Less Expensive Houses Are Not A Bad Thing
It’s Friday desk clearing time for this blogger. “Five years after a huge property crash devastated the Irish economy, a booming urban market where supply is scarce and competition fierce is raising concerns about a new bubble in the capital. ‘There’s an element of craziness creeping back into it where people are getting frantic,’ said Scott, a 37-year-old father of two young children, after wading through the crowds to view a four-bedroom, semi-detached house in leafy south county Dublin. ‘Friends of mine have bought and gotten into bidding wars. It feels like the olden days; it’s kind of wrong.’”
“While the metro Kansas City apartment market is hot, and prices, sales and construction of single-family homes have warmed to pre-recession levels, condominiums are still out in the cold when it comes to the recovery. And the condo market may get even chillier. No new projects are in the works, and Realtors and owners are struggling to sell existing condos. ‘It’s pretty simple,’ said Dan Farmer, a mortgage banker at Peoples Bank. ‘In 2008, when we went into the housing crisis it was the highest level of foreclosures in our history. A lot of the foreclosures were condos because people were speculating in condos. That enormous amount of defaults in condos all over the country, especially in Florida, Arizona and California, led to tighter guidelines by Freddie and Fannie.’”
“The value of the state’s property fell by 0.8%, or $3.6 billion, last year, continuing an unprecedented downward slide that has washed away tens of billions of dollars in Wisconsinites’ net worth over the past five years. The report by the Wisconsin Taxpayers Alliance shows that after years of increases, the value of Wisconsin’s homes, businesses, farmland and forests peaked at $514.4 billion in 2008 and then has fallen every year since, dropping by $47 billion in all.”
“When Rob and Anita Bolton decided to move from Roscoe to Arizona this past winter, they hoped reports of an improving housing market would keep them from having to take a major financial hit. It did. Sort of. The couple bought their house in 2007, right before the real estate bubble burst, bringing on the Great Recession and sending values plummeting. ‘Our Realtor told us we were looking at a considerable loss,’ Rob said. ‘It was good enough, but we still ended up having to write an $11,000 check.’”
“An increase in new home listings and housing inventory kept momentum moving forward in the Florence and Greater Pee Dee real estate markets in July despite falling median prices. Joey McMillan Jr. at Coldwell Banker Segars McMillan and Associates said the lower median sales price represents a supply that is at a price point that’s palatable for first-time homebuyers. ‘More, less expensive houses are not a bad thing, but the houses are less expensive and we’re seeing a lot of first-time homebuyers,’ McMillan said. ‘And seeing a lot of foreclosures come to market, selling at lower prices to fix up to sell or to live in, then six to 12 months later should sell for more so that will correct itself.’”
“A new report says housing sales in Corner Brook are down by 28 per cent this year compared to 2012. Canada Mortgage and Housing Corporation doesn’t usually give out statistics for that region. However, when Corner Brook-based real estate agent Ken Brown requested the data, it delivered. Brown said he sees many for-sale signs in the city — many of which bear stickers indicating a reduced price. ‘It shows that the market in past years have been inflated, certainly it does reflect what’s happening here economically, in the economy itself,’ Brown said.”
“Official mortgage lending data doesn’t capture the entire debt picture for China’s new homeowners. Excessively high housing prices are making it hard for most to cough up the required 30-40% down payment. As a result, banks becoming ‘very creative in helping consumers’ make mortgage down payments, says Junheng Li, head of research at JL Warren Capital. One increasingly common scheme involves an informal version of ‘reverse mortgages,’ which aren’t legal in China. When a prospective buyer can’t pay the down payment, banks allow the buyer’s parents to take out a loan using their home as collateral in order to generate the cash.”
“This has been going on for a while, she says, particularly in big cities. In other words, banks are exposing themselves to more risk than their balance sheets reflect. In using improvised reverse mortgages, banks are lending to a set of people deemed too risky by Chinese regulators. That’s pretty much the definition of ’sub-prime lending.’”
“The eight per cent rise in average Dublin house prices over the past 12 months revealed by the CSO last week needs to be taken with a very large pinch of salt. With the banks cutting back on mortgage lending yet again and only tiny numbers of properties changing hands, any sustained recovery in the housing market is still a long way off. Cash transactions now account for just under half of all purchases. These cash transactions are not being captured by the CSO figures. However, going on the evidence of auctions of repossessed properties where the majority of deals are for cash, it would appear that prices are down by 60 per cent or more rather than the 50 per cent indicated by the CSO data.”
