The Wall Street Journal published this article today about the future of home prices. The article in interesting in that it surveys various housing economists for their opinion on the future of housing prices. Many long-standing themes are highlighted. Here are some notes:
*Over the next 10 to 20 years, housing economists expect prices will rise again — but, on average, probably not nearly as much as they’ve averaged over the past decade. (most economists predicted average appraciation rates to be 2.5%-4% or 1% above inflation)
*Some experts say it’s a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley.
*In the long term, house prices are driven by fundamentals that are hard to predict: immigration, birth rates, the size and nature of households, and incomes. The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live. (BTW, Rosen notes that Portland, OR would be a relatively viable housing market because of the “urban vitality” the city offers)
*…applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a “substantial” fall in real, or inflation-adjusted, home prices over the next two decades “if the historical relation between housing demand and housing prices continues.”
After reading and blogging about one article in Barron’s this weekend I came to another outstading one. Here is a link. Nice work Barron’s.
Among the points that I found interesting:
* If Fannie Mae [ticker: FNM] and Freddie Mac [FRE] stopped all of their activity — for a moment, forget about shutting them down and being insolvent — in order to sell off mortgages as normal loans without this guarantee, the interest rate would have to be around 9% or 10%.
* Q: What other negatives do you see?
A: Inflation risk down the line. [The federal government is] going to probably overstimulate and over support in an attempt to stem these deflationary forces. We are looking at a longer-term inflationary force that is pretty substantial. This has been my view for a long time. Interest rates went into a very long decline from the late ’70s and early ’80s until earlier this decade, when first we saw rates bottom out. Then rates went up a couple of times.
Basically, we are getting back down toward those low levels again. The multiyear bottom in interest rates that started around 2002 will probably last into 2009. Then we are going to see the inflationary aftermath of these government policies, and you might be surprised at how high interest rates go.
* Q: How much more pain are we going to feel in the housing market before things start to stabilize?
A: I think we are about half way through. There is high momentum in terms of home-price declines, so it is pretty clear they are going lower. It always looks a lot like the hills on a roller coaster. It starts out with a flattish period. Then it starts to go down, and then it really starts to drop, and we are clearly in that period. That period is going to be with us for about another year before it flattens out and bumps along in 2010.
The S&P/Case-Shiller Index is down a little more than 15% from its peak in 2006, and I’ve believed for some time that the index will have dropped 30% from its peak. That means some markets are going to drop by 50%. That includes Miami, Las Vegas and Phoenix, all of which were fueled by subprime lending. The foreclosure overhang is so big in those areas.
I was excited when I picked up this week’s edition of the Portland Business Journal last night and saw Kate Myer’s picture on the front cover. Kate was quoted in the story (click this link to download complete story-subprime-problems-loom-pdxbiz-kmyers2) not only because she recently purchased a home but also for her professional opinion on the impact that upcoming foreclosures will have on the local housing market. Nice job Kate!
I sat in on a real estate sales meeting Monday morning. In the meeting there was a discussion about buyer psychology and how it’s been battered with fear. One of the realtors brought up a great question to ask when prospective buyers mention that they’ve read/ heard the housing market is bad, “Bad for who (i.e. buyer or seller)?” The bottom line is that it’s a great time to be a buyer. Here are some of top headlines in the Real Estate Journal (WSJ’s real estate publication):
* “Supply of Homes for Sale Rises”
* “A Good Time to Buy a House if You can Afford One”
* “Open Season For Bargain Hunters”
Now you tell me, is the market good for buyers right now?
The S & P/ Case-Shiller Home Price Index is a monthly survey of home prices in 20 of the top metropolitan areas in the United States. Earlier today they released their data for the 2007 calendar year. Despite record losses for home prices in most of the areas the report follows Portland, Seattle, & Charlotte, NC were able to buck the national trend by showing modest year over year appreciation.
These were the only 3 markets of the 20 that the index follows which did not record losses to home prices in 2007. Here is a link to the press release for the report:
The S & P/ Case-Shiller Home Price Index Report is viewed by many to be the best gauge of home prices for major metropolitan markets because the methodology for calculating home prices changes includes the broadest range of data.