Tuesday, August 24, 2010

The housing market locks up 

It seems to me that this presages another leg down in housing values:

Sales of previously occupied homes fell to the lowest level in 15 years last month as the economy weakened.

The National Association of Realtors says July's sales fell by more than 27 percent to a seasonally adjusted annual rate of 3.83 million. It was the largest monthly drop on records dating back to 1968. June's sales pace was revised downward to 5.26 million.

Home sales picked up in the spring when the government was offering tax credits. But the market has struggled since the tax credits expired on April 30.

I am the rare middle American in his late forties who has never made any money on real estate. I always buy high and always sell low, and for that reason do not consider my home equity when assessing my own financial position. But we have foolishly persuaded most Americans to believe that their home is their "most important asset" instead of a burdensome expense, and they are not going to be happy about this. As people realize that their house is worth less even than in early 2010, their confidence will fall still further and the economy will struggle under the sheer weight of all that gloom.

The temptation, in an election year, will be to reinstate the "temporary" subsidy for home purchases that prevailed through April. This would be a mistake. When you are going through hell, keep going. We need housing prices to decline to a sustainable level, the deadbeats to be evicted, and the bad mortgages to be written off. Until that happens, there will be no hope of a real recovery for the consumer economy.

Of course, your results may vary.


By Blogger Georgfelis, at Tue Aug 24, 11:14:00 AM:

When attempting to figure out what this administration will do in a situation, take the stupidest thing they could do, and double it.

Therefore I believe they will propose that all home mortgages in excess of the real value of the property shall be adjusted down to match, thereby putting the taxpayer on the hook for the “adjustment”, and causing all responsible people to pay for the fools and speculators that drove this huge bubble. It’s a win-win for the Dems, taking money from those rascally Republicans and handing it out wholesale in an election year to their constituents and contributors, what could go wrong? (other than tar, feathers, pitchforks, torches….)  

By Blogger MTF, at Tue Aug 24, 11:30:00 AM:

The second derivative effects should be interesting. As people see their retirement savings decline, founded upon the two bedrock investments of home ownership and the stock market, the hunger for "safe harbors" will grow. Yield chasing cannot be far behind, so preferreds and dicey bonds will continue to be in demand. Most importantly, as everyone looks at diminished yields you would expect savings rates to increase fairly substantially, as people try to recoup their principal losses and build enough to achieve target incomes in a low-yield world. What took $500,000 in savings to generate $50,000 in annual income in a 10% yield world now will take $1,250,000 in a 4% yield environment and, since those savings are after tax, that means the person in our example has to earn nearly twice that amount pre-tax (soon to be higher as tax rates increase).

Obviously, in a consumption based economy, as ours still is, this behavior is a prescription for a very long down term.

If the government really wanted to bring about a recovery, the Congress should immediately lower tax rates. That is especially true for earnings from saved capital, which should probably be lowered to zero permanently. Income taxes should also be lowered, substantially. Perhaps one could argue against lowering rates on really extremely high income levels but I wouldn't.

John Boehner visited a friend of mine recently for dinner, in Ohio. He is going around talking to small business people around the state, asking their opinions of the most critical action items post-election to get the economy growing and encourage job growth. News reports say that Cantor and Ryan, the new Budget Committee Chair on November 3, are doing similar things. These three are doing something the president and his team have never done, and talking to people who create jobs.

More power to them.  

By Blogger MTF, at Tue Aug 24, 11:35:00 AM:

PS. Obviously, the Fed should also consider raising rates. That would help, though the offsetting impact on businesses heavily reliant on credit would be bad.  

By Blogger Simon Kenton, at Tue Aug 24, 01:39:00 PM:

About once a generation, usually locally, sometimes regionally, sometimes nationally, the housing market collapses. With the air squeezed out, the energetic young people in a generation have a chance to found their fortunes as miniature real estate barons. It has been irritating to see this administration block their chance to make it, because Obama et al. wasted so much money on futility. And are still trying to waste it.  

By Anonymous Hal (GT), at Tue Aug 24, 02:25:00 PM:

I think you are probably right that we will be seeing some lower price. The floor doesn't look close yet.  

By Anonymous Mr. Ed, at Tue Aug 24, 03:11:00 PM:

Admittedly without proper research, it looks to me, anecdotally, that not only are home sales down, but attempted sales are down. I'm not seeing many for sale signs in my area. So it looks to me that, for now at least, there is no rush to sell, and that must bolster values. From this, though, I cannot draw broader conclusions.


By Blogger MTF, at Tue Aug 24, 06:05:00 PM:

Our economy sucks and China is going great guns, but we can rejoice in not having this problem!

Route 1 was never as bad as that.  

By Anonymous Fausta, at Thu Aug 26, 08:56:00 PM:

As long as the Community Reinvestment Act is still law, it ain't gonna happen  

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