Mark Gongloff touches upon some truisms in today’s Ahead of the Tape column in the WSJ. Most significantly, he quotes Rosie on the Shadow Inventory, which when you include REOs and spec investors waiting to put their involuntary rentals back on the market, sends total inventory back over 12 months suppy.

But he mentions something I find curious: “A consensus is forming that home sales and construction are at long last bottoming and may soon rise. Economists largely expect this week’s numbers to affirm that notion.”

Consensus? Why should investors — or homeowners, for that matter — care much about the opinion representing the consensus view? That consensus missed the credit bubble as it formed, wrongly believed the sub-prime issue were “contained,” and utterly missed the top in housing. If you followed th consensus, o lost 50% of yuor money last year, saw your home value drop 30%, and generally got mangled in most asset classes other than Bonds, Cash and Gold.

Indeed, its hard to think of anything the “consensus” view got right when it comes to Housing and credit over the past decade.

As to halting the fall of prices, I believe that’s backwards — we want prices to normalize, so that more people can afford homes. Until that happens, Housing cannot begin to recover.

This week’s data: S&P Case-Shiller HPI today at 9:00am; Existing Home Sales Wednesday at 10:00am; New Home Sales Thursday at 10:00am.


More Job Losses = Greater Foreclosures (May 25, 2009)

NAR Housing Affordability Index is Worthless (August 13th, 2008)

True Housing Recovery Depends on Prices
Mark Gongloff
WSJ, May 26, 2009

Category: Economy, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

58 Responses to “Why a Housing Recovery Requires Lower Prices”

  1. Obviously, it is a question of degree.

    But watch the data for non-distressed sales as a hint of “organic” purchasing power of regular consumers

  2. call me ahab says:

    BR Says:

    “As to halting the fall of prices, I believe that’s backwards — we want prices to normalize, so that more people can afford homes. Until that happens, Housing cannot begin to recover.”

    amen to that- the government is doing all it can to put a floor under almost every asset class- with housing it has forced to rates unprecedented lows, expanded loan limits for FHA, VA, and conventional loans and created an $8,000 tac credit for 1st time home buyers-

    Uncle Sam is the best friend to industry but is the mean ol’ uncle to lower income folks who may be able to buy as a house if the price is right (all without the financial voodoo that had been used to “get” people into homes during the boom)

  3. ben22 says:

    speaking of housing:

    “I have never once considered it appropriate to put taxpayer money on the line”

    What? Is he serious?

    And if I hear one more time that someone that is 6’1” and is 200 lbs is ‘physically imposing” I’m going to puke.

  4. The market must find an equilibrium but it won’t happen soon. There is massive government intervention.. foreclosure moratoriums have been off and on here in CA since last July and another about to start in June (adds another 90 days to the foreclosure process unless you offer the borrower a loan mod) restricting supply (supply is extremely tight on the low end right now). Throw in engineered low rates due to $1.25 trillion in purchase by the Fed (using printed money..) to keep rates low and a tax credit. Buyers can buy a higher priced home than normal due to the low debt service costs. But the ability for the replacement buyer to do that sometime in the future is definitely an open question.

    If you look at underwriting and interest rate changes over the past 30 years… lower and lower down payment requirements combined with lower and lower interest rates. The ability to squeeze more out of the market is extremely limited.

    Can you imagine what the housing market would look like with rates around 7%? That isn’t even historically high. Whether the fed keeps mortgage rates low for a long time isn’t the issue.. whenever they stop the market won’t be able to handle it. People talk about a double dip recession… How about a double dip housing bust? The Fed is just buying time for the banks to recapitalize before taking the second round of losses. Local governments dependent on property tax revenues are having a hard time treating these lower prices as a the new normal.. but they haven’t wrapped their heads around the fact that the new normal is a place even lower than today.

  5. If you look at the bottom chart on this page (click to enlarge):


    100% financing (bottom axis) across the whole price range (left axis), now we only get low down payments on the low end. PMI is not taking any risks for the high LTV loans in CA anymore so it is FHA or nothing.

    FHA + tax credit + low rates gets you massive support on the low end. The FHA is going to start allow the tax credit to be used (“monetized”) as a down payment soon..

    This isn’t a horrible market to liquidate supply into.. but supply is consistently being interfered with by various laws designed to prevent foreclosures coming onto market. This will lengthen out the timeline for recovery.

