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Housing: Where the Market Is Really Headed

? How To Find A Rich Single Landowner |


| Global House Price Index ?

July 03, 2006

Housing: Where the Market Is Really Headed

Peter Coy

The headline on this blog item is the headline of the Business Outlook column in the current issue of BusinessWeek, by my colleague James C. Cooper (pictured). I think it's a judicious, well-balanced look at the slowing market. Cooper's conclusion: "The numbers point to a gradual slowdown rather than a sudden crash."

Businesspeople like to read the Business Outlook every week because Cooper makes sense of a welter of conflicting data. Here's an example: Remember the confusing report that sales of new single-family homes rose 4.6% in May? Here's what the Business Outlook says about that outlying statistic:

Government statistictians can say with 90% confidence that May's change from April was between -8.5% and 17.7%, so there is no assurance that May sales didn't actually decline. What's important is that, so far this year, the average of new home sales is down 10.9% from the average during the second half of last year.

If your only contact with BusinessWeek is these blogs, you're missing most of what we do. Check out the rest of the magazine at

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It's not really news as we have seen this and estimated since February/March now. Unless we have attacks or natural disasters, maybe companies closing down and mving out of state or out of the country, it will soft land. But this we have known for quite some time now.

Posted by: Nick at July 3, 2006 04:53 PM

I agree with the statistics pointed out in this article. However, the big picture isn't being told in these numbers. Finally the business/investment people are coming on board to the reality of a slowdown. However, they are only looking at numbers. I think if they saw first hand what's happening here in florida, their views would be very different!

Maybe in Ohio, Georgia, North Carolina..... we will only see a slowdown. Florida is in big trouble and the sooner we stop the building, the sooner we can catch up with the onslaught of homes. They also aren't looking at the prices. The homes in Florida have doubled and tripled over the past five years. Incomes haven't. Have James Cooper drive around any city in florida and check out what builders were charging for homes in 2001 vs. what they are charging now. See what people sold their homes in 2001 and compare the same houses today. Of course the houses today aren't selling. Also, compare the incomes of 2001 to today. I don't know about you, but most people haven't had their salaries doubled let alone tripled over the past 5 years. The only thing that has changed is easy money. Unfortunately, that easy money has to be paid back and some are finding that impossible, thus causing a slow down or trickle, or eventual crash. Thus when/if he drives around he will see his slowdown in full bloom. I'd like to know if he will still call it a slow down?

Posted by: lizziebeth at July 3, 2006 06:18 PM

If you got to the relatively new "Google Trends" at and put in "Housing Bubble" you will see two things - that interest peaked last summer (2005) and the most interest is from California markets. The geographic skew is very consistent with what you see on Ben Jones' Housing Bubble blog. When the topic is about California there can be well over 100 posts. When it's about Indiana, it's far, far less. I believe this proves two things - people are most interested where prices are highest and people care most about where they live, knowing that all real estate issues are local.

My thought is some markets will take some good hits, but many markets will be largely unaffected. Sort of like how the ripstop material on a baffled sleeping bag confines how far a tear in the material will go - each area being compartmentalized. It's the same for real estate markets.

Nationally, the homeowner non-vacancy rate has moved from 98.5% to 98%, which means it has moved more and less in individual markets. This will probably increase again once prices come down and rents go up. Real Estate has definitely cooled down, but the -40% dire predictions one hears from the priced out/don't know how to save money crowd are basically overblown. If they would take some of the energy they spend in their groupthink mantra repeating wishful thinking and work harder and save smarter, they'd be a lot better off.

Posted by: Long Islander at July 4, 2006 05:54 PM

Hey Long islander,

I have to let you know I am not in the priced out/don't know how to save crowd. Quite the contrary! With that said, I am in the There is no way in Heck I am going to pay someone $150,000+ more than they paid for a house they bought to flip, have lived in for only a year and have refinanced and are in debt so deep they need me to bail them out! The market in florida is out of control! Yes, we will see price cuts of 40% there! I already have! And those homes still aren't selling!

