April 16, 2004


Is Housing Headed for a Fall? (Robert J. Samuelson, April 15, 2004, Washington Post)

>Economists Robert Shiller of Yale and Karl Case of Wellesley polled recent home buyers in four cities. In the next decade, these home buyers think real estate values will rise from 11.7 percent annually (Milwaukee) to 15.7 percent annually (San Francisco).

These expectations are absurd, as Shiller and Case say. Annual increases of even 11.7 percent would triple prices in a decade -- far beyond any plausible income gains. Who'd buy those homes? But if people believe, they'll borrow more against homes, and torrents of credit will temporarily bolster prices. Sure enough, home borrowing has surged. In 2003 homeowners' equity (the amount not covered by loans) was only 55 percent of home value, a record low. In 1990 the figure was 61 percent; in 1945, it was 86 percent.

Still, Shiller and Case doubt there's a big bubble -- and they could be right. Lawrence Yun of the National Association of Realtors points out that since World War II, median national home prices have never declined from one year to the next. At worst, there have been localized "bubbles." [...]

Over the past two decades, homeowners have benefited from two trends. One is falling inflation and interest rates. On 30-year fixed-rate mortgages, the peak occurred in October 1981 at about 18.5 percent. Lower rates mean that borrowers can -- on the same income -- afford larger loans and costlier homes. Consider a family with $50,000 in disposable annual income that spends 28 percent ($1,167 a month) on its mortgage, says Yun. With interest rates at 8 percent, it can afford a $159,000 loan; at 6 percent, that jumps 23 percent to $195,000. Interestingly, those changes roughly mirror what's actually happened nationally to interest rates and home prices since 2000.

The other favorable trend has been a transformation of the mortgage industry. [...]

In 1980 high fees and closing costs made mortgage refinancing attractive only if interest rates dropped two percentage points (say, from 8 percent to 6 percent), says Forrest Pafenberg of the Office of Federal Housing Enterprise Oversight. Now the threshold for refinancing is as low as 40 basis points (say, from 8 percent to 7.6 percent), estimates Douglas Duncan of the Mortgage Bankers Association.

All this has made housing an economic cocktail. People have repeatedly refinanced. They've traded up. They've borrowed against higher prices, spent some cash or consolidated high-rate credit card debt into lower-rate mortgages. The Fed's low overnight rate (1 percent) helped keep mortgage rates low. Higher home values buoyed confidence. If more jobs signal a stronger economy and slightly higher rates, what's the worry? Home prices may stabilize, and even if declines occur in some frenzied markets, there won't be a widespread collapse of either prices or psychology.

That "never declined" statistic is staggering.

Posted by Orrin Judd at April 16, 2004 4:42 PM

Nobody, save that intellectual giant Thomas Sowell, ever seems to comment on the biggest scam of the last quarter century +.
The collusion between local govenment, elected and others, and current homeowners to impede, dissuade and stop the production of new housing commesurate with local growth. Using fees, zoning, anti-developer prooganda, land use policies and, worst of all, using taxpayer funds to remove property from the private sector home values will of course be subject to the immutable laws of supply and demand.
When I was a real estate broker in the Orange County, CA market during the late 70's our definition of a "no-growther" was the last guy to close an escrow.

Posted by: Mike Daley at April 16, 2004 7:05 PM

To reverse the old saw, what comes down must go up. It's no exaggeration to say that, these days, with interest rates being about as close to zero as practically possible, with "cash back" and all these other incentives, lenders are paying _you_ to borrow money from them. This state of affairs can't continue indefinitely, any more than the '90's tech bubble could.

Truth to tell, and although some people will call me insane, I wouldn't really mind if the value of _my_ home came down some (though, not, of course, a whole _lot_). The reason? Property taxes, which are pegged to assessed home values. The value of my one-bedroom condo has exploded by $35,000 or more in the last two years, and my property taxes have also gone up concomitantly. Ow ow ow ow.

Posted by: Joe at April 16, 2004 7:49 PM

Me and Sowell.

However, those local bubbles are not negligible.

At one point around 1980, the unleased commercial space in Houston totaled over 39 million square feet, which stuck in my mind because it was equal to the entire commercial space built in Des Moines, where I then worked.

And thousands of houses in Houston were abandoned with the doors left open.

National averages can cover up a lot of bad stuff.

Posted by: Harry Eagar at April 16, 2004 8:23 PM


That's why people move.

Posted by: oj at April 16, 2004 9:13 PM

In my neck of the woods people are complaining the the local newspaper about the economy but houses are going up around me like crazy. And these are not small homes. 2500 sq. feet, almost $200,000 homes (that is a somewhat upscale price around here).

Posted by: Bartman at April 17, 2004 9:06 AM

What Harry said. New England, especially Boston lost 30%. Exception: waterfront properties never go down. In the long run, since then, the market has blazed to infinity and beyond.

Posted by: genecis at April 17, 2004 11:59 AM

in the long run being all that matters

Posted by: oj at April 17, 2004 1:22 PM

In the Washington area, vacancies in office space in the central city are way, way up, but in the suburbs, there's a real building boom going on. Part of the reason my own property values have gone way up in the last two years is that there has been, and is still ongoing, a lot of commercial construction on the main street outside my condo/apartment complex; Home Depot and Walmart have both built stores and more is coming. While the additional traffic will be problematic, I have to admit it'll be a lot better shopping-wise; the eastern side of Manassas was underdeveloped commercial-wise for a long time compared to the western outskirts fronting on Sudley Road running north to the National Battlefield Park.

Posted by: Joe at April 17, 2004 3:27 PM


Having been furloughed from my airline job to something far less lucrative, I can tell you with the authority of first hand experience that the short run can matter very, very much.

And the only way to get to the long run is through a heck of a lot of short runs.

Posted by: Jeff Guinn at April 17, 2004 5:35 PM


To you.

Posted by: oj at April 17, 2004 8:23 PM

There's nobody else it matters to.

It is not a sign of success to lose everything you have and move. "Grapes of Wrath."

As of a few weeks ago (haven't checked lately), the cheapest house for sale in my island was listed at $425,000.

The median income is a shade over $60K/family. Even at negative interest, over half the people cannot even think about buying a house.

Posted by: Harry Eagar at April 17, 2004 10:40 PM


Why? They found better lives in CA.

Posted by: oj at April 17, 2004 10:46 PM

And house prices even higher. Small older two-bedrooms in my part of CA (Anaheim) are approaching half a million a pop; the only places where prices are significantly lower are the local "rust-belts" where there isn't a high-paying job for 40-50 miles.

Posted by: Ken at April 19, 2004 7:30 PM