Housing market myths revealed
The housing market is undoubtedly slowing, but there is so much speculation and foreshadowing, that it is hard to know what to believe. Nobody knows exactly how hard the “housing bubble” is going to pop, but the so-called soft-landing that many analysts predicted does not seem to be coming true.
An August 25, 2006 article by Shawn Tully of Fortune, “Getting real about the real estate bubble,” dispels some of the more popular myths associated with the housing market.
“Now, the giant popping noise you’re hearing is the sound of yesterday’s myths exploding like balloons pumped up with too much hot air. The newest sign that the myth-makers were spectacularly wrong is the data on existing home sales for July. Nationwide, median prices rose .9 percent.”
“But even that meager number masks the real story. Prices actually fell where housing is most vulnerable, in the bubble markets in the West and Northeast. In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.”
What all of these numbers mean is that people just lost a lot of home wealth, or equity. Things will probably only get worse before they get better.
The first myth we will dispel is that if job growth is strong, than prices cannot drop, thus slowing the market.
“But the argument that prices can’t fall in a good job market doesn’t make economic sense: To be sure, a strong employment picture helps demand. But if far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.”
Of course, the job market and housing market go hand-in-hand, but just because the job market is strong doesn’t mean the same for housing.
The second myth deals with thinking that the builders have learned their lesson last downturn, and will not saturate the market with newly-built homes this time around. But this is obviously a huge myth because there is such a surplus of homes on the market right now.
The third myth says that low interest rates will keep values rising, or at the very least, put a floor under prices.
“What really matters for all assets, whether it’s houses, stocks or bonds, is real interest rates - in other words, nominal rates after subtracting inflation. And real rates fell sharply starting in 2001. That caused a legitimate, one-time increase in housing prices. The rub is that prices rose far more than could ever be justified by declining mortgage rates. That’s where the bubble kicked in. Today’s relatively low rates are not, and never were, a reason why prices would keep rising. Once real rates drop and stabilize, the impetus goes away - again, the gain is a one-time, not a recurring, phenomenon.”
The last housing market myth is that restrictions on buildings in suburbs ensures low supply and guarantees rising prices. There are a few things wrong with this myth.
“This argument ignores that the tough zoning laws and anti-development fervor have been a feature of America’s tony towns since the early 1970s. The “not in my town” phenomenon is nothing new. Sure, it’s still difficult to get new building permits in suburbs of New Jersey, New York, Washington, Seattle and San Francisco. But America’s housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses. People in their 50s and 60s cash out early in San Diego and buy a bigger house for half the money in Texas or South Carolina.
Just remember, when dealing with something as unpredictable as a housing market, always think twice before you take anyone’s prophesies or predictions to heart.