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

[matt a]

If you value your home for what it is- shelter- a market crash means nothing as long as you can afford the mortgage that you have. People who were planning on double and triple digit returns on their investment forever were as stupid or greedy as those who thought the dotcom bubble would never burst. There will be some sad stories of people who got in over their head due to bad advice, but mostly this will be the story of those who should have known about the saying "if it looks too good to be true..." when they signed their mortgage papers. Overall I think this is great for the little middle class guy/gal that works hard, plays it safe, and now can finally afford that 2 bedroom bungalow in the valley.

[MiddleClassGrowingFamilyFirstTimeHesitantEastsideHomebuyer]

Pete, welcome, officially, to the MSM.

[RR]

My husband has worked in Financial Services with the Police Unions for about 15 years, and the one thing he keeps mentioning is the CRIME rate. He said that any Cop will tell you - the more people lose their homes, the more crime there is going to be. Stop believing you're so insulated. There are a lot of middle class neighborhoods that are going to sink into ghettos when most of the homes have foreclosed. Crime will go up, make no mistake about it, and that affects everyone.

My nephews, however, who graduated from excellent colleges and work at ABC, might finally be able to buy a home someday. Given that they are making the same salary I was when I graduated 20 years ago! Ivy league educated, law school, and 20 years in an executive position and the most we could **RESPONSIBLY** AFFORD was a $300K mortgage in Thousand Oaks. We watched in horror as everyone around us took out all of their equity to buy new SUV's and then mortgage the rest to pay for the gas and BASIC bills. People are FINALLY going to learn to live within their means. SO SORRY. I know it's not always fun, I've been doing it for 20 years now. We somehow sold in January and moved to the east coast to a growing city and bought a house cash. I'm just waiting to move back home again when prices become rational.

[Bob]

Speculative Manias are well documented in the historical record. Anyone that has been through such an experience recognizesthe next one: We clearly were in a speculative mania in housing stock in the US for the last 7 years. A quick look at the historical record tells you that the market re-adjusts once the hype is over. A simple fact should dictate your position on the topic: the cost of housing (entry level to the median house price) is far beyond the support of the median household income (based upon conventional financing and qualification rules) in many areas of the country - particularly LA. Orange County, San Diego, and the Bay area. The bay areas is slightly special due to the venture capital dynamics - but this probably wont spare anything outside of Atherton and menlo park. LA and Orange county unfortunately has a ways to go to re-adjust its housing prices back to where people can afford mortgages. There will be an effect in the economy - but dont overplay it, the US economy is more than just a real-estate transaction machne . Where will the next Mania be ? Who knows .... but probably not in housing ... at least for many years ....

[Jonathan R]

Housing prices went up at about 20% per year. In the last year, prices went down only 5%. The only people who will get hurt are the few hat bought at the peak. The big story that is not reported is that, on the coasts at least, most homeowners have seen their wealth increase greatly. But people who missed the huge boom will never benefit from this tiny bust.

[Aaron Kramer]

Watch this video and you'll understand why falling prices bring fear to the hearts of bankers, financiers and the government.

http://video.google.com/videoplay?
docid=-9050474362583451279&q=money+as+
debt&total=1826&start=0&num=10&so=0&type=
search&plindex=0

Without more debt there is no more money.
Without more money there is no way to pay off previous debts.

[longdriver]

bob, are you kidding? The city should be sued because a bunch of people bought vastly overpriced homes in Corona. Anyone that bought a 600k home out there should have their head examined. 20% drops is a best case and at this point it's already past that. That area will easily see 40% and probably closer to 50% when this is done. There are already hundreds of homes listed 40% off peak in the Corona area. Eastvale and South Corona are both in a world of hurt. I carpool with a resident of that area. Three homes out of 12 on his street are for sale. 2 are now REOs and the 3rd has just dropped the asking price to $399k after paying $626k in mid 06. That's already a 37% fall from peak. Even at nearly 40% off that home has not sold and it's a nice home that backs up to a golf course. I guess the people that bought recently did not read the book about what happpened out there in the early 90s. Values tanked nearly 40% then too!

[yourkillingmelarry]

Jonathon R, you are a funny guy.
"Housing prices went up at about 20% per year. In the last year, prices went down only 5%."

Now if we can just freeze time this would remain a tiny bust. The trend is your friend Jonathon that 5% today will be 10% early next year to 30% to 40% in 09/10. Then this bust won' be so tiny and the coast won't be as wealthy.

