Why home values may takes decades to recover
i.usatoday.net
i.usatoday.net
Technically we had an inflation rate below 3%, but only because house prices were excluded from the inflation figures. Mortgage payments were probably most working people's single biggest payment, yet the huge rises in those costs (as house prices increased) didn't go into the inflation figures. If they had, then inflation would have been well above 3% and interest rates would have had to rise, dampening the housing market. I can't help but believe that governments were happy to exploit the electorate's belief that they were doing well financially, when in fact it was an illusion.
House prices will have to fall by about 50% (the figures for the UK look pretty similar to that USAToday presentation). People were prepared to take on ridiculous loans when the bubble was being inflated, because they thought they would be unable to afford property if they waited.
In fact, the situation in the UK sounds like it might have been worse than in the US. There were significant numbers of 110% mortgages available in the UK until a couple of years ago.
The BBC did an expose in 2003 showing that major banks were encouraging customers to lie about their income in order to be able to buy property. Yet this expose has been buried, never to be mentioned. The government and the financial regulators did not want to know.
The median salary for a graduate in London is £24,000; the median price for property is £335,000.
I have friends who came from working-class families who were still able to buy houses when they were students back in the 1970s.
The UK has a population density of over 250 people per square km whereas the US has a population density of 34.
I agree with the other points you make though. Indebtedness in the UK is much worse than in the US or almost anywhere else.
It surprised me how much more I'd have to make compared to my parents in order to afford the same things... almost double really. Most of the difference came due to the fact that the house is now worth three times as much as when they bought it 15 years ago. Housing in general is ridiculously out of whack with reality, and in a selfish way I hope the recession-style home pricing stays for good, it'll allow a lot more young people to buy in and actually afford to live in their own place within their lifetimes.
You'll be able to afford your house. Your friends will too. Your parents will still own the same house. So will their friends.
I don't think it should be any different to hoping ipods will be cheaper.
We don't talk about the recovery of gasoline prices. The concept that a bubbles peak price is somehow correct is by definition flawed.
But I agree phrases like "A home worth $300,000 may soon be worth $200,000 or less" are misleading.
The money you spend on a home is money you will some day get back. Whether it grows or not, most people expect its nominal value to at least stay constant. More likely the real dollar value will be constant and the nominal value will rise.
When home prices fall precipatously it is a drag on the economy. Suddenly anyone under water on their mortgage or at a loss on their home can no longer sell, and are effectively locked into their home. This is inefficient because the best labor can not fluently move the most appropriate jobs. The money tied up in a falling home can not be reinvested. An over extended house can not be reversed mortgaged to fund a small business.
It is nothing like gas prices. Low home prices are only good for those (like me) first entering market. But the number of those first entering the market will by definition be much smaller than the number already entrenched in it. Aside from a small percentage of speculative investors the popping of the bubble simply hammers anyone who bought a home in the last 5 years out of necessity and will continue to be a huge problem for our economy for years to come.
I do agree this is going to be a drag on the economy, lots of people are going to lose real money. We built houses that people cannot afford, we built houses in the wrong areas etc... we had a massive case of malinvestment so of course there is going to be pain when it's corrected that is only natural.
Also a lot of people think houses are good investments, when most of the time they are not, in fact most people would be able to have a nicer place and save more money if they rented. Just because people believe something does mean it's true.
Edit: Also a lot of people may feel like they're losing money, because the artificially high price that they thought there house was worse is no longer there -- whether or not purchased a house in the last few years.
A house deteriorates too. You invest in upkeep. The difference between the two are: (A) you buy housing all at once and (usually) pay over time. (B) housing is a manufactured good while oil is a resource.
Sure it would be a difficult "adjustment" for those that saw their house as an investment if prices went into reverse in the long term. It would be a serious hit for those who are invested in multiple houses. But it would be a net win for society.
If you own a house that is going up in value, you win nothing unless you sell. Even if you sell, you are most likely to lose since most people upgrade rather then downgrade or move to renting. If house prices went off a cliff new buyers would win, upgraders would win and "investors" would lose. The long term nature of the product would mena that it would take time for the benefits to affect the averages, but over time people would need to spend less on houses. This would make them weathier.
