Americans Are Still Delusional About House Prices
The recent upturn in house prices from April to July (3.6%) is the sharpest change in direction professor Robert Shiller has ever seen. And Shiller, the dean of house-price analysis, has seen a lot.
The upturn could signal a v-shaped recovery in house prices. Or it could be the "mother of all head fakes," as one investor has described it.
Unfortunately, Robert Shiller's recent survey of Americans' attitudes about house prices suggests it's probably the latter. The survey also suggests that Americans are still delusional about the long-term trajectory for house prices.
In the survey, Shiller and his partner Karl Case ask Americans what they think home prices will do over the short and long term.
The expectation for long-term price changes hasn't changed much since before the bubble (it's now down to 11% a year appreciation). This outlook is more reasonable than it was at the peak of the bubble, but it's still extraordinarily optimistic. This happy outlook suggests that Americans still regard the last couple of years as a freak anomaly -- even though house prices are just now hitting the range of "normal" on key price ratios like price-to-rent and price-to-income.
The outlook for short-term changes (one year), meanwhile, has changed a lot in the past year. Specifically, it has gone from negative a year ago to 2% this summer. Thus, Americans are expecting a near-term housing recovery -- in part, perhaps, because of the recovery from April to July.
Shiller thinks this change suggests that buyers are now trying to time the housing market by getting in at the bottom. This could be contributing to the surge in prices we've seen over the last few months.
It's always possible that Americans are right, that we've passed the bottom and are on the way up. If so, however, this would mean remarkable foresight on the part of the average buyer.
Around major changes in market direction (the peak of the housing bubble, for example), there is widespread agreement about what future prices will do -- and this consensus is usually 100% wrong. If the consensus is right this time that we've just passed the bottom, therefore, it will be because the average American has suddenly gotten a lot smarter that usual about what the future holds.
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What did Gordon Ghekko say "The illusion has become real." I really think the invention of a little screen that we could see others live instead of live ourselves has destroyed people. I really do. There are no artists anymore. Not like before. Everything is boring and hohum so people are ripping it to feel it but it's not there. It's as if they created this marvelous petri dish where nothing will grow and we are all wallowing in it dying.
Waiting in the wing are the oil vultures. If there was a recovery, the demand would go up and higher prices would quash any recovery and they would swoop down to feed on the carcass of a wrecked economy to join the bankers, health care industry, and military industrial complex. Remember Democrats and Republicans are just fancy names for vultures who feed on different sides of the carcass.
There are the commercial real estate and the FHA bubbles that are collapsing. I have two friends who are losing their houses and are having to do short sales. The one was a mortgage broker (business dried up and he let his license go) whose downtown condo went from $400K to $150K and the other had his ARM house loan reset $400/mo. higher and is short selling from $260K to $129K, sadly, after putting his $60K inheritance in as a down payment which he will lose. There are waves of these ARM reset mortgages coming soon like a tsunami. Three friends have had their hours cut from 5 to 4 days/week. No one is talking of restoring their hours. Two friends now have to work from home as their bosses are trying to save money. One boss/owner lost a 40K client and can save $30K by not having a central office. My other friend who is a commercial loan officer is now working from home and says that this is a major trend as a way for companies to save money. These rentals are never coming back for the commercial real estate sector. These sectors are in a permanent depression, not a recession.
I agree. I am no expert by any means, but I don't see how housing costs can stabilize as fewer and fewer people can afford to by houses and houses are being foreclosed on. There was no common sense in the bubble to begin with. How could a family making $70,000 a year afford a $300,000 home?
Lots of black roots, not green shoots.
Many TARP borrowers aren't repaying their billions in loans and the FDIC reserve recently went billions in the red because of bank failures & bankruptcies (they are the people insuring your bank deposits - lol - sleep well tonight). Some of the banks weren't even on their watchlist, but had dramatically fast collapses because of the worsening economy. There have been a lot of articles lately about endowments and pension funds that have lost major portions of their investments in the recession (some 30-40%: some of it due to speculation in derivatives that had the meltdown) just like many of us. Many may be unable to meet their obligations to their retirees which will be a long term problem. Tax revenue is down 17%, so expect more government job layoffs. Just like the alcoholic that has another binge to postpone a hangover, we have just delayed the day of reckoning by adding all this stimulus money, bailout money, & borrowing from China to our national debt.
A house should be no more than four times the combined yearly income of its buyers. Assuming they will be using their income to pay their mortgage.
With that math, the average combined household income is $100k in Los Angeles. That means houses for these buyers should be no more than $400k.
Houses in middle class areas are running $600k-$800k in Los Angeles.
The cost of buying a house, and servicing the mortgage payments, are unsustainable in the long run in these areas.
People can only play games with money for so long, eventually they have to buckle under the pressure of not having enough income to pay their mortgage.
No one is talking about reality. Its like the inflated stock market. People think unrealistic economics will persist simply because they cannot face reality about the future.
But thats the American way. Fantasyland.
There are statistics, damn statistics and there are lies. Don't be fooled. Values have not increased. I have been an appraiser for 22 years. The market was dead for the last quarter of 2008 and first quarter of 2009 and nobody was buying an expensive home during this time. Most sale were modest homes and lots of short sales and foreclosed homes. Sales finally picked up in late spring of this year, including some sales of upscale homes. This only translates into more sales of non-distressed properties, and sales of more expensive homes, not an increase in value.