I am in the market to buy a higher end home. I'm not throwing my hard earned money away because every Tom, dick and harry had to try and get in the "real Estate only goes up, they aren't making anymore land......." game. Everyone was getting in the real estate investment game, what's that sound like???? Oh yeah, the dot com!

I lived in Texas at the end of the last real estate bust there. Housing did go down 40% there. What we are seeing now is far worse than the late 80's! People will once again leave the keys in the mailbox. Only this time it will be in many markets... Florida, AZ CA, NV, NY, Boston....... People borrowed more money than they should have and can't keep up with the loans.

As far as the interest in Indiana vs. California, florida, AZ, NY...... is that they didn't have speculators(slime balls) ruining their state! They didn't have developers selling to the SB's. They didn't have foreign investors...... Nor did they see their housing values triple over the last three years. Let's compare apples to apples.

Let's make a deal to meet back here in six months and see where we're at. And again one year from now. Let's see whose right about the decline in housing prices. This thing is far from a slow down in many areas.

I don't need to work harder and save smarter. I have more than enough to retire at the ripe old age of 40! No, I will keep working and saving at the pace I have been and keep following this nightmare that has been created in my hometown!

Posted by: lizziebeth at July 5, 2006 02:20 PM

Long Islander's comments make sense. His view of the " priced out/don't know how to save money crowd" is the same as mine. I have never seen such a concerted effort of a group of people to "scare" a market. The data is not supporting their hysterical claims so I guess eventually they will go away...

Posted by: Frank at July 6, 2006 12:20 PM

No Frank,

The point is the media, even newspapers, who depend on real estate ad's are even on board. It's not the "priced out/don't know how to save crowd" that are fueling this. It's the Holy @$$^#% look at all the for sale/rent signs crowd.

How on earth did this happen. Oh yeah, it's the I'm so lazy, don't want to make my money the old fashioned way, need to make a quick buck and everyone says that real estate only goes up crowd that has ruined many towns for years to come!

Start looking for another job!

Posted by: lizziebeth at July 6, 2006 03:03 PM

Nope, you are dead wrong.

I have a house and have benefited from this crazy boom. But, it is impossible not to see that we are heading towards a major crash.

Posted by: Harry at July 7, 2006 07:43 AM

If Long Islander's comments are substantial or thoughtless is best left to the future to decide. If the data support the "hysterical" claims, however, can and should be discussed now. Which data support calling the claims hysterical, Frank? The trillion amount of resetting option-mortages in 2006 and 2007? The rising number of foreclosures? The increasing mortgage interests for new buyers who are priced out of the market? Some sellers will be able to hold onto their property, of course, but some MUST sell, even if it is at 40% loss, and those sellers are setting the comps. I think it could develop into a rather hard landing for housing, with repercussions for the whole economy, which in turn would affect housing negatively further.

Posted by: Peter at July 7, 2006 11:48 PM


That's a good one! What data are you referring to? The fluffed data to make it a soft landing? Yes, we'll go away when the market turns to normal. When all the greedy people have claimed bankruptcy because they can no longer afford their payments... When the investors turn to the next big"get rich quick infomercial schemes". Frank, the proof is in the pudding. Homes aren't selling and I doubt I have that much impact on the market.

The effort on the part of people like me is voicing reality. Unlike the lines every realtor was using to scare folks like myself into buying a home in an overinflated market, before there were no more opportunities. Unfortunately, so many fell for it and are going to be hurt. I almost fell for it. Enough is enough! The specuvestors have ruined so many towns for years to come!

The lending industry has brought greed to a new level. Free money for everyone. "Can't afford it, come one, we can find a way! Want a new car, well didn't your house go up $100,000 last year. Well that's instant equity, just borrow from that to pay for the car. No worries, your house will go up again next year. Real estate always goes up!" Greed, Greed, Greed!

Sounds like you have something at stake. Good Luck! I hope you have a soft landing.

Posted by: lizziebeth at July 9, 2006 05:57 PM

For a number of months now I have been following the popular press reporting of what many had come to refer as the “housing bubble”. I have had a number of e-mail exchanges with the some of the reporters as well as some of the people who have housing bubble blog sites. In the process I have developed a roster of more than 100 media oriented people with whom I share perceptions.

