Will the housing market crash?

Great Debates
1

Reading this thread, the “housing bubble” argument came up. So as not to pollute that thread with something peripheral, I’m interested to know if there is good reason to think the housing market will collapse. As far as I can tell, here are the arguments for believing in a crash:

[ol]
[li]Consumer debt is very high[/li][li]Housing prices are very high, and are getting higher[/li][li]The economy is not that great[/li][li]So, due to debt, more people will have to sell their houses, lowering the prices[/li][li]Also, due to the dollar’s decline, interest rates will have to go up (I could be wrong about this point, though), and this will cause many people to sell their house since they could no longer afford the mortgage.[/li][/ol]

Here are the arguments for not belieing in a crash:

[ol]
[li]People have been predicting it forever, and it has yet to happen[/li][li]Furthermore, if it hasn’t happened during a recession, why would it happen now, when the economy is (arguably) getting slowly better?[/li][li]People will always need housing, so demand is constant. How can you have a crash with constant demand?[/li][li]Projected increased immigration will cause even more demand for housing[/li][/ol]

So, I ask as a non-homeowner living in an expensive area, what’s the deal? These arguments all make great sense to me, and I just can’t reconcile them against each other.

2

Well, it’s a pretty straightforward equation, really.

Are there more buyers than sellers and are those buyers possessed of sufficient wealth (either direct or borrowing-powered) to pay the exorbitant rates for homes?

If the answers to either of those questions becomes ‘no’ then yes, housing prices will drop. But I doubt it would be nationally. I think we’d see it regionally in the most inflated areas. The bay area, Washington, DC, NYC, Southern California…these are the areas most likely to suffer through one of these.

But last year I moved my family to a small town in Ohio where enormous houses go for less than $100K. I bought a nearly 100 year old 4000 sq ft monster of a home for $80K. I sold me 1700 sq ft beat up farm house in Northern VA for $270K.

So some areas may be hit…but others won’t.

Also, only skew on topic, but here’s a column by Robert Samuelson on his analysis of the next economy.

3

I’ve not read the linked thread, so I’m coming in without any information.

It seems to me that housebuying really took off as interest rates fell. People decided that the rates were more favourable than they were likely to be in the foreseeable future, and decided that they’d better get in while the ante was lower. With more people buying houses, house prices started to climb and then skyrocket. My best friend bought the my house for a price that seemed in line with the area. After two years of living in it, he sold it to me for a 50% profit. That’s a pretty good climb. There’s a small, one-bedroom house on a tiny lot up the street from me that’s on offer for almost $30,000 more than my three-bedroom place on a large lot.

I think that people are still buying houses, because they want to buy them before the interest rates climb too high and before housing gets more expensive than it already is. But how long can it last?

I think that interest rates will climb to the point where many people cannot justify the expense. At the same time, sky-high housing prices will keep many people out of the market. The boom can’t go on forever. Sometime in the near future (IMO) the bubble will burst. Too many people are unemployed or under-employed. House prices are becoming unreachable to many people. Interest rates are climbing. I think there will come a point where people will start selling their homes in droves, at less than the current market value but more than they paid for them. Sort of like profit-taking on Wall Street. Since you have to live in a house for two years to avoid paying Capital Gains taxes, I think that the bubble will burst starting in the next year and prices will crash in the next two to three years.

I am not an economist or real estate agent, and I’m guessing about all of this.

Fortunately, my place is a block from the beach and that makes it fairly desireable. Since I’m 35 miles from Vancouver, BC, and the Winter Olympics are coming up, it may be good to sell it in a couple of years. Will I? Probably not. I’ve noticed I tend to stay put once I’m settled.

4

This is kinda what’s happening where I live. The economy is tanking. More and more houses are going up for sale. Prices are huge. Nobody is buying. More and more houses are being built. Prices are huge. Nobody is buying.

Can’t say for the rest of the country, but the market here is due for an adjustment.

5

I think it’s very much a regional thing. In the Dallas area, for example, prices are extremely reasonable. It seems like prices in a few specific areas are just completely irrational (e.g., much of Southern California)…

Thousand Oaks, CA and Plano, TX are (roughly) both upper-middle-class suburbs of Los Angeles and Dallas, respectively.

