According to zillow.com, property values in cities like Las Vegas have fallen as much as 60%. This alarming decrease in prices can be attributed to a jump in delinquencies because of poor lending practices and the explosion of the housing bubble. Other causes of this disastrous crash are a ten-year appreciation run from 1997 to 2007 that was bound to end, as well as high unemployment.
Via Mary Umberger, Steve Harney compares the surplus of stockpiled foreclosed homes to water built up behind a dam. Property values follow the basic rules of supply and demand, so when those homes enter the market later this year, prices will drop five to eight percent. Therefore, Harney thinks, it’s best to sell.
I originally thought home prices would rise. But Harney’s argument changed my mind. For the most part, I agree that home prices will continue to fall. Austin Anderson, a market analyst and professor at the University of Southern California, also predicts that the same will happen in extremely distressed areas such as southeast Michigan and southern Florida. This is because banks are expected to sell the stockpile of three to four million homes in these regions, but were unsure if values would increase or decrease in 2009 and 2010 and refused. Just like their approach to giving out loans— where borrowers must meet strict standards to even qualify— this strategy of holding on to properties is very conservative.
Another reason why people think home prices will decrease has to do with the high number of vacancies. In one of my previous entries, I discussed how this also contributes to the oversupply. Currently, the number of vacancies in the United States exceeds 18.3 million. Banks own three to four million of these, while the remainder are privately owned. The U.S. housing surplus will continue to go up as long as vacancies increase.
This glut of homes for sale drives prices down. This conclusion is supported by not only the blogging community, but also the theory of supply and demand. For example, the author of a blog entry on monevator.com predicts that home prices will fall as much as 10%. Morgan Brennan, a writer for Forbes, also agrees when she states that “2011 will witness further price declines.” A CNN Money article titled “Home Prices Near 2009 Lows— and May Fall More” also shares a similar view.
The market will also recover slowly because the demand for homes is currently stagnant. This is another reason for “rock- bottom” home prices. Currently, the demand for homes trails the supply.
This lack of demand can mainly be attributed to two things. One is that consumers expect home prices to decrease further. A Gallup poll conducted earlier this year shows that about 27% of Americans agree with Harney and expect home prices to fall. Hoping to get a better deal in the future, most people— even those that can afford it— have avoided purchasing a house.
Another explanation is shockingly high unemployment. Many people who could not make their mortgage payments and were evicted are currently unemployed and will take a while to find a steady job. As of April 2011, The Bureau of Labor and Statistics calculated that the national unemployment rate was 8.8%. For the market to rebound, the number of jobs created will have to be higher.
Although Harney’s reasoning is well thought out, I do have one criticism. When compared to very distressed areas, I think that home prices in wealthier parts of the country, such as west Los Angeles, San Francisco, and Orange County, will recover faster. This is not to say that these pricey communities have not been adversely affected. After all, I reported in a previous blog entry that celebrities such as Nicholas Cage and Allen Iverson have even been foreclosed on.
Fewer foreclosed homes, those being sold for a fraction of what they were worth years ago, are located in these opulent regions. As the number of foreclosures in a community rises, neighboring properties suffer. These toxic properties have a spillover effect on homes nearby, making their value go down. According to RealtyTrac, just one in every 786 homes in San Francisco received a foreclosure filing. Compare this to Las Vegas where one in every 76 homes is bank-owned. The relationship between the number of foreclosures in a region and property values is clear— depreciation rates in areas with many foreclosures are higher. This smaller supply of distressed homes will make the economic recovery in upscale parts of the country stronger.
Home prices in affluent parts of the country will also go up at a faster rate because of the logic behind supply and demand. Rich people with money to spend on real estate— those that prefer to live in upscale districts— create a demand for homes there. As the economy slowly heals itself, more and more middle to upper class professionals will see their incomes return to “pre-recession” levels. This will allow them to return to their old, more lavish spending habits. Spending on expensive homes in certain parts of the country will increase, strengthening demand.
I think Harney’s prediction about the direction of home prices makes a lot of sense. With so many houses waiting to be sold, not to mention a lack of demand, I’m not surprised that our view is widely shared.
The first cause is that limited supply of housing supply could drive the housing bubble. With the increasing demand on the housing marketing, governmental policy on the housing supply would generally impose an upward pressure on the housing market. This generates incentive on house purchasing.
ReplyDeleteThe second cause is the relax control between the commercial bank and investment bank. There are excess trade of risky products such as mortgage-backed-security and this causes the bank to have greater sources of funding to have a multiplier effect on the loan market.
The most serious reason is that the relaxation on credit to the less credible group of buyers. In order to maximize the profit by earning a high interest rate spread, commercial banks are willing to provide mortgages to less eligible buyers. With the high money supply form the Federal government, the sources of fund cost is low and this is a great opportunity to earn profit even though the down payment requirement is getting lower.