While I don’t expect much in the way of professional integrity from blog site people, I have believed in the mainstream press. Given my experience following this topic, however, I have come to the conclusion that there are biased writers and reporters in the print media who are working at portraying a “housing bubble burst” story when, according to top academic institutions, none exists.

An example is a story that recently appeared in the San Diego Union. In actuality, it was more fair in it’s representation than other examples I can cite but it still focused on the negative over the positive aspects of the data.

The headline for this story was “Other indicators point to housing market that has weakened somewhat after boom”.

Buried in the article was a paragraph that pointed out that an all-time new high sales price for resale housing was reached for the month of May in San Diego.

The article stated, “By contrast, DataQuick said resale house prices actually rose to a new record of $569,500 last month, up $14,500 from April and up $19,500 from May 2005. Resale condos rose $2,000 from April to $397,000, just shy of the all-time record of $400,000 set in March.”

While new home sales figures have been followed these past months and years, most of the previous “scare” talk has centered around the average Joe’s home and how they were going to be ruined in resale transactions. In addition, San Diego has been talked about for months as a prime example of an area with high possibilities of a housing bust.

Re-sales of existing homes make up about 85 percent of all housing sales and new home sales are less than 15% of the entire market. So here we have news that the San Diego housing market was showing strength and the headline plus the text belabors the negative side of the data by focusing on new home sales. The real story would appear to be that resale prices have in fact increased in San Diego when many have said they would drop.

There is also a negative connotation given to data which may be generated by building industry people. In the San Diego Union story the writer says, “Industry leaders are grasping for ways to give a positive spin to the trends.” No such commentary is made when book writing/bookselling Robert Shiller is quoted. The fact that he has been prognosticating – “spinning” if you will -- a housing bust story for years now is frequently not mentioned.

The respected LA Times covered this information in a story by Annette Haddad. Early into the article she said, “The air is finally coming out of San Diego County's housing bubble.” as if to set the theme for her story. Nowhere in her article does she point out that resale homes in San Diego set a new all-time high. She mixes and matches the data to make her case and conveniently makes no mention of this important information.,1,4781005.story?coll=la-headlines-pe-business

Other studies have also been under-reported such as Pomona College’s analysis which indicated that “fears of a real estate bubble are overblown, and homes remain undervalued in many markets.” Their findings question the implicit assumption that market prices previously matched fundamental values but now have exceeded them. The Pomona College researchers question the methodology by which some others have concluded that the housing market is "bubbly." The report notes that "housing-bubble discussions generally rely on indirect barometers such as rapidly increasing prices, unrealistic expectations of future price increases, and rising ratios of housing price indexes to household income indexes. These indirect measures cannot answer the key question of whether housing prices are justified by the anticipated cash flow."

The Harvard study recently released was finally given some press coverage as they pointed out – as they also did in their 2005 study – that the “housing bubble” issue was overblown.

One news source that immediately reported on the Harvard study was London’s Financial Times. They pointed out that, "After the slump of the early 1990s and the surge of the past five years, the housing market might prove an anti-climax to all concerned. The long period of stagnation forecast by the survey would disappoint home-owners who expect big price rises but also those who missed the boat and have been hoping for a crash." (Emphasis added)

Another under-reported study was international and global and was done by the highly respected Organization for Economic Co-operation and Development. In this study of 30 countries the researchers concluded that the United States was not susceptible to a housing bubble. This important study received very little press in the United States.

A welcome press exception was the recent Bloomberg story entitled, “What to Do If the Home Bubble Is an Inflated Idea” by John Wasik on May 30th. That story quoted from a working paper titled ``Assessing High House Prices, Bubbles, Fundamentals and Misperceptions'' cited in the April edition of the National Bureau of Economic Research Digest. Written by Charles Himmelberg, a senior economist at the Federal Reserve Bank of New York; Christopher Mayer of the Columbia University Business School; and Todd Sinai of the Wharton School of the University of Pennsylvania, the paper takes issue with traditional measures of housing growth and casts doubt on a theory that a bubble is inflating even in the most stratospheric markets.

