Saturday, April 12, 2008

The Housing Market

So, a couple people have asked me "when is the housing market going to come back?" Probably because I'm supposed to be an economist.

I saw Yale economist Bob Shiller on ABC news the other night and they displayed this chart he made almost 2 years ago of home values over time (courtesy NY Times).
Shiller was asked what the housing market was going to do. His answer: "I don't know. No one knows." A good economist says 2 things: "I don't know" and "it depends" (2 ways of saying the same thing).

Click on the graph to enlarge. Notice how people who bought houses about 1912 had to wait over 35 years before they could sell them for profit. A similar thing happened the late 1950's, buyers didn't sell their homes for profit until the 80's.

Shiller's point: People used to buy their houses to LIVE in, and not as a profitable investment. The bubble we saw the past several years was purely speculative-- people were investing in homes like stocks, hoping to flip them quickly. (People also buy homes for use as a tax shelter, responding to the government-given incentive). Low interest rates and the flood of investment money buying up subprime loan packages created an aggressive stampede.

A former classmate of mine once went on and on in class about how real estate was the easiest, most guaranteed money there was. "Prices will never go down. The market will never go down." I wonder what he's doing now? (probably making $50,000 a year somewhere). I argued with him at the time, noting that people in Malaysia and Thailand had said the same thing just before the East Asian financial crisis. When their markets went south, all of the speculative real estate values burst and now there are a ridiculous number of nice brand new empty apartment buildings. I doubt he learned anything from our somewhat heated exchange or reality.

About a month ago, Joni and I looked at an older house for sale nearby. The house had been on the market for several months, and last I checked was still on it.
The owner had bought it a couple years ago to flip it. He put new carpet in, done some repainting and put in new kitchen appliances. I went through my list of questions: "How old is the roof, is the attic insulated, how old is the water heater, does the crawlspace flood, etc.?" He knew the answer to none of them. He was struggling to understand why the house wasn't selling.

I thought "Man, the market must have been nice if you used to could expect to turn a quick profit with just some cosmetic touch-ups." Interestingly, there were a few other houses being flipped in the neighborhood, and houses for sale everywhere. East TN has one of the highest foreclosure rates in the U.S.

So, here is what I guess from reading articles and blogs over the past year:

1. The days of speculating and turning a quick profit from flipping houses is over for at least a decade. (Fast-growing metropolitan areas are the exception).
2. Now that investors are loathe to invest in securitized loans there is less money available to make loans for people wanting to buy or build houses. This will continue for a while.
3. The global savings glut means there's still a lot of money to put into real estate, it just won't be put into bonds like it was previously. There will be more direct buying of properties by large funds.
4. Eventually population growth + immigration will lead to an increase in housing values.

Another good economist answer is "If you wait long enough..."

1 comment:

d blake said...

Nice post. I have seen the graph elsewhere, but it really makes it clear how ridiculous things were getting with home prices. I like the economics posts... even if no one else does. :)