The WSJ’s Justin Lahart notes why we saw an increase in New Home Sales last month beyond the weather: Builders are lowering their prices:
"January’s warm weather was one reason for the pickup in sales — but not the only one, according to Oscar Sloterbeck, head of ISI’s survey group. Many builders have been throwing in sweeteners, like flat-panel TVs and better floors, to push sales without having to lower prices. Even so, Mr. Sloterbeck believes some builders have lowered prices to bring customers in.
That is in keeping with what was happening in previous months. In December, the average price of a new home was $272,900, according to the Commerce Department. That was 8.9% below September’s $299,600 — the biggest three-month percentage drop on record. The median price (as opposed to the average price) fell by a slightly smaller 7.7% to $221,800. That is an indication that more expensive homes have seen the steepest price declines.
Prices for existing (that is, previously owned) homes, on the other hand, have registered only slight declines. One reason is that builders are much more motivated sellers than the average homeowner is."
The significance of this is greater than mere Real Estate pricing. As we have discussed for oh so long, this appreciation has been the key to ongoing consumer spending:
"But even if prices for existing homes stay put, that may present other problems, says Lehman Brothers economist Joe Abate. Homeowners have used rising home values to fuel their spending, usually extracting money through mortgage refinancing. If home prices aren’t rising, that spending spigot could run dry. Moreover, long-term interest rates are expected to rise, which could further crimp the refinancing game."
The impact of falling prices has a end game that is potentially very negative — I’ve "war-gamed" various scenarios, and one possible finale is a wave of defaults.
"The big unknown, says Bollinger Capital Management head John Bollinger, is what will recent buyers — many of whom have put down little or no cash to buy their homes — do if the real-estate slowdown steepens. They may not be as motivated to hang on to their homes as traditional homeowners, he thinks, and many may end up simply handing lenders their keys."
While that’s a real possibility, I’m much less sure than John Bollinger as to it ending that poorly. He’s referring to what really is a worst case scenario . . .
AHEAD OF THE TAPE: Home Woes
WSJ, February 27, 2006; Page C1
Putting aside a wave of defaults that increase inventory, if a significant percentage of the market begins to expect falling prices, we’ll see buyers begin to put off purchases and more sellers hoping to beat the rush to the door.
“The big unknown, says Bollinger Capital Management head John Bollinger, is what will recent buyers — many of whom have put down little or no cash to buy their homes — do if the real-estate slowdown steepens. They may not be as motivated to hang on to their homes as traditional homeowners, he thinks, and many may end up simply handing lenders their keys.”
NO, THEY WON’T, IF THEY STILL HAVE JOBS.
After two years of people telling me home prices are going to collapse, it almost becomes a story of Chicken Little.
Since I personally believe nearly everything in life is based on human psychology, including why I am posting on here :), there is no doubt a housing slow down will take place. No where can you turn in any part of the country and not see someone screaming that home prices are going to collapse. Therefore, it is surely logical that people will tend to hesitate and the market will surely slow if for no other reason than self reinforcing behavior. From my experience, I know it also has to do with headlines of national debt, trade imbalances, the war and a general uneasiness many people feel.
Housing market cycles are not a new thing. They’ve been on a pretty measurable boom/bust cycle for as long as I’ve been alive and surely since the beginning of modern society. In the end, the American consumer and American economy has found a way to deal with slow downs and temporary, albiet substantial, home price depreciation. We’ve been through recessions, depressions, slow downs, bubbles, mania and the like, yet the housing market remains resilient long term. One has many reasons to be very cautious regarding the economy given many imbalances that exist today. The concept of the economy being a house of cards is not a new thing. To a certain extent, modern capitalism has always been based on a house of cards. If one thing substantially wrong comes to pass, God help us all. But this is not new.