I believe that publishers and press media management officials need to pay attention to what is being sent out under their banner. Credibility is a well-known problem for the press these days and I believe it is seriously in question for a large segment of the American populace. The reputation of the media at least partially hinges on perceptions and many perceptions are that the “news” is highly “spun”.

In an exchange I recently had with a writer for Forbes, he said, “Journalists love bad news” when I pointed out the disparity and basic inaccuracy in reporting on housing. I guess I am to learn from that comment that I can always expect the negative analysis when I read the popular press? I have to question the wisdom of maintaining that behavior and philosophy if the industry is to survive.

Posted by: Frank at July 14, 2006 02:54 PM

I think a lot of the blame goes on the lending industry. A lot of first time buyers or even move up buyers don't understand an ARM. So the first 3-5 years, that really doesn't matter, but as these ARMs reset and payments double, there is no way a single family will be able to avoid a home in high cost areas.

Posted by: insurance at July 16, 2006 02:58 PM

Frank there is data to prove both sides of this mess. Bloomberg and other institutions are now blaming the slowdown on interest rate hikes. Baloney! The rates are still lower than when I bought my first house in 1986. Harvard, Bloomberg, the press.... all are going on statistics that don't show the whole story. Again, the proof is in the pudding. Drive around any hot area for the last few years. The houses are not selling! Builders are taking $100k off the price of homes, people are dumping houses before they are foreclosed..... No, that's not showing up in the Harvard studies, as they were probably done 6 months ago.....

Posted by: lizziebeth at July 17, 2006 11:54 AM

Holy smokes, it is hard to believe that this is even being debated! Anyone with the idea that there is no bubble needs to put down the bong and get out into the real world. Look at inventory, sales, recent repricing. Realize that the RE market has gone from 15%+ yoy gains to flat in just a couple of months! It is an absolute implosion! This is going to be a thousand times worse than anyone has called for to date! The news outlets are JUST NOW coming around to this story after cheerleading this debacle in the making for the past several years. This will be common knowledge by November at the latest so if you are one of these "trees grow to the sky" folks, hold fire until November when even the retarded flippers will be able to recognize this disaster for what it is!

Posted by: skidder at July 18, 2006 05:17 PM

40% isn't hard to imagine over a few years. I just saw a 15% price drop next door in one day.

Remember that prices are set at the margins. All it takes is one or two desperate sales in each neighborhood to ruin the comps for the whole neighborhood.

Posted by: MAnderson at July 18, 2006 05:43 PM


I'm sorry, but you are out of your mind or your head is in the sand. The key issue at this point is inventory and sales - inventory is at all time highs in almost every national market and sales are slumping everywhere - resale & new home builders.

Slightly higher median prices mean nothing because when bubbles start collapsing - there are fewer sales at the low end, where high entry level prices are now out of reach of most sane people who won't buy into the suicidal loan deals that drove low end prices up in the first place - and more sales are at the high end where upper level income people who can still afford to buy/trade up generate sales that skew the median.

All of the reporting that you point to is looking backwards - looking forward, there is ever higher inventory and ever dropping sales across almost every market in the US, which means an increase in the number of months supply of homes on the market. Every time this has happened in the past, prices adjusted downward significantly - you can say "it's different this time" , but considering how many people took out adjusting loans as compared to past declines - I'd say we are in for quite an 'adjustment" indeed.

Posted by: buddhaman at July 18, 2006 05:44 PM


I don't think anyone has a crystal ball as to what will happen. Case is point in 2000, 6 months before the recession, not one of the 50 economists in the "Blue Chip" forecast predicted the recession, not one. But we can agree on the following:

- population adjusted inventories are at all time highs in several markets

- the pace of sales is slowing throughout the nation

- Residential construction is at an all-time high as a percent of GDP (19%)

- ARM usage is at an all-time high

- Interest-only, negative amortization mortgage usage is at an all time high

- Liquidity as measured by M3 is at an all time high

- A tremendous amount of mortgages will reset in the next two years ($1T+ depending on whose #'s)

- The US savings rate is at or near an all-time low

- Foreclosures in May were up 28% YoY

- Home prices increases have outpaced many fundamentals for the last 5 years(median salary, cap rate, etc.)

