Saturday, April 08, 2006

The No-Drop Drop in Housing Prices

Let's say you missed the boat. You didn't jump at the $450k starter home in Camarillo two years ago. Here's those numbers:

$450,000 @ 5% and $50,000 downpayment: $2147.29/mo plus taxes.

But you were "smart." Even as prices ran up to $600,000 you knew sanity would eventually return. So, what do prices need to be to get the same deal when rates are $7.5%? Ans: $320,000. How's your patience? That's only to get back to the deal you didn't like 4 years ago. Gonna look better the second time around? Where ya been livin' these last 4-5 years? In order for your patience to be rewarded do you really think we'll see $600,000 houses going for $250,000?


Anonymous said...

C'mon now, Robert, what's the point of this? If you stop here, it's just a basic calculation that most folks who land on your blog are doubtless already aware of. Maybe it's meant as something to make smug renters a little less smug, but I doubt most of us who missed the boat are all that happy about it to begin with.

Seriously, I read here because you've got provocative thought to burn, it's just I wish you'd run these things out with a little more thoroughness and patience so that greenhorns like myself can walk away with something that's more like argument and less like innuendo to chew on.

I have no freaking idea if we'll see $600k houses going for $250k, but I would definitely like to know whether you think so and why; and if you don't think so (I gather you don't), I'd like to know what you think will happen instead, and why (is it because you foresee some combination of inflation/bailout, despite your views on gov't guarantee of the GSEs? ... but then you've mentioned looking forward to letting others work "for the privilege of using my money," which suggests that you foresee deflation? I think I'm paying decent attention here but I really am having trouble following).

Not trying to call you out, on the contrary, I'm looking to learn and to get some insight on what's in store for the coming years. Beyond the recognition that we're already all f'd, I mean. ;-)

Rob Dawg said...

Alright grasshopper, you "got me" on several points. I tend to open a difficult topic with a short provocative comment. I don't wish to stiffle any exchange when there's interest in the subject in general and not just my opinions. When it comes to my making sweeping critiques that's when you have to slog through the big cover all bases posts. This one is about the time value of living among other things.

I'm always glad to continue with more detail/expansion. I also like a little feedback so I don't imagine I'm talk to the ether. If I had a Sub-Etha-Sensomatic... but alas.

I've got a suspicion that the $600k house is going to eventually sell for the equivalent of $250k. Surely there will be substantial and quick price drops. That's the easy part. I also suspect a protracted shallow decline, again not real rocket science. Finally I see bigger forces that will inflate even more value so even if what's left is still $400k-$350k it will seem like $250k.

Why is this a difficult topic? Because of the big fight over in that inspired the thread. No one denies that the FDHLRUs (fat dumb and happy line replaceable units) sitting smug in their exurban dystopias are clueless and feeling entitled to something that was not earned. No one has any shortage of complaints concerning the FBs and the gross distortions they've participated in. Where it gets difficult is the third category. The left behinds. We are supposed to only feel sympathy but I think there's more underneath.

Anonymous said...


thanks for the elaboration. I only discovered your blog about six weeks ago, after finding the Housing Bubble Blog and reading your comments there, so I may have missed past "cover all bases points" that would have let me read between the lines a little better.

I have no problem as a rule with the quick provocative hit --- anyone who's tried to expound difficult views in an unvarying tone of earnestness knows that's a thankless job. Occasional explanations are good for reader morale though. I'll stay alert for more of the same.

I wasn't aware of the context for the posting, I hadn't been following things over there. Seems odd that there should be an obligation for sympathy or any other moral position toward the "left behind" or even the "FDHLRU" (very funny), and I say that in my capacity as one of the former ... folks can have sympathy for me if I end up having to bail out the FDHLRU/FB via increased tax on my savings, which I probably will, but until then I figure I've pretty much played my cards as I've seen fit to do over the last ten years, and am living with the results, end of story. It would be weird to claim that I have some kind of right to own a home, a right that's been snatched from me by the neg-am lottery bidders ... if my money ends up being used to save those bidders from ruin, that'll be different, but we're not there just yet.

