Wednesday, June 25, 2008

2.2% Intend to Purchase in Next Six Months; Prices Dropping

Across the U.S., potential house buyers remain wary: they know the bottom of the market is not in sight.

An accurate view of the housing market here and elsewhere factors in excessive supply combined with the credit debacle and wage rate relative to home prices: these are the must-haves for significant price drops.

As we all know, there's a huge supply of houses in our market. And we all know what the median income is in both Charlottesville and Albemarle. Sure, there's "outside" money--but that money isn't interested in the "lower priced" houses glutting our market. So we have a problem.

If the historic trending downward continues, home values will decrease much more from the 2006 level. Every day new listings appear on CAAR. Folks wouldn't be listing if they didn't really have to sell.

If you really want to sell, you really have to drop your price.

Real C'ville - The Bubble Blog believes there will be double-digit declines in our future. In fact, you can quote us in that future (or laugh at us). Additionally, we're asserting there will be an unprecedented acceleration in decline rate for Q3-Q4 2008--when the panic sets in. Charlottesville/Albemarle and environs have been slower than many to correct, but the center cannot hold.

Nationally, just 2.2 % of poll respondents say they intend to purchase a home in the next six months, a 25-year low, according to the Conference Board, a New York-based business research group quoted daily in the WSJ and NYT. As we've all read in the past 24 hours, home-price declines accelerated in April, which you can read in data released Tuesday.

Prices of single-family homes in 20 major cities dropped by 15.3% in April from the year before and are now back to 2004 levels, according to the Case-Shiller Home Price Index released by Standard & Poor's. Of course C'ville isn't part of this Index. We're looking at things from a nat'l perspective here, and most economists and analysts agree this Index is the best picture for projecting the nationwide trend.

Yet there are still realtors in Our Fair City who actually suggest that Homebuyers should not be greedy. This is so out of touch with reality it's almost admirable. Ruby slippers, anybody?

Meanwhile, back at the Ranch--er, laptop--driven largely by the surge in foreclosures and declining value in the housing market, some sad news:

Americans are renting apartments and houses at the highest level since President Bush started a campaign to expand homeownership in 2002.

The percentage of households headed by homeowners, which soared to a record 69.1 percent in 2005, fell to 67.8 percent this year, the sharpest decline in 20 years, according to census data through the end of March. Read about it here.


brooklyn bob said...

“House prices still have room to drop a lot more,” wrote Patrick Newport, an economist at Global Insight, a research firm in Lexington, Mass.

“Given the current level of unsold homes on the market, the number of foreclosures already in or about to enter the pipeline and the run-up in prices over 2000-6, this index is likely to drop much more,” he wrote.

see the New York Times story:

Daniel, the Real Estate Zebra said...

One issue have yet to see really being addressed is what effect rising interest rates will have. Interest rates WILL go up, and they might even go up faster than prices go down. A 1/4 point mortgage rate increase could easily wipe out any gain made by falling prices, and rates adjust daily, not so with house prices. In that scenario, it would make sense for some buyers (specifically, those who NEED a home, not those who want an investment) to buy now. Otherwise, increased interest rates might make homes less affordable.

My wife and I found ourselves in this very situation a few months ago. We were lucky enough to get a rate below 6%. Had we waited, we might not have been able to afford the payments on the house we bought, and the price of the house would have changed little over that time.

I'm seeing buyers right now who are waiting, only to see that their payments are going up as they wait.

dave phillips said...

On the other hand...

The panic in the financial markets has subsided (after the Bear Sterns bail-out).

Charlottesville has a VERY stable economy and is fairly well insulated from the national problems.

Case-Shilling (and every other report) does not really have FACTS about prices dropping because all they track is either an average or median price of what sold. Clearly prices have dropped and a drop in the median price does indicate a softening, but these stats are not ACTUAL price drops.

The national election generally provides a positive boost to the economy.

UVA hired a new Voice of the Cavaliers.

The VA General Assembly is meeting right now and will solve the transportation funding issues (yeah, right).

The 4th of July is next week!

Charlottesville is a great place to live!

Brooks and Dunn AND ZZ Top are coming to town in the same show.

Every issue has at least two sides. I just wanted to offer a few snippets from the glass-half-full crowd. Maybe we are both correct, or maybe we will both be laughed at.

Montpellier said...

Dave - you've devolved to just throwing things up and seeing what sticks?

Yeesh...let's work through this one at a time...

The panic in the financial markets has subsided (after the Bear Sterns bail-out).

You have got to be kidding! The appearance of a crisis has abated, but the second wave is hitting us now, and will gain steam as the majority of the Option ARM resets hits. The monoline bond insurers are being downgraded, and the two largest mortgage entities in the country are on the verge of collapse - Washington Mutual (WAMU) and CountryWide. Both have announced just this week that they're still not sure just how big the problem is for them - and upped their projected losses (WAMU just projected a new loss of $30 Billion)

The entire RE bubble was driven by a huge flood of money being pumped into mortgages - that created a 'credit bubble' which allowed anyone with a pulse to engage in bidding wars for houses. That is the international macro-economic reality - the credit bubble created the housing bubble.