Certainly reasonable minds can differ on where we go from here, but IMHO it is unreasonable to conclude that those who see a sharp correction ahead do so merely out of personal interest or groupthink. Bob Schiller at Yale certianly expects a correction and has strong academic and predictive record behind him.

Posted by: joel at July 18, 2006 06:04 PM

I'm sorry Frank, what real estate office do you work for again?

Posted by: Eprobert at July 18, 2006 06:16 PM

Yeah, it's a soft landing. People talking 40% declines are just hysterical. Just ask the nation's biggest homebuilder, DR Horton

Market Cap:

7/20/05 (1 year ago)

$13.4 Billion


$6.48 Billion

I wonder what a hard landing would feel like?

Posted by: awaiting bubble rubble at July 18, 2006 06:47 PM

Wow, thanks for the laugh bubble-deniers. I've saved this page to my hard drive for future fun. You might as well add Irving Fisher to your list of eminent professors and hired guns who say there is no bubble. Unfortunately, most in the R/E industry only get paid when there's a transaction, so all this huffing and puffing doesn't do a thing for them when sales are stagnant. They've had enough, and they will walk the market down regardless how many academics insist there's no law of supply and demand anymore. Good Luck with that. This time it really is different!! LOL!! Professors, they slay me.

Posted by: Suzanne at July 18, 2006 08:04 PM


I can also cite a number of articles, talking heads and empirical evidence who's collective wisdom seems to counteract the seers that you've chosen to follow. In another 12 months, history will be the true and final arbitor. Want to meet back here in a year and see who's perceptions were more accurate? Look at history- Has their ever been a housing 'run-up' or mania of this magnitude before? Has their ever been one close to this magnitude that has not 'corrected' drastically? What would make this one different? If all of these houses being built are a result of actual demand, why are there now record inventories of unsold homes? If today's prices are justified by current wage rates, normal interest rates, established buying patterns (long-term investment and a place to live)etc... then why aren't these homes being snapped up? Interesting questions. Time will tell and it won't take long.

Posted by: Beer and Cigar Guy at July 18, 2006 08:48 PM

Frank, this is a nice summary of some of the studies that have questioned the bubble thesis. Suffice to say that there are many more creditable studies that point to an extraordinary divergence between the traditional measures of housing value. I.e., home values in relation to personal incomes, rents. Bottom line, in many markets, including both coasts, Florida, Phoenix, and others, housing is simply no longer affordable for 90% or more of potential buyers. This situation is unprecendented, and impossible to sustain.

As for media coverage, a far greater concern is that the real estate coverage of major papers has been too quick to quote realtors as expert opinion, when in fact they are feeding the reporters the same sales pitch they use to prod buyers and sellers toward transactions. If papers on the west coast are focused on a sharp decline in sales volume and huge inventory buildup as indicators of a looming RE correction, good for them. The average sales price of homes is the proverbial red cape, a tempting target for the dwindling number of real estate bulls. The explaination for how average prices can continue to climb through the early stages of a bust (while volumes fall through the floor) is so well understood, and has been so widely explained, that I don't even think it's worth going over again here. See Professor Piggington's blog.

Posted by: Jack at July 18, 2006 10:46 PM


Check out just a few of the companies that helped fund your cited "Harvard study"

Policy Advisory Board- Member Companies

"Members of the Policy Advisory Board are valued not only for their financial support..."

84 Lumber Company

Andersen Windows

Armstrong Holdings, Inc.

