Declining House Values "Catastrophic"?

A lot of bad things are happening to our economy because we expected house values to keep going up. There was a bubble in house prices, and as we have seen in other areas of the economy, bubbles burst. However, the decrease in house values is not necessarily a bad thing.

When we talk about "affordable housing" we mean, "can low income people afford to make a mortgage payment at a high rate of interest for the next thirty years". "Affordable" doesn't relate to the price of the house, it relates to the percentage of one's paycheck that goes to the mortgage.

"Affordable healthcare" likewise does not relate to whether a patient can afford certain medical procedures. It relates to how much is paid for health insurance (if available), and how much goes to deductibles and co-payments.

It seems like all of the "fixes" that the politicians are discussing for these problems don't get to the root of the problem. The market is doing what it is supposed to do. People cannot afford houses as the price is artificially high. The market is responding, and values of houses are declining. Politicians are trying to make houses more affordable by allowing more people to qualify for a mortgage. In the meantime, they are concerned with keeping the value of houses up. Eventually, the market is going to adjust itself to a point where housing is going to be available to people at a price that they can afford, despite the best efforts of politicians. In the short term, it means that people who bought their houses during the bubble will be stuck with high mortgage debt.

We haven't seen the full ramifications of the healthcare crisis, yet. Again, Congress has been focused on getting medical insurance for uninsurable people, to prop up the current medical industry that is charging high prices for necessary services. Congress should learn that market forces will continue to exert themselves, despite their efforts to control them. Will we see a bursting of the medical bubble (and the pharmaceutical bubble) any time in the near future?

Someone said it on CNBC, so it's one person's opinion and may or may not be true.

But if the bailout bill doesn't get passed, house values will continue to decline.

And that one is MY opinion.

from Bloomberg:



Home Prices in 20 U.S. Cities Fell 16.3% in July From Year Ago

By Bob Willis

Sept. 30 (Bloomberg) -- House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation has yet to trough.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

``Prices are falling consistently and steadily -- in former bubble markets and, increasingly, in markets that weren't swamped with speculation,'' Michael Larson, an analyst at Weiss Research in Jupiter, Florida, said before the report. ``The weakening economy, a lack of buyer confidence, and tighter mortgage markets are all contributing factors.''

Home prices decreased 0.9 percent in July from the prior month after declining 0.5 percent in June, the report showed. The figures aren't adjusted for seasonal effects so economists prefer to focus on year-over-year changes instead of month-to-month.

Economists forecast the 20-city index would fall 16 percent from a year earlier, according to the median of 23 estimates in a Bloomberg News survey. Projections ranged from declines of 14.5 percent to 16.5 percent. ........(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIZFy5LFln6M&refer=home

http://news.yahoo.com/s/ap/20080930/ap_on_bi_ge/home_prices_6

S&P: Home prices post 16 pct annual drop in July

By J.W. ELPHINSTONE, AP Business Writer Tue Sep 30, 2:39 PM ET

NEW YORK - A closely watched index released Tuesday showed home prices tumbling by the sharpest annual rate ever in July, and though the monthly rate of decline is slowing, there is no turnaround in sight.
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The Standard & Poor's/Case-Shiller 20-city housing index fell a record 16.3 percent in July from the year-ago month, the largest drop since its inception in 2000. The 10-city index plunged 17.5 percent, its biggest decline in its 21-year history.

Prices in the 20-city index have plummeted nearly 20 percent since peaking in July 2006. The 10-city index has fallen more than 21 percent since its peak in June 2006.

No city in the Case-Shiller 20-city index saw annual price gains in July — for the fourth straight month.

However, the pace of monthly declines is slowing, a possible silver lining. Between May and July, for example, home prices fell at a cumulative rate of 2.2 percent — less than half the cumulative rate experienced between February and April.





I guess you could take the slowing down of price drops as a positive, but you'd have to be wearing the Rosiest-colored glasses ever made...

keep buying. Then they told us there was a bubble, but it wasn't going to pop, we would have a soft landing, keep buying. Now they are blaming the American consumer for the crisis. I stopped listening to those people for any real solid advice long ago. I listen to them for entertainment value every so often.