  6. Mike in Nola says:

    You can see the new Case Shiller release is really bullish. Look at that bounce at the end :)

  7. Marie Antoinette says:

    Between this piece and the outrageously kind “review” of Edmund Andrews book about how his wayward private parts led him to financial ruin I was reexamining the value of my pricey WSJ subscription this morning.

    Marginally better than the NYTimes but…

  8. Super-Anon says:

    A logical extension of that would be:

    “Why an economic recovery requires deflation.”

  9. pmorrisonfl says:

    Super-Anon writes:
    > logical extension: “Why an economic recovery requires deflation.”

    Perhaps you’d be willing to take the logical converse: “Why an economic recovery requires wage inflation.”

  10. danm says:

    Since many Americans never planned on paying off their mortgaged since they basically rented a lifestyle and planned on selling when their place in the life cycle changed, I’m still trying to figure out to whom they will be selling their overpriced homes.

    If young people are graduating with huge debts and taking on jobs that don’t even make a return on their investment, how the heck are they supposed to buy houses over 200K.

    Just do the math. You need to save 10 to 20K per year and hopefully have you house paid off if you want to retire. In the vast majority of cases, the mortgage needs to be under 200K to meet these objectives.

    So it’s not very complicated, house prices need to come down or we need inflation. Until we get one or the other, the probem will not be solved.

  11. Cursive says:

    @Mike in Nola

    “Based on the March data, however, we see no evidence that a recovery in home prices has begun.”

    There was some good news just before that line, so let’s see how this is spun by the financial and MSM press.

  12. leftback says:

    “we want prices to normalize, so that more people can afford homes”

    Thank you, Barry. Why does nobody in the MSM ever say this? Are we so afraid of truth these days? As I have written here on many occasions, we do not in any way have a “housing crisis”. The Housing Crisis was the boom in prices that preceded this bust and priced millions of Americans out of the market. We are simply regressing to the mean in terms of affordability, by way of an undershoot.

  13. danm says:

    “we want prices to normalize, so that more people can afford homes”
    But if prices drop, municipalities will need to adjust the taxes and just you wait and see how many will go bankrupt when their revenues drop.

    Why is it so hard for so many to see the domino effect?

  14. tagyoureit says:

    Boom in prices in absence of equivlent boom in median income.

  15. leftback says:

    “municipalities will need to adjust the taxes and just you wait and see how many will go bankrupt ”

    The next bailout looms large. As you say, danm, the next domino is as clear as day.

  16. larster says:

    With wage deflation and interest rates that are unsustainable housing will continue to go down. Normalization is what people can afford with 10-15% less income and paying 3-4% higher interest rate. Not a pretty picture for buyers or sellers.

  17. call me ahab says:


    municipalities adjust their tax rates all the time to protect revenue- they will lower rates when home prices are increasing substantially and they will increase rates when home prices are stable or falling- I see this happen all the time-

    the goal is to ensure a certain amount of revenue from RE taxes regardless of boom or bust

  18. leftback says:

    @ben: everyone who posts here is 6′1” and 200 lbs and are ‘physically imposing”. LOL.

  19. danm says:

    call me ahab Says:
    In Montreal, when real estate tanked (referendums, ressession, etc) taxes came down.

    This does not happen with a small drop but it does happen when after a huge shock.

    You can’t keep on charging 8K (because house was selling at 500-600K) on a 250K house. People will move out.

    You’ll be amazed what will happen to zoning and tax rates when people truly begin to understand what is going on.

  20. leftback says:

    OT: I think we may be seeing the beginning of a little summer rally in the greenback. A reversal in oil prices is likely from here and I would expect that to put a floor under the $ and drag gold down as well as many other commodities, many of which are looking overbought at this time.

  21. dead hobo says:

    As usual, most here see housing as just housing, and not as a part of an interrelated system of economic assets, each of which are valued as a result of human behavior. Housing will not recover to any substantial degree until people feel comfortable about a future that is reasonably predictable. People need to feel safe about their jobs, wealth, and income before housing recovers substantially.

