How Low Will Home Prices Fall ?

Over the past few years, my views on Real Estate have covered a broad swath of general and specific commentary. We’ve noted on occasion that:

From 2003 to 2006, Real Estate was driving the economy;
– Housing wasn’t a "true" bubble; Rather, credit was a massive bubble;
– Inventory has continued to build throughout the downturn, delaying any housing bottom;
– High quality homes in good locations priced appropriately are still good sellers;
– As Mortgage Equity Withdrawal (MEW) slowed, consumer spending would also slow;
– A 35% correction in prices, from the highs, was possible.

This weekend, we learned a little something about that last concept. The WSJ reported:

"A 72-hour promotion by Hovnanian Enterprises
Inc. designed to jump-start sagging home sales exceeded the company’s
expectations, resulting in more than 2,100 gross sales, the homebuilder

The figure included more than 1,700 contracts and more
than 400 sales deposits. In its fiscal third quarter ended July 31,
Hovnanian recorded 2,539 signed contracts, excluding unconsolidated
joint ventures . . .

The "Deal of
the Century" promotion which ran from Friday through Sunday promised
"unprecedented savings" nationwide, largely on unsold homes that were
completed or under construction. The best deals available were on the
roughly 2,000 homes already started, Mr. Hovnanian told Dow Jones
Newswires last week."

Let’s put that into a bit of context: HOV did more than 2100 sales in 3 days, versus 2539 sales in the entire third quarter. That’s ~83% of the prior three months of building and selling in just 3 days.

Gee, do you think their homes were previously over-priced? Maybe just a little? Kudos to HOV for finally figuring this out.

There is a lesson in this for Real Estate Agents, home owners, and anyone else who wants/needs to sell their homes: price them realistically, and you can sell them.

It has been more than two years since prices and sales volumes peaked (August 2005), and amazingly, many people are discovering this only now . . .


Hovnanian Spurs Home Sales With Price Cuts of Up to 30%
WSJ, September 18, 2007; Page A12

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  1. michael schumacher commented on Sep 18

    for the amount of press it has rec’d it only has 400 deposits?????

    based on loan changes you can bet that more than 25% of those deposits will cancel out…..there are several other factors that will cut that number down to…..too many of them to go into detail.

    Makes a great headline for them though…..just like LEH earlier today.


  2. James Bednar commented on Sep 18

    How low? Is this an indicator?

    7 Birch, Mendham NJ was purchased on 8/2/2005 for $568,000. Owner defaulted on the mortgage. The property was taken REO by Countrywide on 6/28/2007. The judgement amount was $496,155.60.

    Countrywide, the current owner, has listed the property for sale:

    GSMLS# 2444676 – 7 Birch, Mendham NJ
    Agent Remarks: Bank Foreclosure – Being Sold As Is – Bank Addendum and Pre-Qual / Proof of Funds with all Offers
    List Price: $439,000

    The asking price, $439,000, is 23% below what the prior owner paid for the property in 2005. The asking price is also $57,000 less than the outstanding balance of the loan.

  3. inOrlando commented on Sep 18

    “- Housing wasn’t a “true” bubble; Rather, credit was a massive bubble;”

    I couldn’t disagree with this more.

    A bubble, or financial mania, can be defined as an asset inflation driven by psychology, involving large portions of society (the crowd), where prices divert from historical fundamentals via changed inflation expectations for that asset. In effect, an asset mania (bubble) is like a mass auction where everyone has set aside fundamentals of pricing because psychology rules. The last stage is where the public begins rushing for the exits and trys to liquidate the asset, causing asset deflation.

    The U.S. housing mania 1997-20XX has all of this … except the crash (yet).

  4. gunthestops commented on Sep 18

    Barry—I’m interested in what you took away from the FOREX convention–are you going to have a thread on it in the near future?

    Thanks for all your great posts!!!

  5. yourkillingmelarry commented on Sep 18

    ” The last stage is where the public begins rushing for the exits and trys to liquidate the asset, causing asset deflation.

    The U.S. housing mania 1997-20XX has all of this … except the crash (yet).”

    Watching property bubbles crash is like watching ice cream melt. RE is illiquid so it takes a great deal of time for these things to play out. It will the home builders that will drive the prices down, the existing home sellers have knots in their stomachs right now but will eventually yield.

  6. UrbanDigs commented on Sep 18

    Unfortunately this was a business decision by a corporation knowing full well their inventory issues, backlog, balance sheet, share price, investor concerns, buyer demand, etc..

    Most existing homeowners work on emotion and always believe that their home is worth more than the open market dictates.

    Its not easy to remove this emotional element and unfortunately many existing homeowners are dealing with a re market that is running away from them with each passing month. More inventory keeps coming to market with more desperate sellers.

    Its real bad in some markets and Ill tell you firsthand that my mother in a great neighborhood on Long Island, in a great school district, HAS been aggressively lowering the price and still cant seem to get any buyers interested. Meanwhile, every month more aggressively priced competetiion hits the market forcing us to lower even more. Its getting to be a great buying situation for anyone that can pick out desperate sellers who will settle for way below already aggressively lowered asking prices.

    What was selling for mid 600’s 2 years ago, cant even get buyers when we are now asking mid to high 500’s. Amazing how bad it is out there in some markets.

  7. Pool Shark commented on Sep 18

    “How Low Will Home Prices Fall ?”

    Answer: Nobody can say exactly, but I do know one thing for certain; whatever the average house is selling for today, it will be selling for less next year.

  8. Groty commented on Sep 18

    I wonder how many times the people who bought HOV homes for as muchs as $150,000 greater than those sold over the weekend have puked the past couple of days?

