What's so bad about falling home prices?

This is a question I've asked before, but blogger and columnist Daniel Weintraub at the Sacramento Bee asks it more eloquently than I did: What is so disastrous about falling home prices?

Weintraub: "It is great news when the price of energy, food, transportation, health care and consumer electronics drops. But for some reason it is bad news when the price of shelter drops."

More: "So now that housing prices have stopped soaring and in some places are dropping, shouldn't that be good news? Shouldn't we be seeing stories filled with anecdotes about formerly priced-out middle-income families finally getting their chance at the American Dream?

"I understand why foreclosures are bad news, and why the impact of losing a house when you can no longer afford to make the payments is a compelling story. But for every house sold because the buyer couldn't make the payments, there is a buyer on the other end of that transaction who got a good deal. And for every foreclosure, there are probably 10 buyers of nearby homes who benefitted from the general easing of house-price pressure."

It's clear falling home prices are causing some economic damage. Still, these are good points. I know a lot of you will agree, but I'd also like to hear from those of you who disagree. Thoughts? Comments? Email story tips to peter.viles@latimes.com.

Hat tip: Sacramento Land(ing) blog

Comments

[Jason]

The vast majority of people don't really save enough for retirement and depend almost entirely on the equity of their home as their primary source. They are probably the hardest hit.

[yourkillingmelarry]

Falling home prices are a sensitive topic, especially in CA. You might as well be saying 'Falling Bank Account Balances". Remember all the cocktail party conversations about rising home values. It's a polite way of saying "hey, I'm getting wealthy". People don't have direct equity in energy, food, transportation, health care and consumer electronics. When those prices drop their equity actually improves. I rarely talk about my housing views in polite conversation especially with home owners. I could I guess but it may come across as....man, you really overpaid for that house, I bet you feel pretty stupid...or....you are not worth nearly as much as you thought you were and I can prove it with data and facts....or....I guess those four HELOCs weren't such a good idea now that your mortgage is greater than the actual value of your home but hey you have a great car and I don't care what people say hornet nest stung lips look good on you.

[JK]

Falling Prices? Whooo Hooo! Maybe I'll be able to afford a home after all without having to live on the fringes of the Inland Empire!

[John]

Well, falling home prices generally are not good because we are talking about a bubble situation where people have leveraged themselves to the hilt. Most people do not need to lever up for the basics (errrr, in this day and age, many actually do...) or speculate on prices of staples and healthcare. Homes are almost always purchased with debt while those other staples/services are not, typically at least. Sure, lower home prices are good if you're looking to buy or have been priced out in the past but if you're in a home now and you're upside down, well, that's decidedly not very good...

[Mike Johnson]

Personally, I'm glad to see housing prices fall. I bought my first house in 2001, so I watched as it doubled in value. It was fun to watch my net worth on paper rise so dramatically without any hard labor on my part. But I have no intention of cashing out and moving to Las Vegas or Kansas City, so my Zestimate price is next to meaningless. My next home will be a nicer, bigger home in the same city, so I'm glad to see prices come down. If my current house doubled in value, so did my next home, and thus so did the extra money I'll have to cough up when I upgrade.

[Susan]

It's not good news for those who own the homes, because that means a major asset has lost value. This isn't rocket science! It's far more comparable to stock prices than food prices. Falling prices are always good news for *someone*-- but rarely for the producer of the goods or owner of what's being sold. In the case of real estate, that's a lot of unhappy people.

[Michael Snyder]

Mr. Weintraub needs to learn the difference between income and expense. The cost of food and fuel is the driving force behind this “credit crunch.” Tapped out consumers have been hiding these cost by tapping into their equity for a couple of years. Now the bills are due, basic expenses have gone through the roof and the safety net is gone.
Falling housing prices are only a symptom of a much larger problem. To be sure it will open opportunities for a few; but the overall effect is a serious loss for the economy. Job losses will ripple out from Realtors to Contractors to the kid gathering carts at the hardware store. Eventually this economic tsunami will reach Mr. Weintraub’s ivory tower when he realizes his equity / college fund / retirement is depreciating right along with real estate prices.