Not only are rates inching up now, but more importantly, you actually have to document your income and assets to qualify - no more Real Estate Broker Office Mc-Mortgage-Brokering from Cendant and the like. Having exhausted the pool of truly qualified buyers at least two years ago, and then the qualify-with-a-stretch buyers, followed by the totally-unqualified, where will you find people who can qualify for a mortgage at the current prices?

It will be years, if ever, before we return to the lax standards of the past 6-7 years. FHA guidelines never got that weak to begin with and they've quietly tightened since Congress started looking to force them to swallow the mess created by the 'unfettered free market'.

Charlottesville has a VERY stable economy and is fairly well insulated from the national problems.

It is true that we have much greater employment stability than much of the rest of the state and country - largely because the government is our largest employer: UVA.

However, wage growth in C'ville, as with the rest of the country, has been stagnant since the dot-com tech bubble burst. All of the housing inflation and paper 'gains' since then were driven by the same credit bubble as elsewhere in the country.

Case-Shilling (and every other report) does not really have FACTS about prices dropping because all they track is either an average or median price of what sold.

No, this is factually incorrect.

1) It's Case-Shiller, named for the economists who developed it - in particular, Robert Shiller, who as been predicting this collapse for a couple of years.

2) The real value of this index, as noted by a commenter on Jim Duncan's site, is that it tracks same-house resales - it does not use averages. They report averages, based on reliable data regarding the sales and re-sales of specific homes. They also don't rely on the corrupt (gamed) MLS data for these sales prices - they use what really gets recorded at the courthouse.

I am an amateur - you are paid to do this, and you should know your facts, at least as regard housing-related matters, better.

Clearly prices have dropped and a drop in the median price does indicate a softening, but these stats are not ACTUAL price drops.

I gather this comes from the "create our own reality" school of thought (statistics)? The averages can't drop unless there have been "ACTUAL price drops" on at least some sales.

The national election generally provides a positive boost to the economy.

The bust is being driven by very large, international macroeconomic factors - just as the boom/bubble was. See the credit crisis above. This has zero to do with the 'local' economy. Even if the elections provide a tiny bump, the size will be insignificant relative to the big macro fundamentals.

UVA hired a new Voice of the Cavaliers.

Faculty Salaries and Bonuses have been frozen - due to state budget cutbacks - and that's the heart of what drives the UVa-driven local economy. If faculty aren't getting more, neither are staff (most of whom can hardly afford C'ville/Albemarle prices anyway). I guess the "Voice of the Cavaliers" might account for one sale, though. Most likely a more expensive property, so that will help skew the median statics up a bit.

Let me gently offer the other side of this economic analysis: Charlottesville will lag considerably, but be no less affected overall, by these same international macro-economic factors. That means that not this year, but next year, the 50% of the CAAR membership who are part-time dilettantes will decide that their play membership costs too much and the lag will reach you all. I suppose that's the 'half-empty' mindset, but it doesn't hurt to be prepared.

Real C'ville - The Bubble Blog said...

The Bubble Bloggers ourselves, as our readers may have noticed, usually don't leave or respond to comments.

But we'd like to take a moment here to thank everybody who has been commenting. We've learned quite a bit.

The comments following this particular post are, we think, a good example of the dialogue created when there's input from several 'sides' on the complex issue that is the Housing Bubble/Collapse.

First we have Brooklyn Bob, who directs our attention to another article about today's data.

Then we have The Real Estate Zebra, himself in the industry, giving a personal example *and* making a good point about interest rates rising.

Third, we have a commenter who is a regular presence--Dave Phillips. As CEO of CAAR, Dave is doing a noteworthy job of remaining optimistic about our local economy and market (we're actually not being ironic here, btw). There have to be glass half-full types in every business.

However, because we're the Bubble Blog, we tend to be in the mind set of one of our regular contributors, Montpellier. This--man? woman?-- offers tremendous insight on a variety of points, and calls our attention to the far-reaching impact of the "credit crisis" which is continuing this minute as WAMU makes frightening $$ headlines and individual states have started to sue's an impact that no matter how optimistic one is, is nevertheless in all of our futures, as the fallout continues in the coming Quarters....

Again, we want to THANK all commentors and encourage the continuing dialogue.

Dave Phillips said...

Are you sure you are with the law school? You should be over at Darden. I'm always impressed with your knowledge of all things economic and don't even mind your surly attacks on my character and compitence.

I really appreciate your correction of my assumption about Case Shiller using median or average price. While their method is better, I still think it falls short of being exact, but complete accuracy will be difficult.

I know we all put little credit in assessments, but that is a more accurate way of showing price changes. With that said, only performing assessments annually is not going to help, but the concept of evaluating a property's value every month (or week) seems like the only way to get close to actual price drops. I certainly agree that prices have gone down (and might be headed lower), but was just trying to point out that a median price decline of 5% does NOT mean that prices went down 5%. This is often the way the press reports such numbers. I covered this in my 1st Quarter market Report.