Shiller: Expect 5 Years of Stagnant Home Prices
Nice Q&A with Yale prof Bob Shiller on home prices:
What are the main factors driving U.S. house prices? What could push them up, or cause another slump?
Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 – that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.
Is there an oversupply of houses in the U.S.?
Shiller: That’s been a problem. The inventory of unsold houses has been high, but has come down a bit. On top of that, there will be more foreclosures, more homes are going to be dumped on the market as people default. Now, that may show down as home prices will start going up again. But I suspect that this isn’t going to happen. Also, banks have more REO, or real estate owned, that they’re holding on to for the time being. But eventually those REOs are going to be dumped on the market. So that’s why it doesn’t look particularly encouraging from a supply consideration.
Congrats to Dr. Shiller on winning the Deutsche Bank Prize in Financial Economics.
>
Source:
Q&A: Shiller Sees 5 Years of Stagnant Home Prices
Nina Koeppen
Real Time Economics, September 30, 2009, 11:29 AM
http://blogs.wsj.com/economics/2009/09/30/qa-shiller-sees-5-years-of-stagnant-home-prices/
October 1st, 2009 at 12:08 pm
5 years? What about 15?
October 1st, 2009 at 12:29 pm
No bank is holding any significant inventory of REO “for the time being”. Why would they do that? Only if they expected some dramtic improvement in prices, which would have to happen in the very near future to justify all of the holding costs.
Not hapnin’, Bob.
October 1st, 2009 at 12:31 pm
Very weak, but what can one expect from Yale? He should be saying that there will be no depression for the Ivy League elite.
October 1st, 2009 at 12:35 pm
Do we even have solid estimates of the size of the REO portfolios of the major and regional banks?
October 1st, 2009 at 12:40 pm
Well, ok….through for the morning in the salt mine. One of you budding economists out there interpret this for me, please..
http://finance.yahoo.com/news/Ford-Sept-sales-fall-51-apf-696192978.html?x=0&sec=topStories&pos=main&asset=&ccode=
Ford Sept. sales fall 5.1 percent
NEW YORK (AP) — Ford Motor Co. says its September auto sales fell 5.1 percent, signaling a tough hangover from this summer’s Cash for Clunkers buying spree.
Ford says it sold a total of 114,241 light vehicles, down from 120,355 in the same month last year.
Sales of Ford’s popular F-series trucks rose 3.5 percent, while sales of the new 2010 Taurus sedan increased more than 60 percent.
The September results fell 37.2 percent from August totals, which were boosted by the government’s Cash for Clunkers program.
…So did sales fall 5% or 37%? Are we talking m to m or y to y, or are we mixing and matching our time horizons? It appears they mean 5% year to year, but isn’t the bigger “story” the collapse after the CFC ended? How would you have written the story?…….
October 1st, 2009 at 12:45 pm
Mark Hanson has written extensively about the banks shadow inventories – particularly in CA. If the banks dump their foreclosed properties on the market they’ll collapse the market and not only take real losses on the sales they’ll also have to write down their real estate holdings. Furthermore,additional price declines will push more folks underwater and create more jingle mail. They might be hoping for price increases but they’re praying there is no price collapse.
I think FDIC will set off a land rush when they start liquidating the holdings of failed small & regional banks as they run out of cash and Sheila is aftaid to request their $100B credit line from Terrible Tim
http://mhanson.com/blog
October 1st, 2009 at 12:48 pm
Bruce from ABC
Auto Sales Up in August Thanks to Cash for Clunkers
Hyundai, Ford Lead in Sales but Will Consumers Flock to Showrooms in September?
By SCOTT MAYEROWITZ
ABC NEWS Business Unit
Sept. 1, 2009—
August was a very good month for Ford, which said its U.S. auto sales rose 17.2 percent compared to the same month a year ago.
October 1st, 2009 at 12:51 pm
It looks like we return to the NEW NORMAL after Clunkers, $8K first time buyers etc. And keep extending the extended benefits a quarter each quarter.
October 1st, 2009 at 12:55 pm
Well, jc, it is confusing…and back on topic, I know you’ve been reading at CR about the costs to the taxpayer of supporting home mortgages…I think off the top of my head his ciphering was that the 3k credit costs the taxpayer about 45k overall…
Probably we should let home prices find their own level in the new economy. But since I’m not a politician, I cannot know why that thinking is faulty. But someone whom I’ve elected will soon tell me why we need to extend even larger tax credits to those who wish to buy houses, that in the new economy, they can’t afford.
I think the group Chicago had a song about this very time years ago…it went something like “Does anyone really know what time it is?”….