Beazer Homes USA

Boise Cascade, LLC

Boral Industries

The Bozzuto Group

Bradco Supply Corporation

Builders FirstSource

Building Materials Holding Corporation

Canfor Corporation

Cendant Corporation

Centex Corporation

CertainTeed Corporation

Champion Enterprises

Countrywide Financial Corporation

Crosswinds Communities

Fannie Mae

Fannie Mae Foundation

Posted by: boz at July 18, 2006 11:27 PM

MAnderson said: "Remember that prices are set at the margins. All it takes is one or two desperate sales in each neighborhood to ruin the comps for the whole neighborhood".

I agree with this 100%. The fact that 99% of folks are not selling or buying is irrelevant. Everyting happens at the edge.

That said, I believe the margins are a two way street. When a seller's market occurs - it's all happening in the margins too.

Whether the mragins are buyer or seller friendly is a function of what the 99% does. If even a tiny fraction of the 99% decides it's OK to buy homes, the balance in the margins can be overwhelmingly reset to favor the sellers.

Now here is what I believe is the bottom line:

1. Real Estate has and always will go in cycles.

2. With the Internet and the advent of blogging, individuals have a forum to express not just their views, but their HOPES to the world in hopes of changing outcomes. The housing bubble bloggers feel that if they keep publicizing negativity, negativity will prevail, take down home prices and allow them to buy.

3. The second the HB bloggers buy, in vampiresque or "night of the living dead" fashion they will convert to anti-bubblers.

4. In the overall scheme, all of the posturing done by the HB bloggers and the Real Estate industry on the other side will only have a mild influence on things.

5. Supply and demand will rule, and with our population about to hit 300 million, followed by an incredibly fast explosion to 400 and 500 million, there is no way that Real Estate is not going to continue prospering. Net, net -- all the posturing by both RE agents and HB bloggers will be about as effective as the body contortions made by a bowler after the ball has been released.

Hogs get fat and pigs get slaughtered. Unfortunately for many, nobody realizes when it's a buyer's market - and that's what it is now and probably through Spring 2007. Those who wait too long may get left behind.

Posted by: Watching the River Flow at July 22, 2006 11:30 PM

Watching the River Flow,

I liked your comment about the blogs being a place for people to hope, making the prices come down so they can buy................

Interesting theory! Didn't it work on the way up as well. Dangling the golden carrot in front of the want to get on the get rich quick horse. Scaring folks that if they don't buy now, they won't be able to buy later. Causing millions to buy homes they simply can't afford!!!!!!!!

As prices in Florida went up, I thought wow, isn't this great. As prices got out of control and waitresses, hairdressers, teachers, lawyers, doctors....became real estate gurus holding five properties so their net worth is 1.8 million on paper but their cash flow is -$1000 a month, I started to get real concerned with where this real estate bubble was going. Watching friends and neighbors refinance, so that when they moved they have to sell at the over inflated prices. Things are scary! Something's got to give!

As far as your population theory, at the prices in some parts of the country, most folks are priced out of the market. They will rent from investors(probably like you) for less than what their expenses are. They will be able to get a much nicer home for far less than what they could purchase.

The pigs that will be getting slaughtered are those who bought in 2003,2004,2005 and 2006 in over inflated areas. Spring 2007 may be the buyers market, just depends on how close to realistic the prices get.

Posted by: lizziebeth at July 25, 2006 08:59 AM


Yes, Watching the River Flow, that ARM you barely afforded or the marginal real estate you barely sell lately makes you scream "the price of real estate will always rise, 'cause demand increases".

You know, if real estate doesn't go up, "you can't sell your ARM house unless you pay the bank the flat rate interest you still owe them for getting phony short term low rates in the first place", assuming you or your lower middle class clients have no equity, a likely scenario. Then as the bubble pops, you'll want us to bail out your repossesions like the savings and loan fiasco bubble in the late 80s.

I beg to differ. You can be as pro-amnesty and over population as you want to possibly fuel real estate prices, but illegal immigrant over population don't make real estate wages; let alone, legal immigrants or the deluge of H-1B Green Card professionals coming in to our country are hired at 2/3s the going "paultry" domestic wage rates. It won't help a bit.