    The biggest unknown that most here and virtually everywhere else ignore are commodity prices and the asset inflation that makes the prices of the things they are used in completely unpredictable. On TV over the weekend, I saw a poll that about 20% think gas might go to $5 within a year or so. Over 1/2 think it will return to the $3 to $4+ dollar range within a year or so. Thus, only a minority think it will remain at the current or lower levels. Remember, there is a world oil glut at this time .

    While the FED chooses to ignore CPI prices that include changes in oil, food, and other commodities, the rest of us can’t. Second effect influences just compound the problem. Blind fools claim asset inflation can’t exist in the commodity markets; for some reason these markets are immune while tulips, housing, and other markets respond to bubbles quite nicely.

    Stability won’t return to housing until prices and the cost of living become predictable. All discretionary consumption will stay low end until people feel safe again.

    Regulations that limit the amount of cash that may influence commodity prices upwards need to be developed. These regulations will simply limit the amount of cash allowed in the markets. Too much cash chasing too few assets creates inflation. To fix inflation and uncertainty, put limits in these markets. Then watch the rest of the economy grow as people begin trust that the financial world is no longer controlled by thieves and opportunists.

  22. I-Man says:

    @ Ahab:

    “the goal is to ensure a certain amount of revenue from RE taxes regardless of boom or bust”

    Yes, but when that “certain” amount keeps dwindling and dwindling… and the people grow more and more wary of higher property taxes… let alone actually being able to afford them…

    Where does “the buck” stop???

    CA is the screaming baby no one is listening too.

  23. franklin411 says:

    You can’t ignore the fact that CA is a special situation. Name another nation or state in the world that has an $1.6 trillion economy (pre-recession, but still…that’s not peanuts!) and a population of 37 million people, and requires a 2/3 majority to pass a budget. It’s the 2/3 rule that makes California a disaster–the 1/3 in permanent minority status has absolutely no incentive to be responsible. The voters didn’t reject new taxes. They rejected the idea that you can fix our problems with a band-aid. They rejected the idea that turning a $21.5 billion budget hole (without the propositions) into a $16 billion budget hole (with the props) was “fixing” the problem.

    Consumer confidence is out: 54.9 (May) vs 40.8 (April). Green shoots, citizens! Green shoots!

  24. Mike in Nola says:

    dead hobo: You make some good points. New consumer confidence # sucks, but big jump, showing once again that popular opinion is generally wrong. It just takes awhile to show up.

    I wouldn’t worry to much about oil. The “free market” will correct it. After enough speculators get their heads handed to them, the bubbles will quiet down.

  25. VennData says:

    We should be able to vote that we can have no more tax increases… like they did in California… that worked out great.

    And cut back the “supply of cash” like Hoover did at the start of the great D… that worked out great.

    And give tax cuts like we did on mortgage interest, property taxes, and capital gains on the sale of homes… that worked out great.

  26. [...] « Why a Housing Recovery Requires Lower Prices Only a madman can get the $ to rally? [...]

  27. cjcpa says:

    lots of buyers this morning. indexes on helium.
    must have been some good BBQ stories this weekend.

    Or maybe everything really is getting better.

    Two sides to every trade, but I’m still checking quotes on qid, for some reason.

  28. leftback says:

    Back to property taxes. Westchester County, NY has modest houses selling at $1.2M with taxes of $25K/year. Who the heck is going to be able to pay those taxes? Can anyone here say “unsustainable” ?

  29. Onlooker from Troy says:

    Of course the consumer confidence number is all about the stock market rally and the surrounding mini-capitulation to the idea of a recovery that’s taken place recently. Not many have wanted to stay so negative in the face of a rising market. Even Roubini and other realistic bears have moderated their public rhetoric a bit. Just enough to get people to think that the bulls must be right, despite all the real evidence to the contrary.

    That combined with the seasonal (spring) tendency to be positive following on the heels of an awful winter (economically) gives rise to this improved cons conf #. It won’t last, sorry to say.

  30. dead hobo says:

    Mike in Nola Says:
    May 26th, 2009 at 10:05 am

    I wouldn’t worry to much about oil. The “free market” will correct it. After enough speculators get their heads handed to them, the bubbles will quiet down.

    I disagree. Oil prices have risen because the stock market has risen. A lot of the stock market increase was due to liquidity and not fundamental valuation OR by being controlled magic charts. Just cash chasing a return. The stock market will always do this. Oil shouldn’t go up just because speculators know how to work the market when liquidity comes back and returns are being chased.

