

Why home values may takes decades to recover - landist
http://i.usatoday.net/news/graphics/housing_prices/home_prices.pdf

======
coolestuk
I've been making the same points for a decade. The Bank of England was given
the task of keeping inflation low, and their means of doing this was interest
rates. When inflation was getting close to the acceptable ceiling, they
increased interest rates.

Technically we had an inflation rate below 3%, but only because house prices
were excluded from the inflation figures. Mortgage payments were probably most
working people's single biggest payment, yet the huge rises in those costs (as
house prices increased) didn't go into the inflation figures. If they had,
then inflation would have been well above 3% and interest rates would have had
to rise, dampening the housing market. I can't help but believe that
governments were happy to exploit the electorate's belief that they were doing
well financially, when in fact it was an illusion.

House prices will have to fall by about 50% (the figures for the UK look
pretty similar to that USAToday presentation). People were prepared to take on
ridiculous loans when the bubble was being inflated, because they thought they
would be unable to afford property if they waited.

In fact, the situation in the UK sounds like it might have been worse than in
the US. There were significant numbers of 110% mortgages available in the UK
until a couple of years ago.

The BBC did an expose in 2003 showing that major banks were encouraging
customers to lie about their income in order to be able to buy property. Yet
this expose has been buried, never to be mentioned. The government and the
financial regulators did not want to know.

The median salary for a graduate in London is £24,000; the median price for
property is £335,000.

I have friends who came from working-class families who were still able to buy
houses when they were students back in the 1970s.

~~~
potatolicious
I agree wholeheartedly. I remember when I started college I did a quick
calculation of how much money I'd have to make for the lifestyle I wanted, and
support my potentially future family - which is basically on par with what my
parents offered me.

It surprised me how much _more_ I'd have to make compared to my parents in
order to afford the same things... almost double really. Most of the
difference came due to the fact that the house is now worth three times as
much as when they bought it 15 years ago. Housing in general is ridiculously
out of whack with reality, and in a selfish way I hope the recession-style
home pricing stays for good, it'll allow a lot more young people to buy in and
actually afford to live in their own place within their lifetimes.

~~~
netsp
Why selfish?

You'll be able to afford your house. Your friends will too. Your parents will
still own the same house. So will their friends.

I don't think it should be any different to hoping ipods will be cheaper.

------
dantheman
The whole concept of home value recovery is flawed.

We don't talk about the recovery of gasoline prices. The concept that a
bubbles peak price is somehow correct is by definition flawed.

~~~
krschultz
That is an awful analogy. Aside from those in the oil industry or
envirmentalists who want to discourage use, everyone likes low gasoline prices
because energy prices are only a cost. The money you spend on gas it lost
forever.

The money you spend on a home is money you will some day get back. Whether it
grows or not, most people expect its nominal value to at least stay constant.
More likely the real dollar value will be constant and the nominal value will
rise.

When home prices fall precipatously it is a drag on the economy. Suddenly
anyone under water on their mortgage or at a loss on their home can no longer
sell, and are effectively locked into their home. This is inefficient because
the best labor can not fluently move the most appropriate jobs. The money tied
up in a falling home can not be reinvested. An over extended house can not be
reversed mortgaged to fund a small business.

It is nothing like gas prices. Low home prices are only good for those (like
me) first entering market. But the number of those first entering the market
will by definition be much smaller than the number already entrenched in it.
Aside from a small percentage of speculative investors the popping of the
bubble simply hammers anyone who bought a home in the last 5 years out of
necessity and will continue to be a huge problem for our economy for years to
come.

~~~
netsp
High energy prices are good for whoever owns energy. Mostly it's countries
with natural reserves. But there is nothing stopping anyone from investing in
a way that ties his fate with theirs.

A house deteriorates too. You invest in upkeep. The difference between the two
are: (A) you buy housing all at once and (usually) pay over time. (B) housing
is a manufactured good while oil is a resource.