[Toam Sob]

Good news? How is this good news? Prices are still high! Very high! I am not convinced that the pursuit of the American Dream (buying a home) required 3 to 4 sources of income. Many Americans constantly reinvent themselves for the sake of generating more income. There is no doubt that prices of homes need to drop further by at least 30%. Let not forget that the salaries of most Americans have not been adjust properly for inflation, increases in the standards of living, the trade deficit, and the national debt. It bad enough that some foreign currencies, such as the Euro, are now preferred over the Dollar.

[original thinker]

For the last 30 years, people have viewed their home equity
as a replacement for savings accounts. This is the big problem
with re-orientation. It hurts too much to realize that paper profits
are subject to change. It isn't real until you sell. You only
get your windfall if you are moving into cheaper quarters,
immediately, and able to lock in the profit. Millions of baby
boomers, with retirement relocation or reverse morgaging on the
mind, suddenly have to come to grips with the fact that their
overvalued home isn't the "money in the bank" they thought
it was.

[Martin]

This particular blog item is somewhat manipulative of you, Peter, and an invitation to repeat the same old points about how housing's decline will impact the rest of the economy. It will. It's happening now.

This year, Virginia, Santa Claus is on a budget and his ho-ho stomach is a few inches smaller.

[amir]

Los Angeles has been the home for a huge real estate industrial complex of people that built, financed or sold houses. It created a lot of jobs and a lot of wealth. Now with prices falling down, the complex will need to decrease to a rational size, which is probably half or a quarter of its current size. That means that thousands, if not hundreds of thousands, of jobs in construction, finance or sales will be lost. These people who got rich off the bubble are extremely unhappy and are living in denial.

A lot of the wealth that got created went back into the local economy, into retail sales, cars, food, entertainment etc. And many Angelenos (especially baby boomers) got the wrong headed idea that they could retire based on their home value.

The loss of these jobs will cause a recession in the region that will only accelerate the decline in RE prices. This vicious cycle is not in the benefit of most Angelenos.

The only people that will enjoy this ride will be people whose job is not related to RE nor to servicing RE, are in a recession proof business, and are not current home owners. That's a small group to take this news with cheers.

That's why the press is not rejoicing.

[Amused]

There seems to be a large segment of housing market observers that think they will suddenly be able to waltz into the home of their dreams in a great area of LA if prices continue to drop. These people fail to realize that one of the key contributors to the continued decrease in prices is the tightening of the mortgage market.

What does this mean? If you couldn't afford an 800k house when mortgages flowed like water with low rates and minimal (or no) down payment, what makes you think you can afford that same house at 600k when rates are higher and (more importantly) a big down payment is needed?

[Enlightenment]

Falling prices are great because housing must be affordable, and I'm not talking about the poorer people owning a 5000 sq ft house, I'm talking about the poorer people should be able to get a small tiny house. The problem is the dam bubble made all houses too expensive except for the upper middle class to be able to afford a house, and that is wrong wrong wrong!!!

A house is suppose to be a place to live, and not a flipping ATM machine to support foolish people who DO NOT know how to live within a budget.

Remember all you fools, equity is imaginary money unless you sell your house, and thus you aren't rich and never were rich unless you sold your house. The rich people are the ones that sold their house and left California for a cheaper city.

Houses Should Not Be A Commodity:
http://www.irvinehousingblog.com/2007/06/25/
houses-should-not-be-a-commodity/?ref=patrick.net

A House Is Not A Retirement Fund:
http://bighousingbubble.blogspot.com/2006/02/
house-is-not-retirement-fund.html

[arroyogrande]

"what makes you think you can afford that same house at 600k when rates are higher and (more importantly) a big down payment is needed"

Because I actually have cash for a downpayment. There is a weird subset of the population that actually *saves* money for just such an occurance...and it will be interesting to not have to compete with those people that just really really REALLY want a house, but didnt'/couldn't save a down payment.