    My hunch is this “Deal of the Century” by HOV was done because it is on the verge of breaching financial convenants for the September quarter. With banks choking on mortgage debt, LBO commitments they are having problems syndicating, and debt brought on the bank’s balance sheet from issuers unable to roll commercial paper, HOV probably its banks would be extra tough in negotiating waivers/amendments.

    I’d intended to go through the loan documents this past weekend to see how close they are to busting covenants, but I didn’t get around to it, so my hunch may be off base.

  9. michael schumacher commented on Sep 18


    The only person worse in “tangelo” mozila..

    Pretty dubious that “ara” went all in on a 100% loan and now wants to be bailed out of it at a profit……but we’re at the bottom!!-LOL


  10. Rob Dawg commented on Sep 18

    1700 contracts and an additional less binding 400 deposits.

    First a lot of those contracts were worked up in the last 3 weeks when everyone knew there was going to a blowout sale so it wasn’t 3 days worth of sales but closer to one months’ worth. And that’s only assumed a very small amount of borrowing sales from future customers.

    Second their reported deal of the century sales are not sales but contracts. Their quarterly sales are sales and typically include 30% falling out before that number is reported.

    Of course HOV just hammered their own asset sheet valuation by 20-30%. That won’t do their covenants any favors.

  11. Josh commented on Sep 18

    I saw ads for the sale and they were quite significant.

    For perspective though, Jim Rogers commented on this during his Bloomberg interview this morning which was a classic.

  12. Ralph commented on Sep 18

    83% of the quarters sales in 3 days!!! That is more telling than anything else one can say.

    Also of note is that this sale signifies a major shift in psychology for the markets.

    UP to this point new home price drops have been hidden behind incentives, freebies and upgrades. This time the money came right out of the price tag.

    Government stats will now be less misleading than they have been but it also finally makes pricing changes more concrete for the average seller and thus should lead to some more realistic pricing all around.

  13. michael schumacher commented on Sep 18


    the stats. that we get from the gov’t does’nt factor any of the extras given away since the HB’s still call it a sale at XXX price regardless of all the incentives they piled on to achieve that.

    If Hov states a home has been sold for $300k that is exactly the price they report as the sale price….nevermind that they may have thrown in $60k in “upgrades” to get that sale.

    So the actual sale price is $240k however not for reporting purposes……

    This fire sale is nothing more than HOV raising cash……to pay off debt.


  14. Das Gherkin commented on Sep 18

    Hey Michael Schumacher,

    Any new info about the NYMEX oil scam? :) I was just reading about that…you mentioned it yesterday or so.

    Could this be a hedge fund driven phenom, or does it have to be collusion on the part of NYMEX traders?

  15. Lord commented on Sep 18

    I heard mention reductions were ~100k, but out here they normally sell ~1mm, though it may have been more impressive in FL. Now I think it has less to do with sellers than with buyers avoiding anything that they fear will lose value in the future, although they apparently felt these were sufficiently discounted to take that risk.

  16. michael schumacher commented on Sep 18

    it speaks for itself……..

    does’nt take much to figure out how it’s done but most likely under the same phenomenon as the 2/20 rule at the brokers. It is in someone’s best interest that Oil is going up while demand slackens (historically)….

    Down is bad and Up is Good………apparently business cycles notwithstanding-LOL


  17. seamus commented on Sep 18

    @inOrlando: A bubble, or financial mania, can be defined as an asset inflation driven by psychology, involving large portions of society (the crowd), where prices divert from historical fundamentals via changed inflation expectations for that asset.

    I couldn’t agree more. The credit bubble didn’t make the housing bubble inevitable — it was the belief that home prices were going to go up forever, especially in certain markets. It’s not just the condo-flippers in Miami and Phoenix and San Diego, many of whom earned massive returns in the early ’00s, but the renters all over America who were terrified that they’d be “priced out forever.”

    What UrbanDigs describes is the inevitable backlash. People are now terrified that buying a home is like buying a laptop — the same product will cost less the longer you wait.

  18. Chuck Ponzi commented on Sep 18

    Back when I started the Socal Bubble site ( in April 2005, little did I know how much I would be chastised for being a doom and gloomer (and I’m pretty bullish in certain non-consumer portions of the economy as is evidenced by my stock portfolio).

    Even bears at the time (perhaps perma-bears), although were in general agreement that there were imbalances, never believed, even for a second that housing was a major story, much less worth starting an entire blog devoted to such stupidity.

    I’m not really tooting my own horn, trust me, my head is big enough, but I will say that I was often surprised myself that so few people got the connection of rising home prices as a major economic imbalance. Again, very few people agreed there was a problem, but if they did agree, it wasn’t a big problem that anyone should worry about. This is my second lesson in bubble economics, and it just seemed so crystal clear. Please, dear god, tell me how people could be so dense?

    Must always be a good time to buy or sell a home.

    Also, yourkillingmelarry, you said:

    It will the home builders that will drive the prices down, the existing home sellers have knots in their stomachs right now but will eventually yield.

    I’ll have to disagree with you on that point. I think you’re seeing much of the picture, but it will be THE BANKS (or MBS servicers as it may be) that will drive the prices down… the homebuilders still have the option to retrench and cancel projects. Banks are holding the toxic sludge on their balance sheets right now. They will drive down prices to reasonable levels.

  19. SPECTRE of Deflation commented on Sep 18

    Barry, what they did was screw all the other folks that purchased from them. Prices are set at the margin. Who will pay full price now when they just marked to market down 20%?

  20. SPECTRE of Deflation commented on Sep 18

    CNBS is showing Gold down. No problem except it’s up 7.40 per CBOT. The assclowns couldn’t be hiding Gold’s climb since the decision could they? END SARCASM!

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