In Seattle a $59,000/yr salary doesn't qualify for a home loan. The salaries in the United States have recently been devastated by these New World Order wage reductions from over population zealots like you and wages have been over-all stagnant for at least half a decade (read the Whitehouse/CIA data if you don't believe me), yet, real estate during wage stagnation has gone up 50-200%.

Even 4% home loans wouldn't help us now. Yes, some of the old baby boomers with seniority make the big bucks and they might of helped your cause, but they're simply not in the real estate market any more, as they already bought a home 20 years ago. Besides, by 2009-2010, markets like San Francisco will be deluged with baby boomers trying to dump homes in masses and retire to cheaper pastures. Figure it out, over population, even 400-500M with $8/hr Walmart salaries or less just won't help.

Posted by: softwarengineer at July 25, 2006 12:49 PM

I could comment on every point made in this blog. As a CPA, ametuer economist, and profeesional trader, I have spent 100's of hours building models, testing scenarios, and studying historical market events, data poits and determinging correlations. However, when I step back, this whole this is quite simple. WITHOUT THE WITHDRAWAL OF EQUITY, THESE PRICES ARE NOT SUSTAINABLE. Think legal pyramid scheme with the blessing and encouragement of the fed. Did someone say bail out.

There are two ways out of the current situation. One is wage inflation at a historical porporportion. In which case, who cares about a $200k gain in a house, when that is eqivelant to the median wage. Two, this ends badly. But a 30%-40% decrease in home values means that many buyers pre-2003 still realize a very nice gain (referring to the 'hot' markets). The only ones that get really hurt are the homebuilders as sale coem to a halt.

Remember 4-5% appreciation is the norm for 100+ years. Anything beyond, retraces, bar rampant inlation.

Full disclosure: held homebuilder puts since last May.

One last comment: If intelligent professionals were 'hoping' prices would decline so that they could get 'in' as mentioned numerous times, then who is buying.

Posted by: f at July 30, 2006 06:10 AM

I would say both sides have some valid points, but you need to look at the numbers. When your average household is pulling in $40k a year, that translates into something like $36k after taxes ($3,000 a month). Typically, this family could afford about $1,000 a month for housing/rent. That translates into about a $140k home (figure that tax advantage and ammortization benefits cancel out transaction costs and maintainence over several years). If your local market is running in the 250-300K average price range, how could you assume that the average family can afford a $2,000 a month mortgage? What are they going to eat? Maybe it's time to start the run-up in the Ramen noodle stocks.

Greed and fear drive the market. Greed has prevailed with the no-risk attitude that housing prices have never dropped since the great depression. What do you think will happen when people start noticing that the prices are slowing (and dropping in many markets)? When people start realizing that they would pay $1,000 rent for the house they would pay $2,000 a month for if they bought, the party's over. Once that fear starts to set in that prices aren't going to rise at 4-6% or more, people will stop buying, and more will try selling. But again, look at the real value of the home. If you can't rent it for what your mortgage is, then it's overpriced.

The median home price in America rose only 0.9% from Jun 05 to Jun 06. This mirrors similar trends to the start of declines in worldwide markets previously. Most large US markets have shown a steady drop (just a few percent) since the beginning of the year. With inventories at all time highs, why would one think this will improve? With most non-home owners priced out and home ownership rates at record highs, who will buy these? The illegals crossing the border with $300k stuffed in their backpacks?

Some markets will be okay (the ones with fairly priced homes). The ones where mortgage to rent ratios are almost 2 to 1, look for those to come back down to a one-to-one ratio. And oh by the way, for those of you hoping that inflation will save home prices, image what would happen to interest rates if inflation (rent) went up to 9% a year to catch home values? The 12-13% interest rates for mortgages would do wonders for home prices.

Posted by: Randy at August 5, 2006 04:49 AM

I bought my house in glendale ca in may of 1997 from some one who had purchased it in june of 1990. He bought it for 420,000 and seven years later sold it to me for 285,000. I recently sold my home and I am renting. I do follow this market and I do feel we will see a very big crash, but it will take little bit longer to get here. Now I live in San Diego and trust me the market is DEAD.

Posted by: Albert Aghazarian at August 8, 2006 11:44 AM

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