Robert Shiller from Yale is quoted in this WSJ Marketbeat post (and elsewhere too I'm sure) as saying the decline in housing prices on this go around could be worse than in the Great Depression although maybe this house on the east side of Molokai would be spared some of that pain.If so that would be more than 30%. He said that so far prices are down 15% from their 2006 peak.
Part of the reasoning attributed to Shiller is that housing prices went up by 85% from 1997-2006.
If you have done any reading on this you may have seen that prices in the Baltics, Spain, Ireland, Sacramento and Riverside county have all dropped precipitously, more than 30%.
The 85% number is a tough one for me to wrap my hands around. Based on comps of three sales within a mile of our cabin prices here almost quadrupled from 1998 to September 2006. One of my brothers lives in Iowa and as you know many places in the Midwest have practically sat out the boom. Hawaii started slowing down or rolling over or however else you care to describe it a little earlier than many other markets (my perception anyway).
There is no doubt that if Shiller turns out to be right it would create a nasty headwind for the economy. We can debate whether he will be right or not and we can debate what the magnitude of consequence would be but if correct it would be rough going for a while.
All of that is beyond our control and so as a matter of philosophy I tend not to worry about things beyond my control. I do think it is worth remembering that there is value in having a place to live, there is psychic value in enjoying the place where you live and that if you have no plans to sell anytime soon and no plans to raid your equity (assuming you have equity) the decline in prices may not have to impact you in a meaningful way.
I do not deny the whistling-past-the-graveyard element to this but there is a kernel of truth to it too.
15 comments:
Shiller seems like a reliable, if some what bearish source. None the less I think we should all expect a lot more than nasty head winds.
Reduce risk, reduce leverage as much as feasible.
Schiller is one of the smartest guys on the planet. I have read all of his work on housing prices (and other stuff, since I am a card-carrying economist) and he hasn't been wrong yet. Whether 85% prediction is on the mark is unclear, but take him seriously.
Norm
Roger,
There is always jingle mail
Roger
Was that 85% in real or nominal terms?
My back of envelope math says that if market up 85% nominal it would only have to drop about 45% to get to similar valuation (assumes 1997 was at some reasonable long term sustainable value). If we're already down 15%, another 30% down from here is roughly the currency inflation (10 years of 3% per annum).
Btw, I certainly agree Shiller is one of the few economists consistently worth reading.
Michael
maybe i was not clear.
Shiller believes the decline will be more than 30% he is not calling for an 85% decline.
One of the reasons he thinks it will be more than 30% is because of the 85% run up.
In addition to jungle mail there are now "fire sales" i.e, arson.
Schiller's comments about the future trends in the price of houses are one thing to consider but the other we should not forget is the absence, or nearly so of any householder savings, and that combination of cheap fuel and water is the one that will really make the economic engine sputter. Willy
There are many areas of the country (non-coastal and non-la-la land) that did not experience the run-up. It was a fool's game from the beginning. Houses are not an investment;you can't get out of housing-they do depreciate and fall apart in the long run.
Lastly, there was no whining when the run-up occured in these selected areas. The participants are getting what they deserve.
We have another brother?
The 85% from 1997 isn't that dramatic Roger.
We have another brother? is what he would say about me, lol.
As far as 85%, there are studies that say over the long term home prices only go up a point or two above inflation. sorry I can't cite them but i have stumbled across them many time.
Intuitively a point or two ahead of inflation seems a little low to me but 85% in ten years seems a little high.
85% seems high in 10 years????
where do you live? It seems low to me.
Get ready for shillers prediction. even if he is a little wrong the 15% reduction that has already occurred shows a rather ominous event is occurring.
This will be no fun, but very interesting. Hopefully our paying attention to the issues will give us the edge we need.
Don't forget...Those who go into foreclosure will need about a decade to restore their credit. And without their demand, housing prices will go no where.
Here in the UK there's been a lifting of house prices for 10 years, and also some increase in building of new properties, particularly apartments. The subsequent falls I've been expecting have materialized as quickly as I'd thought. There have been drastic reductions in asking prices of apartments in areas where the building has been prolific, but three or four bedroom detached properties are only seeing a slowing of growth in valuations. I still believe this will lead to a drop in house prices of greater than 20%, as they return to the mean. This figure, though, may have a new definition: It could be in relation to the Euro rather than the pound. A future valuation could be 'Cheap compared to it's valuation in 2005 in Euros', but I'm not saying our currency will change from sterling.
Crap. I am buying lots and rental properties now. And I can assure readers that the banks are holding onto worthwhile multi-unit and prime office properties and not selling them because they fully expect the market to turn in their favor. I am presenting under a consultant contract with one of the big five banks to renovate larger apartment complexes in the midwest that were foreclosed upon. And I have a blank check to do the job. Rental real estate is spectacular as an investment now.
The real estate sitaution is bad for over-leveraged buyers.It is wonderful for landlords and those that want to buy the home of their dreams at pennies on the 2006dollar. Interest rates are great, and contrary to popular talking heads and those without boots on the ground, financing is easy to obtain with good credit. As with stocks, NO ONE can precisely time the real estate market, but billions of dollars in buyer pools and smart money in the banking industry real estate divisions are going into multi-unit and office real estate as well as buying back single family homes at auctions.
Schiller may be a wiz, but he is not out in the field. Statistics? Bunk.
T
I'm in Puget Sound and things got a little frothy here in 2006. The market has slowed now. Compared to 2006 it's a buyer's market. Prices may have dipped a few percentage points, but nothing like 15%. The economy here is robust with Boeing, Microsoft, and many bio-techs going well.
High gas prices are probably the biggest headwind this economy (Puget Sound) and, by extension, the real estate market face.
I was in Florida in 2005 and saw the manic real estate speculation going on there. People were putting down earnest money on houses before the foundations were poured; certain that they could resell at a profit before the house was ready for occupancy. Same thing was happening in California, Arizona, and Nevada. Those are the people who are hung out to dry now and where the markets will fall farthest.
Methinks it will take two years for a new bottom to form in real estate nationwide. In the meantime Puget Sound may fall a bit more this year before firming up.
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