The problem you describe is not inherent in houses. It is inherent in expectations. People made decisions based on expectation that houses are the best investment. That is the root of the problem. If the expectation had never existed, houses would be seen as goods and noone would be that worried about their house value going down. It would just be like buying an item at price X, one week before it goes on sale. That's not such an economic hit.
You obviously don't know people going through this so let me paint you a vivid picture.
My grandfather died in March 2008. His home wasn't an investment, it was the house had had lived in for 40 years. He paid $340,000 for it. We have been trying to sell the house for over a year, we finally sold it this month for $150,000.
That is the housing market right now in a nutshell. It doesn't really matter to us because the estate is a gift to us, not our own money really.
But now flip the coin to the people who "normal" home buyers. Say I moved into that house 10 years ago and now my job is gone. I want to sell that house and move somewhere else. What am I going to do if I bought the home for 340k and have to sell it for 150k. I owe the bank almost 200k. I'm not an "investor", I have a wife and two kids and all we want to do is get out of our house. We didn't buy it as an investment and we played by the rules, but now we are completely and utterly screwed.
It has nothing to with investing. It has to do with putting a roof over your kids, and the expectation that if society won't burn to the ground around you. For people underwater in their homes - society has basically crashed and burned around them. They are basically trapped in their current situation whether they want to be there or not with only one way out - default.
People love to blame sub-prime borrowers who shouldn't be in homes, or speculators who shouldn't have bought homes. Sure those guys lifted the prices that everyone had to pay, but the VAST MAJORITY of homes bought during the bubble were still primary residences for people, and all of those regular families are now the victim in this situation.
Ignoring those problems is to be either incredibly out of touch, incredibly stupid, or incredibly callous.
I" want to sell that house and move somewhere else."
In the majority of cases, people want to buy at a higher price. Even if they want to buy a cheaper house, you lose the difference between the house prices at the time you buy, the price at the time you sell (buy again), times the rate at which house prices fell. Say you go from a 300k house to a 200k house after a 25% fall (big numbers), you "lose" $25k. If you move to a more expensive house, you "win."
If your house is under water, you are in no worse a situation really then if prices hadn't crashed. You still have the same mortgage.
When you buy a house you lock in your housing costs.
The only way you can reasonably expect that ratio to change in a dramatic way the way it did is if there was some underlying structural change in how people live. For example, a massive migration to dense cities where you're not spending hundreds a month for a car means you can, spend a larger proportion on housing, pushing that ratio up. But of course, we know that hasn't happened and will take decades if it ever does.
I do have a minor problem with the last graph though, "Monthly supply of homes for sale". Since this is meant to compare existing homes to new homes, the line graph and the thickness of the line doesn't convey enough of the target information; this would be better done as a bar graph, with two bars, one for existing and one for new, for each year.
I had a boss once who made graphs with three Y-axes on them (two on the left and one on the right) and multiple X-axes, all in different scales, mixed linear and exponential. He tried to use different colors, but would then print it out in greyscale. They were extremely hard to read and get anything useful out of, which I always thought was part of his goal.
Is this to create more debt and therefore more currency in circulation or is it to benefit the homeowner in some way?
It is failed government policy that set all this in motion, the question is: Why were those policies put in place? Are they for the people or for the government or what?
"Governments subsidise home ownership because they think it encourages stable, more law-abiding neighbourhoods. The children of homeowners do better at school than the children of renters do. Homeowners are more engaged in local democracy. And, because homeowners must pay off their mortgages, housing supposedly encourages people to save more than they otherwise would."
Is it any surprise that the kind of people who save up a huge amount of money to make a down payment and are consistently responsible enough to always make large mortgage payments are 'good' people?
By 'good' I simply mean the kind of people who abide by laws, encourage their children in their school work, take an active interest in local government, etc.
This reminds me of a program they had in Illinois where the state decided to send books to all new parents. Some study found that children who grew up in houses with lots of books did better on a wide variety of metrics so the government reasoned that sending books to parents would somehow help the kids. It never occurred to them that the key was that type of people who bought/read a lot of books where also the type of people who were better parents.
http://www.nytimes.com/2007/09/14/business/15cnd-greenspan.h...