“Doubts about the reliability of the CSO figures are only part of the problem. Even if every house was being purchased with the aid of a mortgage, a far bigger obstacle to gauging the true state of the housing market is the fact that transaction volumes, either with or without a mortgage, have virtually dried up. So no credit and tiny transaction volumes on the one hand, but an apparent price recovery, at least in the better Dublin suburbs, on the other.”
“Looking at the current situation, it’s hard not to be reminded of 18th Century Russian statesman Prince Grigory Potemkin, chief minister and sometime lover of Empress Catherine the Great. Whenever the Empress got it into her head to journey through her vast territories, Prince Potemkin would travel a few days ahead of her constructing ‘villages’ that were in reality no more than facades, populated by suspiciously well-dressed and fed ‘villagers’, thus ensuring Her Majesty a rapturous reception wherever she went.”
“While the Russians may have had Potemkin villages with an attractive facade concealing the poverty that lay behind, we in Ireland have a Potemkin property market.”
“The eight per cent rise in average Dublin house prices over the past 12 months revealed by the CSO last week needs to be taken with a very large pinch of salt… Cash transactions now account for just under half of all purchases. These cash transactions are not being captured by the CSO figures…it would appear that prices are down by 60 per cent or more rather than the 50 per cent indicated by the CSO data”
A microcosm of what is happening here? Auction prices not included in the NAR reported price rise, half of all sales being cash, actual prices falling. A fake “recovery” declared amid collapse?
The global economy has turned into one big lie; a perverted joke designed to allow the PTB to maintain wealth and control.
So if it rises 8% per year the next 9 years or so the house prices in Dublin would be doublin?
+1
The couple bought their house in 2007, right before the real estate bubble burst, bringing on the Great Recession and sending values plummeting. ‘Our Realtor told us we were looking at a considerable loss,’ Rob said. ‘It was good enough, but we still ended up having to write an $11,000 check.’”
So lets add up the losses;
-$11k cash at closing
-72 months of massively inflated payments while rents were half that amount
-6 years of taxes
-6 years of insurance
-6 years of maintenance costs(figure $6k/yr at a very minimum)
-$10k in closing costs at the front end
-72 months of financing costs on losses
You see…. this is what happens when you pay a grossly inflated price for what is always a rapidly depreciating asset. And the losses are magnified tremendously when financed.
Given the circumstances, these people were fortunate to have only lost $100k or so.
I am annoyed by journalists who still purport that the housing correction caused the Big Down. It was just part and parcel of the Down. I didn’t cause anything.
Not rising house prices meant an end to MEW. End of MEW meant drastic declines in consumer spending. Fall in consumer spending meant lay offs. Lay offs meant more spending declines.
An economy based on debt and trade imbalances can only function as long as the debt is flowing. The housing bubble was the engine driving debt spending.
That has been replaced with government spending… but for how long?
good points. Yes in 1996 I paid $15,000 to the title company to get out from under my house. I paid extra utities for that house for 6 years compared to the smaller space I rented. I paid a lot of maintenance and put in a landscape. property taxes were what I paid for 6 years.
The monthly payment was $966 not including maintenance. The slightly smaller place I previously rented was $475, not quite half. For 6 years.
Yes that was a lot of money back then.
It’s like a housing STD they contracted according to your tabulation there HA.
“Less Expensive Houses Are Not A Bad Thing”
For some people, this is true.
For others, it is devastating.
For an economy with $1.5T in trade imbalances that needs to generate $1.5T a year new debt per year to keep the economy functioning, falling house prices means the household sector can’t “do its share” of debt creation. This forced the federal government, the borrower of last resort, to step up with the insane level of new debt.
Bubbles are a symptom of loose lending, and loose lending was the solution to the negative economic effects of trade imbalance.
Before we can stop the bubbles, we have to stop the loose lending.
If we are to stop the loose lending without crushing the economy, we must attack and reverse the trade imbalance that made the loose lending necessary in the first place.
No Darryl….
Falling housing prices to dramatically lower and more affordable levels is positively bullish and good for the economy.
Right. Because the economy was doing so well in 2008 as house prices were falling.
I agree that house prices are too high. However, that is just a symptom of deeper economic trouble. We have to fix the root cause before we address the symptoms.
But it sure did in the 1990’s when prices fell.
Nice try Darryl.
Falling housing prices to dramatically lower and more affordable levels is positively bullish and good for the economy.