Sure it would be a difficult "adjustment" for those that saw their house as an
investment if prices went into reverse in the long term. It would be a serious
hit for those who are invested in multiple houses. But it would be a net win
for society.

If you own a house that is going up in value, you win nothing unless you sell.
Even if you sell, you are most likely to lose since most people upgrade rather
then downgrade or move to renting. If house prices went off a cliff new buyers
would win, upgraders would win and "investors" would lose. The long term
nature of the product would mena that it would take time for the benefits to
affect the averages, but over time people would need to spend less on houses.
This would make them weathier.

The problem you describe is not inherent in houses. It is inherent in
expectations. People made decisions based on expectation that houses are the
best investment. That is the root of the problem. If the expectation had never
existed, houses would be seen as goods and noone would be that worried about
their house value going down. It would just be like buying an item at price X,
one week before it goes on sale. That's not such an economic hit.

~~~
krschultz
This isn't an over time thing. This is an all at once thing.

You obviously don't know people going through this so let me paint you a vivid
picture.

My grandfather died in March 2008. His home wasn't an investment, it was the
house had had lived in for 40 years. He paid $340,000 for it. We have been
trying to sell the house for over a year, we finally sold it this month for
$150,000.

That is the housing market right now in a nutshell. It doesn't really matter
to us because the estate is a gift to us, not our own money really.

But now flip the coin to the people who "normal" home buyers. Say I moved into
that house 10 years ago and now my job is gone. I want to sell that house and
move somewhere else. What am I going to do if I bought the home for 340k and
have to sell it for 150k. I owe the bank almost 200k. I'm not an "investor", I
have a wife and two kids and all we want to do is get out of our house. We
didn't buy it as an investment and we played by the rules, but now we are
completely and utterly screwed.

It has nothing to with investing. It has to do with putting a roof over your
kids, and the expectation that if society won't burn to the ground around you.
For people underwater in their homes - society has basically crashed and
burned around them. They are basically trapped in their current situation
whether they want to be there or not with only one way out - default.

People love to blame sub-prime borrowers who shouldn't be in homes, or
speculators who shouldn't have bought homes. Sure those guys lifted the prices
that everyone had to pay, but the VAST MAJORITY of homes bought during the
bubble were still primary residences for people, and all of those regular
families are now the victim in this situation.

Ignoring those problems is to be either incredibly out of touch, incredibly
stupid, or incredibly callous.

~~~
netsp
Sorry. I didn't mean to seem harsh. Quick jumps can be very hard on some
people. 340k to 150k is very big. But I do think these are more end cases then
it seems. The point to note is this:

 _I" want to sell that house and move somewhere else._ "

In the majority of cases, people want to buy at a higher price. Even if they
want to buy a cheaper house, you lose the difference between the house prices
at the time you buy, the price at the time you sell (buy again), times the
rate at which house prices fell. Say you go from a 300k house to a 200k house
after a 25% fall (big numbers), you "lose" $25k. If you move to a more
expensive house, you "win."

If your house is under water, you are in no worse a situation really then if
prices hadn't crashed. You still have the same mortgage.

When you buy a house you lock in your housing costs.

------
martythemaniak
Comparing median household income to median house prices is probably 80% of
what you need to explain the housing market, and this article does a pretty
good job. The essence is that you can't sustainably spend more on a house than
you make, so there is no reason to expect the historical ratio to change more.

The only way you can reasonably expect that ratio to change in a dramatic way
the way it did is if there was some underlying structural change in how people
live. For example, a massive migration to dense cities where you're not
spending hundreds a month for a car means you can, spend a larger proportion
on housing, pushing that ratio up. But of course, we know that hasn't happened
and will take decades if it ever does.