I balked when they told me how much they were charging. I was told, that's what they're going for. We negotiated down a little, but still-- I had never paid that much money for anything before! Now, we can't sell it, and we're having a lot of difficulty refinancing it. We love the house, but hate the mortgage.
I suspect a lot of people wish they held off a few years until they got to a buyer's market. I bet a lot of people are watching housing prices now.

I am very worried about my sister and her husband. Same thing happened to them, and so many others.

But we're really stressed out right now.

And can live in the neighborhood for the foreseeable future, I wouldn't worry about the dollar value just now. Best of luck getting a better rate.

Back then NOBODY was saying "Watch out, house values are going to fall!"

So I had no qualms about purchasing ... after all, house values always went up ... it was the prevailing sentiment that your house was a great way to invest ...

So my house is now "worth" about half of what I paid for it. Can't sell it if I wanted to, and no one in their right mind would give me a refi.

So I called my mortgage company and told them when the time comes to refi, which I'll need to do in a year, I'm just going to have to walk away and disappear like so many other people are doing. And know what? The person I was talking with started practically begging me to "arrange payments"! Whatever that means. I'm hoping that those of us with good credit will just be able to roll over their mortgage to one with a good fixed rate, no closing costs. Maybe it'll happen.

He acts like he wants to do us a big favor by doing another loan. But then he is demanding that we do extensive repairs before we will qualify. (We got hit by a wind storm during the latest hurricaine). Costs that he promised to waive keep sneaking back into the paperwork, and the interest rates keep nudging up. I'm about to tell him "forget it".

which, translated, meant if I paid them between $30,000 and $40,000. That was just prior to me telling them I'd have to disappear when my 5-year fixed rate mortgage was up.

Well, whatever. It'll either work out, or it won't, and I'm certainly not going to make myself sick worrying about it right now.

:nuke:

real purchasing power of workers' wages goes down at the same time that the housing prices come down?

I think deflation is entirely possible.

With the complications of high fuel, home heating, and energy prices, and the accompanying high prices of groceries and everything else, without an increase in wages.

The housing boom really distorted the housing market. As people were speculating on rising real estate values, less property was used for rental property. Now that we have houses sitting empty, we'll see what happens to rents.

"bought into" the belief that radical increasing home values were going to continue, and they BOUGHT their house at a grossly inflated price. When the bubble burst, that home that they bought for $350,000 and have a $300,000 mtg. on is now valued at $250,000! Lenders get all kind of nervous when the asset they financed becomes worth less that the liability they're carrying. To compensate for the increased risk, many increased the interest rate on that mtg. making it impossible for the homowner to pay their monthly payment. Because this has happened in so many areas, the entire market is in a downward spiral.

To complaicate things, accounting rules demand that banks list their assets at the "Market Price" (Mark to Market). Bank assets are lowered, so they have less or no money to lend.

It's a similar bubble to the dot com one, except in this case there really ARE assets, and MOST have a value. Seems the banks mostly did a snap across the board decision to value all their sub-prime mtgs at $0. In the dot com bubble, in many cases there weren't any assets.

This will be resolved. This AM I heard a decent plan from DeFazio that is the mirror opposite of the plan they voted on the other day. There will be people hurt severly though. I don't see much hope for the people who bought radically overvalued homes in certain parts of the Country. That value was never there and it won't come back.

If interest rates are less than the rate at which houses appreciate, a person is stupid to not borrow as much as the banks will allow, for the biggest possible house. Everyone has access to the same math, so a housing bubble occurs.

There is a good case to be made that 4-5% interest rates made a housing bubble inevitable, and removed all incentive to save.

When I was in my early 20's, I considered myself the luckiest guy in the world because I got a mortgage at 11.18%. Because interest rates were so high, prices were relatively low. I bought a $47,500 3-bed 1-bath two story on about an acre in town. I put about $10,000 down. As interest rates dropped, the value of that house doubled, then doubled again. Given that history, I don't really blame the current owner for buying that house with a nothing down stated income ARM. His payments started at about the same as mine were in 1985.

Low interest creates high and volatile prices for goods (including homes) and low savings. Our savings rate sucks because saving is irrational.