    Speculators create a back story. This one involved a vague promise of economic recovery which will drive oil demand to old levels and old prices. The media, being stupid and complicit in many cases, goes along. Speculators don’t mind buying at higher and higher levels because of the promise of big profits later on. Even if big profits don’t appear in reality, they will appear from greater fools that chase returns. The current glut is ignored because the back story of fantasy high demand in the future.

    This scenario is easy to repeat. Only the back story driving it may change a little over time. A bubble burst will only chase out the marginal players.

  31. leftback says:

    There go the post-barbecue buyers. Flipping burgers, flipping stocks.
    Sitting in cash for now, looking to get short later this afternoon.

  32. Mannwich says:

    Bingo, Barry, but it seems that we the people still prefer to be lied to. After all, its easier and more fun to play pretend. Mass delusion is now America’s Pasttime.

  33. Mike in Nola says:

    Re: Oil

    My stupidly unexpressed thought is that when the little guys get their clocks cleaned enough times on way down, there will eventually be a lack of greater fools for the manipulators to sell too. It won’t necessarily be an increase in wisdom, but a decrease in capital.

  34. leftback says:

    hobo: It’s all about the $, there is really only one trade at the moment. $ moving in opposition to stocks, oil, gold, long bond yields etc.. There is only one market. The currency market is the tail wagging the dog. If you get the $ direction right you will be on the right side of the trade.

  35. I-Man says:

    @ Left:

    “there is really only one trade at the moment”

    Truest words I’ve read in awhile.

  36. dead hobo says:

    Mike in Nola Says:
    May 26th, 2009 at 10:25 am

    … when the little guys get their clocks cleaned enough times on way down, there will eventually be a lack of greater fools for the manipulators to sell too. It won’t necessarily be an increase in wisdom, but a decrease in capital.

    Maybe. Only commodity prices affect everybody. There is major spill over into the real world. Their excessive speculation imposes a huge cost on the rest of the world, both directly and indirectly. Directly: everything costs more due to artificially high prices. Indirectly: the economy becomes inhibited significantly because people are uncertain and, on occasion, afraid.

    The stock market is relatively self contained. People choose to get in or out. People don’t have this choice with commodities.

    I disagree that speculators will eventually learn by having their clock cleaned over and over.

    Stupidity is an infinite resource.

  37. I-Man says:

    @ F411:

    You can’t ignore the fact that CA is a special situation.”

    You’re right, I cant ignore the fact that you are in a “special situation”…

    Its called:

    Being really f*cked.

  38. Mike in Nola says:

    BTW, has everyone subscribed to David Rosenberg’s newsletters? I think they are very good. Lots of facts. Barry posted the link last week.

    Also, if you wanna waste some time, this looked interesting:

    I esp. liked the FBI gadget/widget. You can have the ten most wanted on your desktop.

  39. ben22 says:


    you are spot on with the $ comment. We had some discussion going on it last night in the other thread.


    I’m curious on what you think about the reaction in the dollar today based on the N. Korean missle news. Are you still thinking an “event” will collapse the dollar? I stayed up late last night thinking about what you said.

    I remain a dollar bull at this time, barring any short term set backs on the way to SPX 965-1k. Look out below when both reverse. Dollar up, market way down.

    Credit deflation.

    And last,


    Consumer confidence is out: 54.9 (May) vs 40.8 (April). Green shoots, citizens! Green shoots!

    That is hilarious. LOOK! LOOK HOW THE SHEEP REACT!

  40. ben22 says:


    I signed up however I think they are going to charge for that very soon.

  41. dead hobo says:


    Oil was about $40 a while ago. Lately, it’s been well above $60. The $ hasn’t been this variable. Forex is only a bit player in the price of oil.

  42. leftback says:

    Brian the Broker must have been taking a lot of orders from Johnny R over the mesquite-grilled swordfish steaks.

    hobo: It’s not linear. Oil and most commodities appear inversely leveraged to the $. Can you guess why? (Hint: a major source of the leverage is located in the vicinity of Greenwich, CT and another source is at 85 Broad St).

  43. ben22 says:

    Look, can’t we make the stuff about oil simple.

