Still an Ugly Picture in Housing

It would be hard to argue that these are pretty pictures:

(Image source: http://www.irvinehousingblog.com/wp-content/uploads/2007/09/ugly3_lg.gif)

(Image source: http://messingaboutinboats.typepad.com/sailing/images/2008/01/07/ugly_fish.jpg)

(Image source:  http://www.pjcj.net/yapc/yapc-eu-2006-enigmatic_perl/slides/images/ugly.jpg)

The same holds true when it comes to describing the state of the residential property market, as Beat the Press' Dean Baker makes clear in "No, Home Prices Can and Will Keep Falling":

The NYT told readers this morning that: "Home building and home prices, which had fallen for almost three years, appear to have almost no place to go but up." This one is very seriously wrong.

It is probably true that home building has no where to go but up. Construction had fallen to just one third of its bubble peak rate. It may not zoom upward, but the rate of building is unlikely to fall further in the next six months or year.

Prices are an altogether different matter. The basic story here is that real house prices are still 10-15 percent above their long-run trend level. Since the country still have a record housing vacancy rate, it is hard to see how this gets corrected with prices rising. Furthermore, virtually every economist in the country expects unemployment to rise and stay high over the next year. Also, mortgage interest rates will trend upward.

If this is a recipe for rising house prices, then I'm missing something.

Comments

[LTG21C]

I am going to disagree with you about the 10 to 15% overvaluation of housing prices over the long trend as being SUFFICIENT to foster a revival.

Suppose housing prices did fall to trend line 10 to 15% lower than present.

In order to preserve the trend line, housing prices have to spend a fair amount of time LOWER than trend.

Therefore, there must be an undershoot of the trend-line that is of a severity and duration to preserve the trend line.

A reasonable guess is that point would be 10 to 15% below trend for, say, 5 years, with the trough or bottom spike well below that.

Politicians and policy makers can have it two ways ---- a severe contraction that drops prices more, but for a lesser period of time, or a milder contraction that results in stagnation for a much longer period.

In the USA, I believe that the latter will happen --- at least one, perhaps 2 decades of stagnation in housing prices even as inflation skyrocket.

Meanwhile --- the housing stock will suffer from one major change that have always been the killer of prices and value of existing homes: obsolescence.

The existing housing stock will be too big, in the wrong place, cost too much to maintain, or otherwise, for whatever reason, not suitable.

With that, housing becomes a real quagmire.

[HSpencer]

Common sense tells you that McMansion sales are dead and gone. Although Americans have a hard time learning lessons, sometimes lessons are force-fed. I also think 1200 square foot 60's and 70's houses in certain places that sell for $300,000 now, are also obsolete. That was unrealistic to begin with. I sense a leaving of the high cost areas for the lower unemployment rates of the south and southeast. I see new 1400 - 1600 square foot houses for under $125,000. I see existing 60's and 70's ranch styles going for under $100,000. I see lots of renters. Renting is the new vogue for the American family stressed out on finances, and having uncertain job security.