October 1st, 2009 at 12:59 pm
“Probably we should let home prices find their own level in the new economy.”
So much simpler than dealing with the unintended consequences of intervention.
“Does anyone really know what time it is?”….
It’s later than most people think, especially H Wanger. It’s Red October™.
October 1st, 2009 at 1:19 pm
probably time to start talking quintiles with housing as well as wages
I’ve heard that homes below $250K are selling .. over not so good .. no one ever said the ubbers were stupid .. ie property taxes and energy costs .. I say why in the 1st place .. someone in a thread down the way “gaming the system is the new economy” ya got it
October 1st, 2009 at 1:25 pm
LB – yes, I know exactly where we’re at. You made that call how many months ago?
October 1st, 2009 at 1:27 pm
3.18 on the 10-year. Holy Flight-to-Quality, Batman!
October 1st, 2009 at 1:34 pm
The only cure for high housing prices is LOWER prices…. Stagnant prices are FANTASTIC, because it enables young people to save up their money and buy a house at an affordable price without having to leverage to the hilt. (Incidentally, that’s what I’m doing, so I talk my book…) The only thing I would wish for is for interest rates to go up, which would increase the yield on my cash, as well as drive down the price of homes to the long-term trend.
Think of all the better uses of our money if we don’t enslave ourselves to housing debt for 30 years….
HCF
October 1st, 2009 at 1:36 pm
Has anyone seen anything on national rates for renting homes? I wonder if they’re going down along with home prices, or up because so many people are losing their homes and renting . . . .
October 1st, 2009 at 1:38 pm
@HCF
Indeed. Give lower house prices and deleveraging from crappy mortgages a chance, BB! Do it for the kids!
October 1st, 2009 at 1:41 pm
@ Greg0658, “I’ve heard that homes below $250K are selling .. over not so good.”
If there are no sales, how can we say the what the home is worth? Mark-to-hope?
October 1st, 2009 at 1:47 pm
Barry, just wanted to say your content has ROCKED this week. Is this blog sweeps week or something?
October 1st, 2009 at 1:48 pm
I agree, Transor. Some really good posts here this week. Must be getting close to a top, if not there. ;-)
October 1st, 2009 at 1:49 pm
@emmanuel117:
> Do it for the kids!
I agree completely, emmanuel… People proclaim to “love” their kids, but in reality, the best thing most of us could do for future generations is to hug them regularly, and otherwise just make sure they have a good education and NO DEBT! Everything else, imho, is secondary.
HCF
October 1st, 2009 at 1:50 pm
@Shnaps Says: No bank is holding any significant inventory of REO “for the time being”. Why would they do that?
Here’s my guess about why a bank would hold REO inventory; they can still claim the loan as an asset.
Hypothetical example:
$500,000 loan on house, made to a minimum wage family in 2005. Let’s say they’ve stopped making payments.
Scenario 1: The bank could foreclose and sell the property for its 1999 price, say $200,000, losing the loan ‘asset’ as well as the house.
Bottom line: Net loss, $300,000 or so.
Scenario 2: They could keep the house and the loan on their books, crediting themselves with $500,000.
Bottom line: out the monthly mortgage payment, but the books look good enough to the FDIC to let them keep playing the game.
If I’m a banker short on capital, and long on keeping my job, I could see this as an appealing alternative.
How does that sound to the econ-literati here?
October 1st, 2009 at 1:52 pm
@ HCF The only cure for high housing prices is LOWER prices….
That’s my book too, HCF, keep talking!
October 1st, 2009 at 1:59 pm
@pmorrisonfl:
It’s funny about talking our books… I’m convinced that the question of buying/renting a house is much like “Night of The Living Dead” or any zombie movie. On one side, we renters are beating away all the zombies saying “housing is a great investment” and using all our ammo to argue for lower house prices, no government subsidies/tax credits, higher interest rates, etc. I’m just afraid that one day, I’ll be bitten by the housing zombie and turn into every other “housing only goes up” zombie.
If that day comes, remember to shoot me in the head (figuratively of course) and then burn the body…
HCF
October 1st, 2009 at 2:00 pm
“Has anyone seen anything on national rates for renting homes?”
They are going down Thor, we are in deflation. Calling the sky blue when it’s actually red doesn’t alter reality.
“No bank is holding any significant inventory of REO “for the time being”.
This is total bollocks. The banks have shit-loads of REO and more to come when Jingle Mail hits the high end.
October 1st, 2009 at 2:02 pm
How would Shiller or anyone else know for sure what the banks are or are not holding? They are not required to be honest or forthright about anything, so how would anyone know, except for maybe Tiny Tim and Ben?