Prices have fallen 50 to 60% in Ireland apparently, why isn’t their economy booming?
—
” However, going on the evidence of auctions of repossessed properties where the majority of deals are for cash, it would appear that prices are down by 60 per cent or more rather than the 50 per cent indicated by the CSO data.”
I agree that the bubbles won’t stop until the trade imbalance is straightened out. I also think that if it weren’t for the dollar’s place as the world reserve currency, our economy would not even be able to withstand these bubbles to begin with. If we ever lose our standing as the owner of “thee” currency, then I think we will just have a big old crash.
A comment from another blog…
“The Iranians have dropped trading oil in the US dollar and are encouraging others to do the same, India is already trading with Iran for oil not using the US dollar, China is prepared to do the same, other will follow. The US dollar is not held up by gold and hasn’t been since Nixon defaulted on the US promise not to print more money than could be underwritten in gold. OPEC then agreed to trade oil only in US dollars thus making oil the currency that gave the US dollar its worth. To trade in the US dollar the OPEC nations had to have vast amounts of it. If oil is no longer traded in US dollar then the dollar has no real worth and there is also no longer any point in those nations holding it. If large sums of US dollar enter the market then the USA is screwed over night. At best the US dollar is buggered as the third biggest oil producer in the world Iran is no longer trading in the US Dollar. China has made the decision to no longer trade for oil in the US dollar but is using the Yuan (they made the announcement on 9/11 last year). June 13 this year Russia made a deal for the value of $270 Billion to trade oil with China Rosneft will supply China with 300,000 barrels per day over 25 years starting in the second half of the decade.”
“Friends of mine have bought and gotten into bidding wars.”
One born every minute. What would not sell during an inactive market when the prices were low may be intensely fought over if the prices are raised.
If it was a commodity that had its price raised then the sales volume would probably drop off, just as it is taught in Econ 101. But if it is an investment that has its price raised then the sales volume just may pick up.
I used the wrong term in the post I made above:
The word “commodity” should be replaced with the term “consumption item”.
Except during shortages, fewer consumption items will be sold if prices are raised. During shortgages (such as a run on toilet paper) more consumption items will be sold even if prices are raised. But this is usually due to stockpiling - and stockpiling consumer items can be look at as a form of investment.
Personally I find this form of human behavior to be extremely fascinating.
And there we see the difference.
Houses are not really a “consumption item” as the average house has a life span longer than the average human. They are a monthly expense, true. They should not be though of investments, true.
Housing is a non-consumable, monthly expense.
However, what you pay is highly variable based on your means, and what you choose to pay. Do I “need” to live in my house? No. I need shelter. I have chosen to live in a relatively large, relatively nice house, knowing that I am paying more for that luxury than I would for a smaller place. In that regard, housing is consumption. Not that the item is consumed, but that choosing to live in a nicer, larger, house, you are diverting resources that could go to other things that are more traditionally considered “consumption”.
“A lot of the foreclosures were condos because people were speculating in condos. That enormous amount of defaults in condos all over the country, especially in Florida, Arizona and California, led to tighter guidelines by Freddie and Fannie.’”
Speaking of those tighter guidelines…
Regulators relax proposed mortgage rule
By Danielle Douglas, Published: August 28
Federal regulators on Wednesday softened a proposed rule that would require banks to keep a stake in home loans that they parcel out to investors, for fear that the policy would disrupt the nascent housing recovery.
The move will likely quiet the outcry from industry groups and housing advocates who have cautioned against strict rules that could freeze home buyers out of the market. Banks have warned that a pile-on of new mortgage regulations would raise their costs and ultimately make it more difficult or expensive for consumers to get a loan.
…
‘Our Realtor told us we were looking at a considerable loss,’ Rob said. ‘It was good enough, but we still ended up having to write an $11,000 check.’
That’s diddly-squat. A colleague of mine had the misfortune to ‘have to sell’ the family home last year, due to hubby’s job loss. Turns out the home sold for around $500K less than they believed it was worth, based on the initial list price.
Real estate listing sites like Redfin have taken to scrubbing the record of these sad tales of drastic list price reductions before sale from the price histories they post online. But I can vicariously attest that the effect of a $500K drop in perceived net worth is quite devastating.
Did they cry?
“Did they cry?”
He cried upon discovering that her legs were “welded shut.” She will cry a little bit later, with pleasure, a la Real Housewives of Orange County.