And because I have a significant down payement (ie 'skin in the game'), I can actually still get a historically good fixed rate mortgage. Wow, it may actually come to pass that saving money will become a good idea after all!

- arroyogrande

[tew]

Re: "It's far more comparable to stock prices than food prices. "
Not so fast. Economists include shelter costs but not stock prices in CPI (inflation) for very good reasons.

Shelter of a given quality and quantity produces unchanged shelter services over time (subject to maintennce costs). The cost of those shelter services is reflected in home prices. If a given flow of these services increases in price, that's not generally good. Unless the quality and quantity of the shelter services increases, then the price increases are inflationary.

Stock prices reflect claims on future cash flows from businesses. A firm's cash flows in turn reflect the quality and quantity of its output. Productivity drives real growth, which may be reflected in higher stock prices without implications for inflation.

[sunsetbeachguy]

Amused misses a big point.

Yes, interest rates will be higher for a time.

However, every homeowner over their ownership period receives hundreds or thousands of offers to refinance at better rates.

You can very rarely, almost never renegotiate the price.

[poor patrick]

tell all those poor old gringos who live in a tent or something down there in
downtown los angelas that jobs are plentiful but only if youve gone
through 5 years of advanced trigonometery
and 5 years of english analytics with a prerequisit of advanced english
and 5 years of political politeness and gender ,race sensitivity awareness
then maybe that bum will prequalify for a application to take one of those silly job training courses at college.and the job that will probably pay half as much in 10 years as it did now
uuuuuuuuuuummmmmmm
no wonder so many iddiots chose the easy way to make money by playing
the real estate market
and I might add holding the family home for ransome

[Cal]

Falling house prices make it harder for people to move around, few want to buy when prices are dropping (fewer transactions) and as prices fall fewer people are able to move (low / no equity positions). When people buy and move there are whole industries that benefit (movers, loan officers, title, realtors, furniture stores, etc) it creates a virtuous cycle. When people sit around and not "consume", it is "bad".

In general it isn't a good thing when prices go down just as it isn't a good thing when prices get out of whack with fundamentals. Unfortunately in this world the gov't will respond to prices falling much more forcefully than they will with prices "booming". One of the drivers of the credit bubble was the fed trying to mitigate the damage from the stock bubble burst by excessively dropping rates.

There are fundamentally fewer buyers now do to the contraction of credit (and some dar say.. local recession) , the supply and demand rules are now overcoming the irrationality of buyers and sellers.

[Tex]

I didn't register for the Sacramento Bee, so I didn't read the entire piece, but based on Pete's quotes from the blog, Weintraub is making one of the same points I have been making all along -- that lost in all the hand-wringing over falling real estate prices are the stories of fiscally responsible, hard-working people (many of whom are young families) who need this "correction" in order to *responsibly* attain the "American dream" of home ownership. I am glad someone in the mainstream media is finally making that point.

Although some people will be hurt and that is unfortunate, it's just not healthy to have home prices so high that hardworking families must spend 80% of their income on the mortgage just to have a decent place to live. I think this price correction is, ultimately, good for society. People will be reminded of the virtues of hard work, saving, and fiscal responsibility, and of the consequences of excessive debt and "easy money" that sounds too good to be true (for good reason).

Susan, I'm not sure that people who are unhappy about the price correction necessarily outnumber the ones who are happy about it, at least not here in LA. Most people in LA are renters -- I think Ann posted the stats a few days ago. Lots of today's renters are educated, middle-class professionals who simply refused to overpay for homes with suicide loans. Needless to say, those folks are cheering this correction. As for LA's homeowners, most of them are fortunate enough to have purchased before 2003. So unless they went beserk with a HELOC in the past few years, most homeowners are probably fine. Watching your "Zestimate" go down a few hundred thousand is hardly a true financial loss. Thus the people who face the most harm from this correction are the people who overpaid in 2004-2007 and are now facing the prospect of being upside-down. It sucks to be them, but I don't think they constitute the majority of the population.