[Horizontal Translation]

Always looking for the upside, Bill Gross of Pimco (bond trading king) recommends investing in foreign countries and currencies:

http://tinyurl.com/ytdos6

[Trudy Self]

You are assuming that those who were priced out of the market can now suddenly qualify for a loan for a little less house cost-- that is the assumption that caused the bubble in the first place. Loans are going to be harder to get and in case I am the only one who has noticed, real interest rates charged new homeowners are not following the prime down.

The issue of affordability isn't just price-- it is credit and that is still being tightened.

[Sara in the IE]

To Longdriver: here in the Inland Empire,you mention Corona and Corona South- but are actually speaking of Eastvale and Mira Loma- what did you expect to happen? Farm land was purchased from dairy farmers for upwards of $5 million dollars per "dairy farm" and subdivided into new housing tracts. If you know people who bought in this area then you are acquainted with fools. Every local knew that these areas being developed were not worth the prices set by builders! Mira Loma and Eastvale never were more than outlaying communities in the county areas, and that is all they will be, only more congested, overbuilt and overpriced. Don't blame the city of corona for real estate woes- blame greedy builders, foolish buyers and crooked financial institutions- in county areas of mira loma and eastvale! Duh!

[Aaron Kramer]

Bob,
The next mania is "Green Technology" brought to you by the same producers of the tech bubble, AKA "Y2K".

In case you forgot how it works.

Hurry up upgrade your computer or the old computers will fizz out and we will be thrown back 40 years. (The world is warming too quickly and it's our fault, we must do something)

Oh look tech companies are selling a lot of stuff. I'm sure they'll do this forever. (Invest in economically noncompetitive technology or buy carbon credits from me, I mean a company. We are located down the street two doors down on the right. )

Oh that Clinton economy was just marvelous.(Look at the good we are doing. This is a moral cause and you owe it to your children to do more {I'm not saying Bush is any better, he sucks too. His cronies handed us the housing mess}

Scam ends and the bust begins, finger pointing ensues.(I didn't know that they were going to outlaw certain types of consumption but don't worry if you have enough money you can buy carbon offsets, from me, and pollute as much as you want. God I love carbon indulgences, I mean offsets)

Well, we all got new computers in the tech bubble, hopefully we will actually get cheap renewable energy from the Green bubble that is forming. Remember if they were serious about dependable renewable energy geothermal would be at the top of the list not an also ran. (no sun or wind required and no pollution) But since that technology has already been patented Al won't use it because it won't make him and his cronies rich.

Bubble as I'm using it is -a misallocation of resources that results in the misguided belief that we have entered a new paradigm. The problems that inherently exist in this new paradigm can only be solved through the expansion of the bubble.

[Ragnar]

When I can finally get my family's butts out to Southern California in two/three years, we should be able to buy a home using the downpayment from our equity gained in an area of the country that did not go bubble crazy. Lower housing prices will help us out. We still won't have a mansion, but at least we'll have something decent.

[Chris]

People just need to start looking at homes right now as less of an investment and more of a place to live! A home is not like at all, can you shelter yourself in a stock? The lower the prices go, the better for everyone except those who are looking at real estate as an investment rather than a place to live. And by the way, those investors are what screwed up the market in the first place so I feel like they are getting what they had coming to them.

[Vid]

The problem with this entire discussion is that the price increases from 2002-2006 were, in most cases, not REAL price increases - they were artificially inflated by the rapid proliferation of sub-prime loans. The fact is that until housing prices fall by an additional 30-40% they will still be too high for any home buyer seeking to finance the purchase with a traditional mortgage, i.e. a mortgage in which he/she is building equity by actually paying down the loan and not just gambling on rising prices. The whole subprime mess was a classic Ponzi scheme - it could only keep going as long as people ignored the fact that they weren't actually buying anything - they were simply paying off the debt of the previous buyer. Unless the industry standard winds up switching from a 30-year fixed to a 5 year interest-only ARM (which seems unlikely given the current credit situation) prices will have to fall to approximately 2003 levels and stabilize before any REAL growth can start to take place.

[MyLessThanPrimeBeef]

Falling prices are like falling hair.

If it's someone else's hair, it's funny, but if it's your hair, it's tragic, unless we are talking about leg hair, in which case, a lot of people will not mind, but actually like it.

[National Bubble]

An orderly decrease in home prices over time is a good thing because it washes out all those speculators and allows for a healthier market. Unfortunately, the current drop in home values is anything but orderly and it is going to eventually push the economy into a recession. Especially in areas like Orange County that are heavily dependant on mortgage related jobs.