“With the banks cutting back on mortgage lending yet again and only tiny numbers of properties changing hands, any sustained recovery in the housing market is still a long way off. Cash transactions now account for just under half of all purchases.”
Where have I recently heard a similar story? Oh yeah…
All-cash home purchases top 50%, reports says
Kathleen Pender
Updated 5:30 pm, Monday, August 19, 2013
A new report from Goldman Sachs estimates that the number and dollar volume of homes purchased with all cash has risen to more than 50 percent nationwide, significantly higher than previous estimates.
The company said the number of all-cash deals hit 57 percent in the first quarter of this year compared with only 19 percent in the first quarter of 2005. Over the same period, the dollar volume of all-cash deals has risen to 56 percent from 33 percent.
…
Where is the cash coming from? HELOCs for the little guys? Warehouse lines for the big investor pools?
Z.1 shows continued contraction in household debt, while business debt is surging. I’d say the big guys are selling bonds at low rates, and using the cash to “snap up” houses.
Most recent release is June 6, which covers Q1:
Household debt at $12.8T, down $35B YoY and down $20B QoQ.
Business debt at $12.9T, up $800B YoY and up $170B QoQ.
First time since 1991 that business debt has been higher than household.
Of course, the other big mover is federal government, Up $1.45T YoY and $300B QoQ.
Yes, but this statistic is misleading because it does not follow the money trail all the way back to its source. We don’t know how many “cash” transactions were done by buyers who ultimately borrowed the money with some type of loan other than a mortgage. How many of the buyers are actually Blackstone-types?
Blackstone is operating with 50% short-term loans, and 50% investor capital. The investors can get their money out if they don’t like the returns. Rental Watch is definitely incorrect when he says that investors in private equity real-estate investments are locked in for seven years min. That is not the going term. The lenders are probably locked in for five years (maybe seven), but not the investors.
“While the Russians may have had Potemkin villages with an attractive facade concealing the poverty that lay behind, we in Ireland have a Potemkin property market.”
Heh heh heh…it’s different over there in Ireland, where half of all home purchase transactions are all-cash deals!
Potemkin market - that is brilliant. In the US:
1) The government, via the GSEs, has been issuing nearly 100% of the total MBS volume: http://washingtonexaminer.com/federal-government-controlled-99.3-percent-of-mortgage-market-in-2012/article/2522042 - about 2 trillion dollars a year.
2) The US central bank then buys a quarter of that.
I think the government and central bank have lost sight of what actually drives the economy - human wants. The currency represents the wealth - it actually is not the wealth. There’s not much one can do with a small slip of paper other than make small airplanes or use it as a bathroom hygiene product.
With their picking winners and losers, wading into the markets, all they’re doing is creating distortions. I’m not advocating laissez faire capitalism but I am saying that encouraging bubbles, while it may enrich the cronies in the short run, will lead to economic disruptions which will lead to a political cost.
Funny how on the one hand, we have multitudes that discourage tariffs, since they deem tariffs to be “government inferference in the free market”, even though they’re not. Tariffs are a way of dealing with international trade. They are necessary because our trade partners don’t have to follow the same rules as us. Our trade partners do not usually have a free market to begin with, nor would they if given the choice.
On the other hand, most of these same exact people are fervently opposed to any reduction in the amount of government intervention into the housing market. Being a domestic market, there should be little need for so much official price support. The free market would take care of this better than the government. Beyond the enforcement of contract law, there should be no need for Uncle Sugar to invtervene here.
Why do you see that as a conflict?
1) Free international trade = rich get richer.
2) Continued intervention in the economy = rich get richer.
I think the consistency is PLAIN to see.
Oops, sorry about the extra italics.
Hey Uncle Fed, per our discussion the other night:
The Boomers are the generation born from about 1945 to 1964, Gen X was born 1965 to 1984, and the Millenials (aka Gen Y, aka the Echoboomers) were born from about 1985 to 2004.
Gen Y -alone- outnumbers the Boomers.
The youngest members of Gen Y are indeed about 9 years old. Most of these 9-year-olds have yet to form their own households.
I don’t think most people group one generation into a 19-year time span. Ten years is more like it. I don’t think you’re a Boomer if you were born 19 years after the war ended. I’m pretty sure most people think of Gen X-ers as the kids of Boomers. Isn’t that how the label got started? Like, “What should we call the kids of the Boomers? I know, we should call them Gen X because we’re too lazy to come up with a better label”.