Nothing was more miserable than being a kid in a blue collar family in the early to mid 70s. War, violence and struggle in America of peaceniks versus “patriots”, globalization, loss of jobs, food stamps, a mood of protectionism with legislation to boot, OPEC woes, a housing peak, a cratering stock market, etc. Yet we survived and so did the housing markets.
Look at Japan. What a miserable mess that has been for nearly twenty years. Yet, I also know personally that life in Japan for most has been quite good. Housing bubble beyond our capacity to fathom, deflated stock market for nearly twenty years and yet most Japanese are quite comfortable financially. They didn’t invest so much in stocks but they became great savers. Even so, as Japan is the world’s largest creditor, their government has run up massive deficits and has seen their debt downgraded in the past. Sovereign nation debt downgrades? Yet they are the world’s creditors that the bears point to as a “healthy” society versus our unhealthy society? China’s day of mess will surely come as well as the government’s portfolio of nonperforming loans will balloon beyond today’s astronomical to stratospheric when they see a slow down. And they will some day.
My point is, we humans tend to screw everything up in due time. It is our nature. Periods of stability create instability. Or in psychological terms, we become self destructive. Bill Clinton’s sexual escapades, George Bush’s alcoholism, Lincoln’s severe depression and thoughts of suicide. They are but the public experiences of “But by the grace of God, go I.
ie, The economy and its cycles are simply a reflection of human behavior. Our methods and risks and greed and passion and fear are all manifested in economic cycles. Yes, the time is likely here for a slow down, financial crisis caused by the Fed, recession or something similar but, hey, been there done that. The house of cards will continue, trends never last forever and tomorrow the entire world population will work to try to make their part better and we’ll likely get through it without a long term mess as all of the perma bears, who by the way are they way they are because of their faulty wiring like the rest of us, are predicting.
Time to buckle up and make this week a better one than last. lol.
Thanks B. I enjoyed your inspirational post to start the week.
Still, the sky really is falling (-;
NO, THEY WON’T, IF THEY STILL HAVE JOBS.
…and fixed rate mrtgages.
If they have ARMs, their jobs may not be enough.
The fun starts when the Mortgage companies start fighting the Credit Card companies over who gets to squeeze these unfortunates under the new bankruptcy rules.
The financial failure of all three is the real worst case scenario
What’s your point? That we can’t control much and since things have always worked out in the long run, we should just accept our leader’s bad decisions and hope for the best because the US always seems to get out of tough situations stronger?
Yes, the US has done great things as a nation but at what cost on a personal level? Is everything about GDP growth or does quality of life have any part in it?
Hitler probably accelerated America’s rise to the top, propulsing the world into decades of growth. Should we, now in hindsight, celebrate him as a gift to the world?
Hitler (and many others) came into power because of mass complacency. Our social fabric is unraveling and people are totally complacent to it in the name of stuff.
B, as a child in the thirties, believe me it was worse.
Listening to CNBC this morning on the way out the door to work, I heard that median new home prices are actually up, not down, for the month of January.
Did I hear wrong? If not, what’s going on?
>>>Listening to CNBC this morning on the way out the door to work, I heard that median new home prices are actually up, not down, for the month of January.
Did I hear wrong? If not, what’s going on?<<< Sales were stronger in the west than in the south. Being that prices are much higher in the west, than in the south, that is where you get a higher median.
I know your life in the thirties was worse than mine in the early seventies. My grandparents always reminded me of that when they told me of walking up hill both to work and back home again. lol. Seriously, I never want to go back there so I can relate to your comment. Frankly, it is a little of that uncontrollable, irrational fear that drives me in business.
D, thanks for supporting my thesis. Control is an illusion or delusion depending on how you frame it. And to a certain extent, no, government or no one else can stop human behavior in a relatively free society. – “The human is a beautiful machine that works very badly.” Cycles will happen and there is likely not alot anyone can do to stop them. Make them worse or better relatively? Maybe.
I read as much as I can about the human condition. Regardless of short term gyrations, the true money is made at behavioral extremes. Stocks, bonds, real estate, whatever. And being in sales & marketing for most of my life, I like to have an inside track on my prey. lol.