[toby]

And let's not forget Property tax. In Santa Fe NM (for example) families that lived there for generations were being priced out of their homes because of rising property tax....

The lowering cost of homeownership is ALWAYS a good thing and don't let the few tell you different.

The idea of a homeownership being anything else but savings (the true meaning of equity), is just plan wrong. A good investment? That would be going against history.

[yours truly, Johnny Dollar]

Everyone benefited when Henry Ford lowered the price of the Model T.
VHS and Beta machines were $2,400; everyone benefited with the lower
price. And plasma screen televisions.....

[gfw]

The assets that you've listed have little, if any, resale value. If people buy an asset expecting it to appreciate, then it doesn't, they've made a bad investment. If enough people do it, and enough highly leveraged people and banks go bankrupt, then there's a serious problem.

I don't support a bailout, and I don't own, but we should have been discouraging this sort of speculation. If people justed consumed their shelter, we wouldn't worry so much about the volatility of the price of it. Unfortunately, most people treat their houses like an ATM-- HELOCs, HE Loans, Refis, etc. Now they'll be bust.

[Jimmy]

You research a digital camera (let's say), find the best price and buy it. Then a month later you see it advertised 50 bucks less. Multiply that feeling by a thousand, then add to it the fact that you'll be paying for the next 30 years. This is whats at work here

[Dan]

The problem with the falling housing prices is that they aren't falling fast enough. They should fall as fast as they rose or all those houses will just deteriorate entire neighborhoods as they sit idle and unoccupied.

The real problem is that Americans are so stupid. They are more concerned about how many dollars they think their house can get (even though they won't sell it without buying a different house) than they are about the falling value of the dollars they are paid in.

The crash-and-burn of the U.S. is by far a large real world problem to Americans. It wipes out their savings, their 401Ks and IRAs. It destroys their income base. The dollar drop 10% in this year alone. That's a real 10% drop in every American's income.

American do not even have the choice of buying American products anymore because everything is made in China and a few other overseas countries. That means declining dollars is decline wealth for the typical American.

[CJ]

I think there are more people out here than everyone realizes that have not purchased a house in 3 or 4 years because we felt the price of housing was out of line. Most of my friends in the San Fran bay area have just been saving and many of us can now make a 50% down payment. We believe 3 to 5 years from now will be time to consider purchasing a house. Baby Boomers will be looking to down size, mortgages will ease a little and we will have our pick. Bottom line: when everyone is buying stock, purchase a house or save. When everyone is purchasing a house, save or buy stock. When everyone is saving, buy a house or stock. Stay out of the bubbles! And only bite off what you can chew. Strawberry pickers in $600K houses don't make sense!

[John]

It's only a problem if you look at a home as an asset and an ATM machine. If you actually understand that a home that you live in is a LIABILITY and nothing more than just a roof over your head, than you should care less whether your home goes down in value. In fact, having the assessed value go down means you throw away less money on taxes.

Unfortunately, our country has become little more than a nation that racks up debt to consume imported goods. We need the wealth effect (of rising home prices) to keep the party going.

[Booba]

Falling prices are bad for:
- irresponsible borrowers that bet that prices will go up forever;
- people who cannot earn enough for their "high life", so they can "refinance" (i.e. get in deeper debts, naive kids!) with "cash out".
But these two categotries don't matter.
What really matter is all that real estate gang wants home prices as high as possibe!
Didn't you read confessions of real estate agents that they used to make up to half a milluion bucks a year during bubble time just for taking orders?
Didn't you read Hovanian's confession from K. Hovnanian Homes that sales persons in his company started actually sell houses in 2006, becuase before they just took orders?
And what about mortgage brokers, apprisals and other members of that pack?
Imagine: millions of individuals in America suddenly started making big money without getting extra education or extra hard work! Sure they want to keep it this way!
And their Associate of Realtors, thanks to "independent" and "free" American mass media does a great job so far.
Read article of real estate!
Who the "mass media" quote most? Realtors!
Their "expert opinions" became notorious for their incompetence and pure lie, but "econoimists" from National Association of Realtors and real estate agents are still the most quoted persons in mass media!
Naturally, as I said before, they are interested in preserving high home prices. And they pay "free press" for ads, so "free press" just work their money out.
That's why in all articles of real estate if prices are high the city or state "enjoy" it, and if prices are going down "this is bad"!
Simple, huh? :)