    Oil rose primarily, imho for two reasons

    1. You had a dollar that had reversed it’s uptrend (for now)
    2. It got killed since the peak, so the normal reaction is that it will snap back from the deep decline from completely silly levels.

    I also think that this rise might be speculators anticipating demand coming back during the summer driving months. When it doesn’t, oil should revert back to a lower level, and any rise in the dollar should help push that along.

  44. dead hobo says:


    I don’t disagree about the major players.

    I just can’t see the $ as having a major influence in the ACTUAL price of oil, as opposed to the BACK STORY that affect the price of oil. The $ hasn’t decreased in value by 50%, but oil is over 50% higher than recent lower prices. It’s a substantially phony issue.

  45. ben22 says:


    could be some brokers were out looking for customers at bbq’s but here is my own take.

    Went to a nice picnic on Sunday.

    Overheard three different conversations about:

    1. Remodeling a kitchen
    2. Buying a new flat screen tv
    3. buying bank stocks

    Take a note from Franklin on the consumer confidence index. This is exactly what I’ve been thinking we’d see as this countertrend rally goes further and further. It would only be fitting that more and more people think things are o.k. before another fall. The more stuff like that is presented as Green Shoots, the better for those of us that plan on getting short soon. If everyone knew it was going to happen they would not only NOT be shopping, they would have already sold.

  46. ben22 says:


    what do you mean by back story? Are you talking about things like oil supply, or countries that have the oil? I’m trying to see your side.

  47. some_guy_in_a_cube says:

    “But he mentions something I find curious: “A consensus is forming … ”

    Nice job again calling them out BR.

    As soon as you hear the words “A consensus is forming”, grab your wallet and run – you’re the dinner!

  48. dead hobo says:


    Re oil:

    You have a good understanding of the Back Story and sales pitch that emanates from it. As long as oil and other commodities allow unlimited speculative dollars into the market, your understanding will remain profitable for you.

  49. call me ahab says:


    Where does “the buck” stop???

    good question- but if someone’s actual RE tax liability hasn’t changed in absolute terms- it would hard to see outrage even if the actual tax rate is higher on the lesser value


    I’m w/ you dude- my only point was that an “unexpected event” such as floating of the yuan would trump the dynamics that are pushing the $ higher -

    you and I are not in disagreement regarding the probable direction in the near term

  50. dead hobo says:


    Re Back Story:

    Re-read my posts. If you still draw a blank then I can’t add anything else.

  51. ben22 says:


    I see what you are saying now. Nice you have the picture, makes your posts much easier to find.

  52. dead hobo says:

    ben22 Says:
    May 26th, 2009 at 10:57 am


    Nice you have the picture, makes your posts much easier to find.

    I like this picture. It makes me look handsome and vibrant.

  53. leftback says:

    hobo: My point is – a lot of the oil trade is simply leveraged $ hedging, although on a smaller scale than ’07-’08.
    I cannot compete with your picture, dude. You are a hobo chick magnet.

  54. Mike in Nola says:

    Thought this was a great headline on CNBC: Consumer Confidence Sees Biggest Jump in 6 Years.

    Wait! Let me get my broker on the line.

  55. dead hobo says:


    Agreed about the direct relationship between the available amount of junk credit and the price of oil. As junk credit becomes more and more available, so will the price of oil rise and rise.

    Mathematically speaking, does the change in the price of the dollar have a leveraging effect on speculative oil purchased with junk credit? For example, if you are at 10X leverage on an oil trade and the dollar falls 1%, would the leveraged value change by more than 1%, and potentially 10%? If so, then this is another reason to limit the amount of speculative dollars into commodities.

  56. I-Man says:

    @ Ahab:

    Agreed on the point of lesser value equating less tax paid, even if the percentage goes up…

    But its the principle of the thing… no one “feels” like they can afford higher taxes, and given the impending backlash of all this spending, likely wont “feel” inclined to vote in any higher taxes, and with rising unemployment and falling household wealth combined with lower property values with which to milk revenue from… the stage is set. So where does that Buck stop?

  57. [...] until housing prices come back to earth. And according to author and blogger Barry Ritholtz, they still have a long way to fall. There are still two to three years of “toxic” balloon mortgages out there ticking like [...]

  58. [...] view may be correct, but FusionIQ CEO Barry Ritholtz cautions people to be careful when discussing the consensus opinion about a certain [...]