D, you know the human brain has a negative bias. Actually, studies have shown it takes five times as much positive feedback as negative feedback for the average human to be in stasis. That’s why old men who never get married or live by themselves turn out to be deviants. Women, in their generally positive nature, bring us back into statis. Did you get your loving kiss this morning? I think you need one. If I were there, I’d kiss you. Not on the lips, of course. That is, unless yur real purdy.
I have to say I really don’t subscribe to your conclusions regarding America’s rise to power or Hitler’s rise to power. To a certain extent, the victors of WWI helped create a crisis in the making where a nationalist psychopath such as Hitler was able to garner enough power to come into play. Or, so sayeth Clemenceau, Germany should be brought to its knees so that it could never start another war again…..or something like that. A major boo boo in dealing with the human condition. Not that it absolves the German people for their part in the most horrific of human atrocities in modern times. Don’t worry, there is plenty to go around. I once read it was estimated that humans had managed to kill nearly 1 billion people since the beginning of time. I digress.
You know, it’s funny how people have a fascination with tragedy, death or war. Oh, as long as it is directed towards others. We were all fascinated with bombs dropping on TV in real-time in Desert Storm. There are incessant blatherers about the Apocalypse. Many are fascinated by natural disasters. War movies and documentaries are very popular and run nearly nonstop on cable. Our F117s fly overhead at sporting events. We cheer our legions on similar to the Romans. We watch the Ultimate Fighter on TV. The Laci Peterson case drew great TV ratings. And as it relates to perma bears, they actually cheer the housing bubble to come to pass or the economy to crater because of irresponsible Fed policy. Even though…….upon second thought, those same people cheering may lose their jobs or their homes or even go bankrupt because of it. They are really cheering for…………..self destruction? You know there is alot written about such topics. There are many hypotheses for this behavior. I generally believe in the one where it gives meaning to an otherwise meaningless life of sorts. It provides clarity into an unclear existence. A reason for being. Something to take the mind off of ones own misery.
Just a thought. Why do people actually wish for bad things to happen? Oh, the bulls are going to get what they deserve now. Uhhh….
And if you don’t like your leaders, quit voting for them.
Damnit! My internet was out for most of the day. I missed out on all the “happy” rhetoric flying about.
Curse you BellSouth!!!!!!!
Anyway looks like the ghost of Crazy Eddie is alive and well in the housing market cause…….
“Our deals are so good they’re Insane!!!!”
Sounds like people are dropping out of the housing market, good time too make some popcorn and watch the picture show.
Is everybody in? Is everybody in? The show is about to begin. – Jim Morrison The doors
Note the difference between median home prices and number of units sold.
Of course, median is a bad measure, as a handful of expensive homes skew the data. See this post on Greg IP of the WSJ.
just as an autobiographical note: i bought my first residence (a condo) in cambridge, ma. in around (can’t remember with certainty!) 1990, when prices had already slumped some. i was naive enough to think i bought at the bottom, but no, prices kept falling for another couple of years before they turned. when i had to sell in ’96 due to a job-based relocation, prices had returned to – exactly where i bought in the first place!
since then, of course, prices have spiralled in cambridge (and boston in general), and i do sometimes wish that i had held on and simply been a remote landlord, but i digress: the point is, i’ve been there, done that when an overpriced housing market falls, and it’s no fun as an owner….
And as it relates to perma bears, they actually cheer the housing bubble to come to pass or the economy to crater because of irresponsible Fed policy. Even though…….upon second thought, those same people cheering may lose their jobs or their homes or even go bankrupt because of it. They are really cheering for…………..self destruction?
No D! it is not! But you already made the answer yourself…..the true money is made at behavioral extremes….you got it?
I know I’m going to make money but unfortunately my mom taught me how to have empathy. Libving with dissonance… if you only knew!
See this post on foreclosures