------
nostrademons
The data is great, but I really wish they would start the Y-axis of their
graphs at zero. It's easy to obscure the true magnitude of a change by picking
an arbitrary starting point. </pet-peeve>

~~~
thwarted
The true magnitude isn't the point, the relative change is, and limiting the
graph to a specific sub-range makes it easier to read because it is is more
straight forward to following the tick lines to the actual label numbers on
the Y-axis. There are a lot of ways to misrepresent data, and data on graphs,
but this isn't one of them. These graphs are especially nice because the
Y-axis labels are in a largish font, so it's more difficult to misinterpret
the scale.

I do have a minor problem with the last graph though, "Monthly supply of homes
for sale". Since this is meant to compare existing homes to new homes, the
line graph and the thickness of the line doesn't convey enough of the target
information; this would be better done as a bar graph, with two bars, one for
existing and one for new, for each year.

I had a boss once who made graphs with three Y-axes on them (two on the left
and one on the right) and multiple X-axes, all in different scales, mixed
linear and exponential. He tried to use different colors, but would then print
it out in greyscale. They were extremely hard to read and get anything useful
out of, which I always thought was part of his goal.

------
pj
What is the value of homeownership? Why does the government give people
incentives to buy homes in the form of tax breaks, etc?

Is this to create more debt and therefore more currency in circulation or is
it to benefit the homeowner in some way?

It is failed government policy that set all this in motion, the question is:
Why were those policies put in place? Are they for the people or for the
government or what?

~~~
mblakele
[http://www.economist.com/finance/displayStory.cfm?story_id=1...](http://www.economist.com/finance/displayStory.cfm?story_id=13491933)
and
[http://www.economist.com/opinion/displayStory.cfm?story_id=1...](http://www.economist.com/opinion/displayStory.cfm?story_id=13492469)
discuss some of these questions:

"Governments subsidise home ownership because they think it encourages stable,
more law-abiding neighbourhoods. The children of homeowners do better at
school than the children of renters do. Homeowners are more engaged in local
democracy. And, because homeowners must pay off their mortgages, housing
supposedly encourages people to save more than they otherwise would."

~~~
smanek
Correlation != Causation

Is it any surprise that the kind of people who save up a huge amount of money
to make a down payment and are consistently responsible enough to always make
large mortgage payments are 'good' people?

By 'good' I simply mean the kind of people who abide by laws, encourage their
children in their school work, take an active interest in local government,
etc.

This reminds me of a program they had in Illinois where the state decided to
send books to all new parents. Some study found that children who grew up in
houses with lots of books did better on a wide variety of metrics so the
government reasoned that sending books to parents would somehow help the kids.
It never occurred to them that the key was that type of people who bought/read
a lot of books where also the type of people who were better parents.

~~~
mblakele
Oh, I agree - but I was answering a question: "Why does the government..." Is
this scientific policy? Is this good policy? Those are different questions.

------
mattmcknight
One thing that is left out of this analysis is the impact of inflation. While
the inflation that is being introduced by the Fed buying Treasuries won't
necessarily involve wage increases intially, it eventually will distort the
price gains again. It's a blunt instrument to reduce the value of these
massive debts that the US homeowners have incurred and the negative equity
positions that people are in.

~~~
nradov
Inflation only occurs when the sum of money and credit increases. So far
lenders have been reducing credit faster than the Fed has been increasing the
money supply. Perhaps that will turn around some day, but there is reason to
think that we have already passed "peak credit" and such levels will not be
seen again in our lifetimes.
[http://globaleconomicanalysis.blogspot.com/2008/06/peak-
cred...](http://globaleconomicanalysis.blogspot.com/2008/06/peak-credit.html)

~~~
mattmcknight
That is a misleading analysis. The credit you are referring to as part of the
money supply is bank credit, which is created by the central bank when they
introduce currency units. Credit has been moving from the private sector to
the public sector. The US govt has already run 1T debt in Q1. What they
couldn't borrow from abroad with treasuries, they had the fed print money to
buy the excess treasuries. Now we're hearing noises about how the fed wants to
issue bonds. Inflation is coming, just have to figure out what to hoard.

~~~
nradov
You haven't addressed the "peak credit" point. Deflation is upon us. Hoard
dollars.

