My Prediction: The Housing Market Is Just Starting to Fall

The sky is falling. No it isn’t. Yes it is. Make up your darn mind.

Actually, the day we put up our house for sale in the Spring of 2006, my wife and I had already decided – the housing market was going to crash.

Even though we nervously watched as housing prices officially remained high in many places, we’ve held to the belief that it was better to pull our money out of market rather than get stuck with a house and lifestyle we didn’t want.

Now that the media frenzy has joined the solo singers who warned the housing market didn’t make sense, we watch for prices to dip low enough to say “buy now.” It might be a while. Housing markets move like aircraft carriers, not speedboats.

In fact, as the ship turns, it has sprung a slow leak. I believe it is only just beginning to sink.

Why? Because the mainstream market has not really been infected with the virus already infecting the subprime market. Yet

You see, when I first started fretting over crazy California home prices in 2004, I was told this: “The market won’t crash because of sound fundamentals: the economy is good and barring another major terror attack, there really isn’t anything to slow or hurt the market.”

In a way that’s true, but not entirely. I mean, there never seems to be a trigger on the horizon until it happens. Those sound fundamentals are BASED on the housing market engine. But regardless of how, a trigger always lurks, waiting for the right moment to strike.

The fact is, there are potential market triggers all the time: Hurricanes, earthquakes, accounting scandals, wars, bad government policies, oil shortages, bad breath. When things are good, the markets ignore them. But when investors are nervous – i.e. they sense fundamentals are not sound – they overreact to every piece of good and bad news.

That’s been the stock market for the last few weeks. Overreaction to mergers, news from the Federal Reserve, the paltry Chinese stock exchange and the news of subprime lenders stuck with billions in bad debt. In other words, investors no longer trust the economy.

No matter that warnings of this problem have been around for years. Now they matter because they are tangible: The value of homes have dropped below the mortgages taken out on them. It’s easy to find a story in almost any newspaper (see below), but here’s a great one from a college friend in The Washington Post (via The Associated Press.)

Now for the ugly part: analysts are claiming the subprime problem is isolated and that the market is improving. A few good numbers leads this Bloomberg reporter to claim all is okay in her lead. But a surge in buying while inventory is still rising is NOT a good thing. And she cites the same biased sources that have been promising that 1. A slowdown wasn’t going to happen in the first place and 2. It really hasn’t been all that bad so far.

Hah! If homes are going dark across the nation, and they’re all about to be auctioned off, what does that mean for home prices of the middle class that seemed safe but can barely afford the American dream?

How many Joe Americans now have mortgages higher than the value of their homes? If Joe needs to sell for some reason, such as a job in another state, can he afford to take a loss? Or is he stuck in his castle? How much did your neighbor’s house sell for?

And what about all those investors stuck with condos they can’t sell or rent out at a rate high enough to pay even have his mortgage expenses? A simple question: Is it cheaper to rent or own right now?

Sooner or later, something has to give and the most likely is housing prices. The real sinking has yet to begin.

Once that happens, an economic chain reaction is likely to occur. Homebuilders will lay off carpenters, roofers and plumbers. Home improvement stores will cut staff to keep costs down. Furniture stores also will be hit. And what will happen to all those real estate brokers? The economic engine propelling this nation forward needs new fuel.

This means opportunity too; just not yet. Eventually, lenders will stop buying their own properties at foreclosure auctions, which is part of the reason home prices haven’t fallen more intensely. Instead the foreclosure market will DRIVE home prices for several years as banks and investors sell properties to regain as much cash as possible. (Doesn’t ANYBODY remember the Resolution Trust Corporation?) And that will mean true housing bargains.

My suggestion is wait for it.

Additional:

• Greeley, Colo.: A Front-Runner in Foreclosures, Los Angeles Times
• Home Equity Could Buoy Economy, Los Angeles Times
• A Hard Fall for Irvine Mortgage Lender, Los Angeles Times
• The Subprime Loan Machine, The New York Times
• Senate Questioning on Mortgages Puts Regulators on the Defensive, The New York Times
• For Some Subprime Borrowers, Few Good Choices, The New York Times
• Foreclosures Force Suburbs to Fight Blight, The New York Times
• Fannie Mae Ends Purchases of Loans by New Century, The New York Times

Comments

[Lester]

Media frenzy? The media played a central role keeping the bubble going. Check out:

http://economicdespair.blogspot.com

It provides an interesting example of realtor inspired bubble talk from the Washington post.

[brettdl]

Yeah, the author is right on. I've been amazed how the quotes from those in the real estate industry often trumped everyone else, especially as recently as last fall.

At least in NYT and LAT, they act like good traders and mostly "go with the trend." The trend is down, not up.

[kate]

"lalalalllalalala - I'm not listening - fingers in ears..." Ok, totally hear you and agree that there is more down swing to occur with the subprime market. But - oh dear, just hoping it's not so bad where we are just buying now - Portland OR. We were so sick of renting, and our landlords put our place on market - and well - instead of finding another rental, we are buying. Fingers crossed we don't get hurt.