A realtor.com search for a (detached, single-family) house for less then $250,000 with at least 2 bedrooms returns 2 suitable properties for Thousand Oaks, CA (and all surrounding areas). Both are under 900 sq ft.

A similiar search for Plano, TX (and most surrounding areas–I excluded Dallas proper and some far-flung rural areas) returns about 4000 properties, the majority of which appear suitable.

6

I, too, think it will be a regional thing.

Out here in Vegas we have an influx of Californians(mostly) that is jacking the prices through the roof. For example, my parents bought a new 400,000 house in 99 or 2000. Their neighbors down the street sold the same model house built at the same time on a lot that is the same size for 775,000 last year. Sooner or later the housing market here will drop once the influx of people slows.

Slee

7

I think you’ve framed the basic issues extremely well, Avumede.

The current market has all the hallmarks of a bubble and I believe that prices will eventually come down (but no guarantees – rarely but sometimes what you think is a bubble is really a new paradigm, and you never really know until it pops). The biggest problems will be regional, as others have said, just as the biggest increases have been regional. But there is a real possibility of a nationwide or near-nationwide softening as interest rates increase.

But you have to understand that housing market “crashes” don’t work like stock market crashes or even commercial real estate crashes. There are several things that make it different – you’ve identified some; here are some others.

People have an emotional attachment to their homes, or at least to the concept of continued home ownership, that they do not have to stocks. They’ll make sacrifices in other parts of their lifestyles to keep their houses.

On the income side, people mostly buy houses on their current cash flow, not anticipated future cash flows or even values. What that means is that declining prices won’t necessarily harm people’s ability to continue paying for their now-overpriced homes.

On the outgo side, people have become very good at refinancing mortgages and competition makes long-term fixed-rate money available. Let’s say that “mortgage rates” as measured go all the way to 10% – unaffordable, right? Well, no, because most people will have termed out their variables somewhere along the way. The marginal buyer is squeezed out, lowering prices, but existing buyers can continue to make their nut.

Banks hate repossessing. Even when they don’t lose much money on it. It’s messy, expensive and gets you in the papers. Unless things get really bad, banks will work with homeowners to avoid repossessing.

What all this adds up to is relatively little forced supply even in a declining-price environment. When the decline comes, I wouldn’t want to be in the new homebuilding business. And I wouldn’t want to have a newly-minted 80/15/5 based on a bonus I hope to get next year. And if I’m a homeowner I’ll be putting off any illusions I had about a big tradeup based on built-up equity anytime soon. But it’s not likely to cause widespread economic havoc the way the commercial real estate bust in the 80’s did.

8

In Southern California, I believe the median income is only about half of the income needed to purchase a median-priced house. Something about that just doesn’t add up in my book. It’s interesting, though - I started a thread about this awhile back, and the consensus seemed to be “no way is there a bubble”.

9

BIS Shrapnel last year forecast falling prices in some British, US and Australian markets because property prices were overvalued by more than 10%. As I recall the piece the cities mentioned were London, Sydney, Melbourne, New York and another US city. The market that I am familiar with, Sydney, seemed certain to be heading for trouble, prices were rising while rents were stagnant and vacancy rates rising but most critics didn’t agree. Events this year have proved BIS correct as home prices in both Sydney and Melbourne have fallen despite record low interest rates.

10

I don’t agree that the DC area is due to crash. Demand for housing is quite high and the supply does not meet the demand. Plus, although prices are high, they aren’t anywhere near as insane as in CA. A lot of people would have to “go away” to depress house prices here. Of course, if the overall economy goes completely into the shitter, we might be screwed, but then, we’d all be screwed anyway.

11

I don’t see land value rates around here going up much longer. They’ve grown insanely high, and I doubt they will be self-sustaining as people’s ability to refinance repeatedly starts getting them into trouble. I don’t expect a housing market crash, but a decline towards a more normal figure is probably likely.

The question is - will new homeowners have the funds to afford new housing? Some will, most won’t.

12

I concur. I don’t know whether the housing market will “crash,” or what even constitutes a “crash.” However, I do know that house prices in the U.S. and the U.K. have risen substantially above long-term averages in recent years and that those prices almost certainly will revert to the mean.

Disclaimer: I am not a houseowner.

13

Value like beauty is in the eye of the beholder.

Market prices can have no relationship to economic value and manias can go on for years or decades. The tulip mania of the 1600s proved that.