The fate of the $600k house you sketch out sounds nuanced and reasonable to me ... which brings me around to answering your original question: no, I don't think that my patience since (to pick your date) 2002 will be rewarded; obviously, it hasn't been, unless I were to exaggerate absurdly and say that the liquidity and mobility I've kept for the last four years has been worth (again to use one of your numbers) ~$280k. But I do think that my patience *from now on* is likelier than not to be rewarded. I thought that in 2002 and was wrong, but maybe I won't be wrong this time. Every action boxes out an infinitude of possible alternatives, that's life; all I can do is keep my eyes open, expose myself to sound thinking (merci, blogosphere), do the math as needed, and not beat myself up about it if I find myself having this same conversation in 2010 as a result.

Don't sweat the low volume of comments here, BTW, the dense nature of your material makes it tough to contribute. I found my way here through an interest in housing, for example, and am just barely competent to put a couple of sentences together around that subject; ordered thought on public transportation is way out of my league, but that doesn't mean that e.g. your "pay only your operating costs month" isn't a fantastic read. Keep it up.

Anonymous said...

$600k homes going for 250, eh? Marginalizing yourself and making it impossible for people to take you seriously is your choice.

Anonymous said...

... after accounting for inflation, he said. A much less marginal claim.

Anonymous said...
This comment has been removed by a blog administrator.
Rob Dawg said...

Ohhh, a disaffected reader. Anon, your point is valid $600k to $250k does sound like a lot. Even $250k inflation equivalent sounds mighty low eh? Let's look at it piece by piece. First $600k was the peak of the bubble so I take 20% right off the top this spring. $480k and then I predict 7% per year in then year dollar declines. 2007, $446k. 2008 $415k. 2009 $386k. 2010, $359k. Okay and now 2005 $250k in the next few years of 8% inflation: 2006, $270k. 2007, $292k. 2008, $315k. 2009, $340k. 2010, $367k. The inital 20% could take longer than I expect, declines could be less than 7%, inflation less than 8%. Push it around a little bit if you care but it takes a lot to make the prediction look as silly as you wish. The illiquidity of the market isn't going to make for nice smooth graphs for each of these components so YMMV.

Anonymous said...

Robert, that is one of the most idiotic rationalizations of a stupid comment I've ever read, albeit one which would pass for deep thinking on Mushroom Ben's blog.

Rob Dawg said...

Anon 8:31; Sorry you don't accept the scenario. I wouldn't put my money on it either BUT... I would bet against it either. Learn that disagreement is not evidence of failure. I specifically challenged you to fool around with the numbers; run this without an immediate drop and with whatever appreciation and interest rates you care to defend. I'm guessing the best you can stand behind is around half the decline I posit as being possible.

Anonymous said...

Robert, if you seriously believe your statement of "20% right off the top this spring" and 8% inflation, you are delusional and/or marginalizing yourself.

Admitting to foolishnes is always better than idiotic rationalizations which require one to create numbers from whole cloth by backing into a predetermined result. It relegates you to the "Horses Ass" bin.

Rob Dawg said...

Well comments from "anon" aren't worth much. I'm willing to see how the silent spring plays out as to sales prices and sign my name to that. I know 20% is at the extreme of nearly everyone's guesses but I believe the velocity is far faster than most expect. I don't see "orderly markets" being mantained and the FED is not fast enough to head off the problem. Remember, we are talking about houses at the margins and the 20% is a mirror of the recent gains.

I'm predicting here. I certainly could be wrong and If I am I'll be on record as being wrong. Hardly deserves children who feel the need to hide trowing snowballs.

Anonymous said...

the people who barely got in with arms and i/o loans will have to get out fast,they can not refi,and the first few distress sales will drive down comps fast...this is not a rational market and the correction will be at least as irrational as the growth,my gut feel is that the initial fall in prices will be sharp and sudden,20% in the valley sounds reasonable to me.