[brettdl]

Well, just keep in mind you may need to hold onto the house for some time. Make sure you LOVE the house.

Also, as you negotiate, remember it's a buyer's market in most parts of the nation. (New York City is an exception at the moment.) That means you should be able to literaly ask for the kitchen sink, and get the tub thrown in for free.

We intend to rent for a while more unless I become fabulously wealthy or prices divebomb by the fall.

[brettdl]

Oh, and I'm sorry to hear about your dog, Lucy.

[chip]

I think you're right. And you guys got out just in time, and should be well positioned to buy as the market bottoms out. Great timing!

[brettdl]

Thanks. I hope you're right.

[kate]

yeah, you know what's weird here in portland (and seattle) (and maybe you have it in chicago too?) is that it doesn't seem to be a total buyers market. I mean, sellers have to work hard and give some - but they aren't desperate - and when I was looking, almost everything was getting snapped up pretty quickly. Seattle is actually freakishly still expensive and competitive. I just wonder if there is something about these inner "hip" city locations that are not feeling the pinch because so many folks are trying to live "close in"...?

[brettdl]

Yeah, we see same pattern here too. Older suburbs seem to be getting hit first and the problem is slowly migrating into the city and wealthier burbs.

I don't know Chicago well enough to be sure what's going on here, though the city had so much room for improvement that people don't seem quite as stretched as in L.A., where everything was in the stratosphere. (A one-bed condo on the lake over where we live sells for under $150,000.)

But there is also a lot of heavy building going on in the city, with 8,500 units opening up in downtown this year. When we first got here in September, parking spaces downtown went for $20,000-$55,000 (so I hear.) Now, they're offering them free at one new buildings going up.

And prices are clearly lower. One place I walked into said prices starting at $350,000 but the saleswoman was actually pitching the base property for $300,000.

BTW, my instinct says this is a replay of the late 1980s, when home prices went down for 5-6 years, depending on location. I was in Arizona at the time, where prices recovered more quickly than others, probably because it continued to attract snowbirds and retirees.

Perhaps urban cores are becoming the new retirement zones, which is why they've been more resilient so far. Or maybe the young folk inhabiting urban cores are more financially resilient since many are empty nesters. Hard to say.

Still, I would be careful about buying at the near top of the market. Nothing is worse than spending $500,000 on a house that might drop $200,000 in value, even if it's for only a couple years.

[me]

Prices are already dropping much more than realtors are admitting or reporting. And scams such as 'cash back at signing' allow them to report selling a house for say 300, 000 bucks, put that ont he contract, then immediately refund say 25,000.
Also the real value/price of a house is what it can actually sell for now. People still think their houses are supervalued, but if they try to sell at that price? No buyers!! Zero offers! Why? People want the houee--but it's not wortht he price the seller thinks it is, which is usually the 2005 price.

[brettdl]

Oh yeah, I forgot about the rebate scams to keep prices looking high. Also, the buyer in most states winds up paying more in property tax as a result of the inflated purchase price.

[Mark D]

You know, I don't mean to gloat (seriously) but this is one of the reasons I love living in Kansas City.

Even as the bubble grew, housing prices were tolerable.

For example: Our house is a 3BR, 3BA, 1800 sq feet, 2-car garage, front-to-back split, etc. It cost $150K when we bought it in '05.

Even with a pop in the bubble, we could still sell it today for about $180 - 200K. And that will probably be as low as it ever goes.

KC is that stable for the most part, so it will primarily be the subprime folks who are going to feel the heat. Unfortunately, they're the ones least able to withstand it.

Now, I truly, honestly feel for folks in Seattle, NY, and even parts of Chicago, that probably paid 2-4 times what we did for half the house. Those places are going to lose lots and lots of value.

But only in the short term.

If someone plans on living somewhere for 10-20 years -- or even 5-10 -- then they should be alright. But some folks may have seen dollar signs and wanted to flip the house in just a few years. Those days are over.

Of course, this mainly applies to prime-level homeowners/buyers. The subprime market is a whole other beast ... that will die a very, incredibly, painful death.

/long winded comment

P.S. I write personal finance articles for a living, so I have some knowledge. If anyone else smarter than me -- not hard to do -- wants to correct my assertions, please feel free. :-)

[brettdl]

I agree that in the long-term housing prices will come back. As a whole, they always go up.

[Judicous1]

"I agree that in the long-term housing prices will come back. As a whole, they always go up."

long-term quantified is what, 20 years give or take a few?

[Judicious1]

"I agree that in the long-term housing prices will come back. As a whole, they always go up."

long-term quantified is what, 20 years give or take a few?

[brettdl]

lol. Well last time the market took about 6-7 years to hit bottom.

[EnTrust]

Foreclosure rates will only continue to rise well into 2008.