14

Prices keep rising here (S.F. Bay Area), but houses keep selling.

A house just went on the market just a couple of doors down from me. Asking price was 16% higher than a similar house sold for in the same neighborhood just a year ago, and about 2.5 times as much as I paid for my similar house in 1997.

The house sold in less than a week.

Ed

15

Nice treatment of what to do now today
http://www.msnbc.msn.com/id/6765475/

Great stuff here.

Let me say one thing that has been touched on but not explicitly stated against there being a crash: One thing working against a true “crash” is that as long as the unemployment rates stays steady or improves people can ride out a crash – if prices fall 20% below what you paid, and there is no reason to sell (i.e. job loss), people will not junp into the market and thus will mitigate the effects of a downturn (of course this only works a while) but it flies in the face of a Black Tuesday scenario when one day the house was worth $500K, the next it was worth $250K, people begging you to take thier once million dollar jhomes for pennies on the dollar.

Let me say one thing that has been touched on but not explicitly stated that augers for a downturn: Much of the money that could be in the Stock Market has been chasing real estate – a belief in a “boom” has been a small but not tiny peice of what has fueled price rises a small bit. Increasing Market Prospects, teamed with increasing interest rates and (paradoxically & I may be wrong here) increasing consumer confidence may result in a liquidation of real estate assets – and if prices dip enough it possible we see stampede behavior.

So what do I say? I say that housing prices 12/30/06 will be basically the same adjusted for inflation +/- 5%, as they are today when taken in the U.S. as a whole, definitiely in each regional YMMV. A WAG, folks and anyone telling you with **GREAT CERTAINTY THAT THEY KNOW ** what is going to happen is BS’ing you (about being sure but that doesn’t mean they are wrong)

16

I think I disagree here.

People with good money management skills can ride out a “crash.” You’re right about that.

The problem is that there is a very significant segment of the population which has been getting itself into trouble with credit card debt and then getting bailed out with home equity loans. This process can be repeated multiple times. As long as home prices keep rising, it works, but what happens when home prices fall? The consumer gets into credit card debt. There’s no equity for a bail-out. The consumer winds up unable to pay bills and now faces bankruptcy and/or foreclosure. The consumer, evicted from his/her home becomes a renter, and drops out of the housing market. The market gets flooded with foreclosed houses, and prices get forced further down.

It’s a slower process than a “Black Tuesday” scenario, but a serious crash is definitely a possibility.

17

Sooner or later, slee, growth in Vegas is going to run up against a wall no merely economic forces can break down: A limited water supply.

18

Ah, they can run a pipeline up here to Jersey; our reservoirs are practically overflowing at this point.
Anyway, just wanted to add that the 10 year Treasury, on which mortgages are based, hasn’t been rising during this round of rate increases by the Fed. I’ve been turning over in my head how this could be for a while now, and I think I finally hit on it: the 30 year is no longer being issued (see this article from 2001), and this has resulted in an artificial shortage of longer-dated bonds on the market.
Which means you could have low interest rates for an extended period, which would tend to support the housing market. Although as that post from Sydney points out, low interest rates aren’t a sure thing to keep prices up.

19

What part of my post do you disagree with? I say that the relatively stable job market is one thing working against a crash.

You note that people are using refinancing and equity loans to pay off credit card debt – everypoint you make up to this part of your quote I agree with 100%

Easy credit is a huge problem, however, I would not expect wholesale disruption of the housing market simply because equity was no longer being converted into consumption. In fact, most people can keep thier houses under Bankruptcy if they can continue to make the housing payments. If there is negative equity in a house, because of a downturn this will be especially true.

Some links on keeping your house in Bankruptcy
http://www.moranlaw.net/keepthehouse.htm

http://experts.about.com/q/909/826777.htm

20

I agree about the re-financing trends to cover credit card debt. Those that refinanced into variable rate mortgages may get squeezed out somewhere along the way.

Also, there are those who own summer homes and will sure let go of these before losing their main homes, so shore and resort areas could be the hardest hit, no?

One fuuny thing is, I own two homes: One I live in now which has doubled in vale over the last six years. The other home is just now reaching the value I expected it to reach six years ago. This is why we still own it (we rent it). Both of these homes are withing 35 miles of eachother, one in the city and one just outside.

So My guess is that it’s totally dependant upon interest rates and only some areas/people will be effected.