For every action, there is an equal and opposite reaction. In other words, for housing to reach a bottom, something has to happen to cause it to change direction.
Something has to change or improve. In other words, something has to get better before housing does.
Caroline Baum at Bloomberg, one of my favorite columnists, pens a witty take on the very notion that something needs to improve, in order for housing to improve called Snoozing in Econ 101 Is Hazardous to Your Health. She provides the hopeful statements made by many these days and applies good old Econ 101 logic to them – I embellish each point a bit as well:
Misleading logic is plentiful these days
Home sales won’t pick up until housing prices stop falling. What could possibly make people start buying again? According to the confused thinking above, prices will levitate spontaneously, encouraging buyers back into the market. Sales activity leads prices. Cart before the horse can’t move a market. You need activity.
Housing affordability has turned up, which is a harbinger of stronger sales ahead. Affordability is only up in the formulaic sense. Underwriting requirements are at a far higher level now than before so it is not apples and oranges. In other words, the buying power has been weakened by elevation of standards. This becomes a self-fulfilling prophecy because housing markets (think of it as collateral for mortgages) gets rattled by more conservative lending practices after it was built up by a sustained period without real underwriting standards.
>Governments continue to interfere with the law of supply and demand; that’s to be expected. What’s surprising is that so many practitioners of the dismal science [Economics] can’t seem to get it right either.
If we can all hang in there, the US population will have 700 million more people in 2100 and a good portion of the South Florida real estate market can finally be absorbed by then (call me optimistic).
Acronym of the week: YAWN: Young and Wealthy but Normal Better yet – my modification… PAWN: Poor and Worried but Normal
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Jonathan,
Very nice post. You seem to follow this very well.
I think in this case, value is what needs to improve from a buyers perspective for this to change and that will only happen through lower prices. Sellers remain stubborn, at least in my neck of the woods – and even the increasing population here can’t absorb the inventory to stablize the market.
The quote in your post is definitely misleading logic and it is clear from the actual sales that afforability has not turned up enough be it because of undewriting standards or home values.
[…] Jonathan Miller writes an astute post about some of the misleading logic volleyed about on the inter… about the real estate market. The long and the short of his post is that basic economic principles dictate that the market will not on its own begin to shift back to a more balanced market and that there must be some force at play to cause the directional change. It’s very easy to see the impact on housing values in the Atlanta real estate market. Prices have been on a steady decline, sold home listings are down almost 40% year over year and a little bit of additional activity due to the historic upswing in spring is not driving inventories down. […]
“Something has to change or improve. In other words, something has to get better before housing does.”
1) The rational (would be) homebuyer understands that a downpayment will be needed, therefore he is saving now.
2) That same rational homebuyer understands that falling prices ‘pay’ him to stay out of the market.
3) When either condition no longer applies, ie no further downpayment is needed and the present value of falling prices is too minimal to consider, the market will turn.
4) Considering 3, does Congressional action help or hinder? Or does Congressional action extend the time before prices stabilize and sufficient downpayment is saved?
5) Is there sufficient clarity to judge the communities (schools, government, crime, taxes, etc) of all housing markets? Or is more time needed before one may make an accurate estimation of the neighborhood/shool district/city-town/county/state?
best guesses:
1) still saving, but amount needed is getting smaller.
2) in some markets, being paid $1250 a week
3) two years? four years?
4) makes it worse for everyone except the bastards
5) still shaking out. What looks good today may really suck tomorrow.
Perhaps one of the changes needed is that of an improving consumer (Buyer) confidence in:1) the general economy and 2) his or her job security.
It would be interesting to know what percentage of an average salary for a particular region went for housing during the 50’s, 60’s, 70’s, etc. and compare it to the past 8 years or so. Maybe then we’ll have another indicator of when consumer confidence might return.