There was a generation after Boomers and before Gen Xers. I think they are called like the Silent Generation or something, but I accidentally called them Echo-Boomers the other day.
Well, you’re free to make up your own definitions if you like, but you will be incorrect when you use the terms based on your own definitions.
There was a generation after Boomers and before Gen Xers. I think they are called like the Silent Generation or something
Please consult wikipedia to address your many misconceptions about western generations.
Wikipedia isn’t really an authoritative source, especially when the article gives precise dates for Baby Boomers, but not Gen Y or Gen X, and then uses two different terms for Gen Y. I doubt many people born in 1964 would consider themselves to be Baby Boomers.
I remember when the Gen X term was coined. Of course I can’t cite the exact source, but it was in reference to the kids of the Boomers, not just people who were born one year after the last Boomer was born.
Wikipedia isn’t really an authoritative source
Yes, your own personal opinion is much more authoritative.
Gen X and boomers outnumber gen Y 2 to 1. Gen X and boomers own the majority of houses as the youngest are 40 years old and aging rapidly.
Nice try…. You serial liar.
Nice try…. You serial liar.
My statements are from wikipedia, yours are made up in your diseased mind…You dry drunk.
Youre a serial liar and everyone here knowsit
“There’s not much one can do with a small slip of paper other than make small airplanes or use it as a bathroom hygiene product.”
AND the key to the value of those slips of paper, REPAY debt and pay taxes. With $40 T in debt offsetting the $40T, there is enough demand to give those slips of paper value.
it’s different over there in Ireland, where half of all home purchase transactions are all-cash deals!
So which deals are unreliable indicators, all cash deals or mortgage-based deals?
Or both?
Historically and anomalously high levels of all-cash investor purchases are an excellent indicator of incipient collapse.
Try not to get stucco.
Could a large proportion of cash buyers also indicate a market bottom?
Why would it serial liar?
Why would it serial liar?
” If a dry drunk also suffers from obsessive-compulsive disorder, attention-deficit disorder or Type A personality as so often they do, the problem is compounded and the prognosis grim.”
Your problem is compounded, and your prognosis grim.
Stick with the topic Serial Liar.
You’re lying about the demographic cohorts.
“Make it a matter of personal policy; Don’t Borrow Money.”
BINGO
“If you buy a house right now in the current environment, you will be scammed out of hundereds of thousands of dollars.”
You better believe it mister.
“Housing is never an investment. Housing is a depreciating asset and a loss, always.”
Exactly. Houses depreciating just like automobiles. The difference is that losses on housing are crushing and last a lifetime.
“Why buy now what you can rent for half the monthly cost?”
Good point. Then buyer later when prices roll back to early 1990’s levels.
The Potemkin global economy?
Sell people things they can’t afford on credit, creating debt and money.
The few accumulate all the money, and use it to bid up the prices of assets, allowing the unwashed masses to borrow more money into existence, so they can keep spending more than they can afford, so the few can keep accumulating more of the IOUs that we call money.
In “Atlas Shrugged” Ayn Rand used a metaphor of an old oak that looks as strong and healthy as ever from the outside, but when a branch breaks off, the tree’s core is reveled to be rotten and the trunk completely hollowed out.
Ayn Rand was nuts.
And a hypocrite. Rand took Social Security and Medicare after she was diagnosed with lung cancer.
To add to this, it’s not price that determines value. For a long time I would say it’s “location, location, location.” But the LLL is just part of the value. The neighbors give your house value (or subtract from the value). Someone can build the nicest looking clean slums but when filled with slum people they turn to rubble.
The American culture is much different these days than 50 years ago when my parents left the house unlocked when we went on vacation. From this perspective, houses are way overvalued these days compared to when you have a sure bet of being in a decent neighborhood.
There was a web site a few years ago called rottenneighbor, or something like that. People would pinpoint on a map where idiot neighbors lived and explain why they are idiots. That web site has been removed a long time ago. I thought it would be a great thing. I would have added it to my search criteria for neighborhoods where I would rent.
“When Rob and Anita Bolton decided to move from Roscoe to Arizona this past winter, they hoped reports of an improving housing market would keep them from having to take a major financial hit.”
I like that they had to bring money to the table to sell, and will then move to Arizona. I’d bet anything that they engage in a bidding war once they get down here. They can re-live the whole experience.
A quote from the Boltons’ Realtor™ :
“But if you can afford to get out of that negative-equity position, then you should sell and get out. You can then ride the equity wave back up again in your new house.”