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Most of the new housing is in the suburbia -exurbia. Its very functioning depends on cheap energy prices. Someone who bets on a thirty year mortgage is betting on the availability of cheap energy for the next 4 decades. Now, how realistic is that? A $10 per gallon of gas can undo the suburban lifestyle and that means that the the majority of the suburban housing is basically way overvalued in the long term. This is completely disconnected from whatever the current market says these houses are worth.
Yes, we have wasted trillions on worthless housing in suburbia. This just hasn't sunk in but it will sooner or later.
Housing prices have another 20--30% to drop.
The Dow will be at 4,000 by 2011.
It's always nice to have an optimist around.
You can think happy all you want but magical thinking can't replace reality.
Real estate will always be a good investment. Looking at the past three years of the RE market and saying it isn't a good investment is like looking at a bear market and concluding that stocks will always go down. As in stocks, the RE market is all about timing. We bought four properties in South Florida in the 90's, rehab'd them and sold two of them. The last sale was this past December and we made over 500% profit on the sale in about 12 years. The time to buy is now with prices at the level they were four years ago and interest rates at all time lows. If you have the money for a down payment, credit situation is good, and with the tax credit, you'd be a fool to rent in the present environment. If you don't plan on staying in one place for long, then I would advise against it. But that would be the only caveat. What got a lot of folks in trouble was buying a house they couldn't afford no matter what the RE market was doing and/or taking money out of their house to buy stuff they really didn't need. I always went by the worst case scenario. If I couldn't afford the worst case, I didn't do the deal.
the millionaire next door is in the unemployment line before he goes to the soup line.
My husband and I moved from Minnesota to Missouri in 2007 and rented for the first two years we were here.
But without a real estate tax deduction, we were getting killed every April.
This year we finally bought a house down here and are happy with what we thought was a good deal on the property as well as some long-term tax relief.
Our 21-year-old son got a great deal on a foreclosed townhouse back in Minnesota, plus he gets an $8,000 tax credit.
We expect to stay in our home long term, and the terms of our son's tax credit require him to stay a minimum of three years.
So there are plenty of good reasons to buy and plenty of good deals. But if you view your purchase as some sort of road to riches, you're going to be disappointed.
Just try to enjoy your new home sweet home.
How much better did you do at tax time? Is that number larger than the interest you paid on the loan + tax + insurance? That said, if you're there for a long time, it could work for you and I hope it does. If your mortgage has no penalty for early payment, you could benefit tremendously buy paying extra each month.
My husband's a lawyer, and our kids grown, so with no mortgage-interest deduction and no dependents (apparently we cannot claim four spoiled cats and a golden retriever), we have really been hurting at tax time.
So he said we should become home owners again.
Frankly I also like not having to worry about what the landlord will say when I pound a nail in the wall or paint a room.
This isn't to say there aren't lots of perks to renting: My husband's not nearly so keen on home ownership when it comes to repairs or lawn maintenance.
:o)
Smartest thing I ever did was buy less home than I could have and pay it off quickly. The mortgage "write-off" is the biggest bunch of BS going; I'm just amazed at the number of people who fail to discern the difference between reducing taxable amount and getting all that interest back.
Glad to hear you say this. You are right. Pretend I'm the lender. Pay me $100. Now here ya go, here's $33 back in a tax deduction. You want to do it again?
People, debt is the new slavery. Do like gmundenat. Buy less house and pay off early.
THAT is sustainable.
Right on. I saw the collapse coming and sold my money-pit of a huge house and paid off all my debts. I love renting; someone else has all the worry and I can easily get up and move.
We did buy a small house that we could afford.
But now BOTH of us have had to take substantial pay cuts that were totally unforeseen when we moved into the house. On top of that, our health insurance premiums doubled this month. Our property taxes are going up - which we expected- but our house and property are worth LESS. What are we supposed to do about that?
Americans are delusional. The title should have stopped there and not added "...about home prices." Americans are delusional about themselves, the economy, the wars, banks, house prices, the price of oil, climate change, the stock market, you name it. Americans are sleepwalking into apocalypse.
but we're MORE delusional than any other country. USA, USA, USA!
...remembe
Housing will pretty much keep pace with inflation. Is the CPI increasing at 9% year over year? No? Then this is as ridiculous an idea as a fully moderated post on economics.
Your first sentence says it all. Anyone who made better was fortunate. Many more were not.
And many who initially did better had it taken away ...
Gee, maybe selling our houses to each other wasn't the best thing to base the economy on.
Ya think? I once head the advice to think of a house as your home, not an investment vehicle. Perhaps this should scroll across the tv every hour on the hour.
A house is not the biggest investment you'll ever make, it's the biggest expense you will ever have. This just shows the naivety of Americans.
"I'm going to get those bomb-bay doors open if it hairlips everybody on Bear Creek."
back to the subject, housing, like everything else is what someone will pay for it. After decades of observation and lounging in the shoreline shallows, I see the successful surfers living well as they score big thrills and status with proper timing and judgment of the waves. (Many others call them bubbles.) All low-involvement investing is Ponzi, one just needs to know the how to BLSH. (buy low, sell high) It's not good that workers in the water tend to be shark food, but I have to admit, having only taxes and insurance to pay is a benefit of being old and frugal.
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