[Carmel]

It is a flawed ASSumption that people who didn't choose to buy a vastly overinflated house didn't make enough money to qualify for such a loan or didn't have money for a downpayment. It is now obvious to everyone that the majority of people who bought overpriced homes and are now losing these to foreclosures could not afford these homes in the first place.

Housing Hyper-Inflation.... Easy come, easy go!!!!

[bob]

I think people are missing something obvious here. Sure, some people are going to sell the home and move to make money, but others have to move because of a JOB CHANGE! If you need to move somewhere else for your job, and your home is worth 20% less, but the other place you are going to move has not dropped 20%, that's a big problem. Take Eastvale, CA for example. There should be a class action lawsuit because the builders and government planned 20,000 new homes in a period that is way too short for the actual growth to take place. Owners there have been completely raped as their home prices dropped already 20% from the peak, and more is on the way. What's not wrong with this scenario?!!

[stephen]

glad that prices are falling. has been ridiculous. people who are leveraged out trying to buy a house that really is out of their reach, with hopes of winning big bucks. tough luck. no sympathy. if the stock market goes down, people who invest in that lose out. same difference. quite unbelieveable that a million $$ buys you a townhouse or small SFR. glad that prices are falling. hoping they will plummet. sure, there will be shockwaves, but at least it will force people to buy what they can afford, and not let greed dictate practice. you gamble, you lose. not my problem.

[peter m]

Tanking prices for homes in the poorer parts of LA will lead to increasingly trashed out neighborhoods as lots of folks in the inner hood took out no doc,I/O,100%financing ,stated, and all other toxic mort products and way overpayed for POS 60-90 yr old stuccos & clapboards in such marginal areas of LA county as Bell, Maywood,Compton, Scentral, Inglewood, SGate, Wlimington, East LA. Pomona, La puente, Pacoima, Sylmar, San fernando, ect. The marginal purchasers in these areas will be severly underwater and will abandon the homes to forclosures EN MASS, which will really crater the inner LA areas and the marginal districts all over LA county.

This matters little to insulated Westsiders but overall this will create havoc in the inner city and outlying slummy districts and futher the declines in these areas into trashed out exurban-inner city slums as bad as rampart or pico union.
Just the staggering waves of foreclosures and resets alone will desecrate these already half-way slummy areas and affect the values of the nicer areas adjacent to these districts. Drastic declines in Compton will infect nearby gardena which will affect Carson which in turn will spread to torrance in a chain reaction.
LA City and the entire county is 90% strictly ordinary middle or -lower class working districts or out and out ghettos. The Westside is an anomaly for LA county, a tiny wealthy coastal fringe which is less than 5% of LA cty area and population. Sorry folks LA is not what U thought it was. It is not all Palm trees or sunny beaches .

LA Re is now tanking hard-a hideous price-gobbling monster out in the open and chewing its way thru the exurban landscape.

[JK]

Peter M, you are kidding yourself if you think only the urban ghettos will be affected by this downturn. Even if they make up most of the subprime loans, they hardly account for all of the flippers left holding the bag on their "investment". What do you think these amateur flippers are going to do? I'm will to bet that they will walk away and let the property go into foreclosure.

Also, there will be plenty of job losses in the mortgage, construction and real estate industries; can't pay your mortgage without a job. While you are turning your nose up at people that don't live on the Westside, please trust, there will be plenty of foreclosures to go around.

[24-23; 28-21, etc. etc.]

There's only one person to blame:
Remember where you came from and where you are going
and why you have created the mess you got yourself into
in the first place.
Start by looking in the mirror.