guess.
Cool.
Cow_tipping.

Diggin Deeper said...

david...as you know, it's a huge grouping of population. Wealth is transferring from the previous generation and added to the wealth created during the Boomer's generation. In many cases this isn't chump change. When considering non-discretionary spending, this group wields a big stick. If we waste 30% of the numbers, there are still over 50 million that do not have the money drain of younger families having to wade through their financial and educational responsibilites. The only point here, is that it's probably the only group with numbers, that can lead us out of this real estate situation.

Will they? That's anybody's guess.

Cow_tipping said...

Boomers have equity in their houses more than likely, tons of equity in their built in the 70's and 80's crap boxes. Now the funu starts when they try to unload these crap boxes in arctic tundra (north of the Mason Dixon line or even several states south of it ...) to fund their "retirement". The first few will unload it succesfully assuming this crash doesn't get loooooong drawn out to 2015. Then, we'll see 40 million of these come on the market and just sit and rot, like good little crap boxes should.
Anyone want to live in Minnesota ??? No right, well can you imagine almost 10 million people do, over 8 million of whom will want to sell in 2015-2030. Crash, I wish, it will be welcome if it just crashed. The word for it is yet to be written in the english language.
Cool.
Cow_tipping.

Gwynster said...

Add to that housing stock that is occupied currently but needs to be sold or leased as the population begins to die. When you are talking a cohort as large as the boomers, that is some serious standing inventory with noone to absorb it.

One way it can be absorbed is if household creation slows way down and we end up with a population of primarily singles but for that to happen, pricing has to come down farther (or wage inflation goes through the roof) to make that affordabilty ratio work.

alba said...

I don't see how the Baby Boomers can lift the housing market out it's doldrums any time soon. These folks (I'm very close, depending on your definition) have lived their entire lives thinking they would be able to retire with a pension, social security, medical benefits, and a home paid free and clear. Not even ss is a given, and the rest have gone away, or diminished greatly in value. On the contrary, look for these folks to be your burden for MANY years to come. Hardly does a 401-K make up for a perceived pension in perpituity, for those who've had to change their assumptions in mid-corporate-life. Not even boomers stay in their homes. Look at the average amount of years people stay in one home. The point to this; boomers weren't "dumb" to leave the money on the table, as they moved up. They spent their "earnings" just like the rest of us. I think we'll find boomers were not immuned to the amount of equity spent/wasted via the ATM effect. Boomers will be the proof that retirement is based on expectations of past generations, unless you work for the government, or as a civil servant. Boomers are counting on you!