October 1st, 2009 at 2:03 pm
@HCF: Wanna buy my house? They’re not making any more land over here in my neighborhood. Get in now or be priced out forever.
October 1st, 2009 at 2:04 pm
@HCF I’m just afraid that one day, I’ll be bitten by the housing zombie and turn into every other “housing only goes up” zombie.
I know what you mean, HCF, I live in South Florida where ‘housing zombie’ was one of the leading professions up until very recently. There are lots around here, dead, undead and unreconstructed. I admit to even feeling optomistic about buying in the next year or so once or twice in the last month or two. On the other hand, one day it will be time to buy… let’s hope we both recognize it in our respective situations.
October 1st, 2009 at 2:06 pm
The company I work for owns a bank. On the bank Web site, there are about 80 real estate listings. Is that all we have? No. We have 1000’s. I’m not privy to why only 80 are listed but I think it’s obvious that we are trying not to look desperate. Some better properties are probably being kept off the market because should the market turn we will get a better price. So Schnaps, you are incorrect.
October 1st, 2009 at 2:08 pm
No hurry, fearless renters, it will be like catching a knuckleball. Wait for it to stop bouncing and pick it up.
Relax. Real estate as an investment is dead. There are too many houses.
October 1st, 2009 at 2:12 pm
Bruce TN
Tremendous pressure on pols to JUST DO SOMETHING!
If we had taken the pure, free market approach then the banks,AIG and other large financials would have toppled like dominoes after Lehman and the entire global financial system probably would have seized up and we’d have 20% nominal unemployment now instead of the stated 10%.
OK, if we agree the “pure” approach is too radical (and it absorbed most of the Fed/US bailout funds thus far) should we have not bailed out GM & Chrysler and let them go BK. Oh yeah we did both. Well maybe the orderly BKs were worth the 10s of billions the taxpayers paid for a soft landing.
Should/could the US turn their back on main street and vote down the job creation programs and clunkers deals after we pumped trillions into the banks?
If the foreclosures start ripping again the banks that hold this bad paper will need another round of help, is there any% chance Geithner will tell them no?
If BBs free money barrage only temporarily jacked up the market and there’s no follow thru job creation and consumer spending increase then we face political pressure for another round of plebian stimulus, with climbing unemployment and mid-term elections approaching thats a tough “no” for the incumbents. If we can run a 50% US deficit maybe we can get away with 60%. Blows to refusal finance
October 1st, 2009 at 2:13 pm
I am confident, here in Boston, that housing is still 20-25% above long term trend and will correct before all is said and done. What I’m trying to figure out is HOW it will get there… Rents go up? Prices come down? Income goes up? Hyperinflation causes nominal value to shoot up (while real value approaches zero)?
Either way, accumulating a war chest as I am attempting to do isn’t the worst strategy, I guess
HCF
October 1st, 2009 at 2:18 pm
Mannwich
Mark Hanson tracks the bank foreclosures thru the belly of the python in CA. How many come into the beast and how many come out the end based on the public data. Right now they’re constipated with various “programs”
October 1st, 2009 at 2:18 pm
PMSO -
Check out http://www.doctorhousingbubble.com/ It most covers California (heavy socal) but he goes into great detail about the shadow inventory.
October 1st, 2009 at 2:20 pm
HCF, I think hyperinflation is the magic elixir that jacks up nominal values and effectively devalues the dollar to allow us to repay these foriegn debts with the new american peso
October 1st, 2009 at 2:21 pm
JC – that assumes no other country in the world does exactly the same thing. For instance, how would China not collapse if our currency implodes? How could they compete without a very strict peg to the dollar?
October 1st, 2009 at 2:29 pm
HCF, Boston will correct, but maybe not as much as more bubbleicious areas.
You just have to wait… individual currency blow-ups are NOT going to happen. Managed deflation.
Hissssssssss…
That’s the air being let out of the bubble slowly.
October 1st, 2009 at 2:32 pm
@jc:
I’m afraid that the policy makers see engineering high inflation/hyperinflation as the “easiest” way out of this… Somehow, most adults are easily fooled by “nominal” values. Let’s keep this in mind if it’s ever $25 to buy a loaf of Wonderbread (“Hey, it was only $2 a loaf when I was a kid!”).
@Thor:
If we all debased our currency tomorrow, then China is definitely screwed (as all of us are). However, I think China is consciously preparing for a post-dollar world, as evidenced by their slower U.S. treasury purchases, it’s securing of physical assets (oil, gold/silver, rare earth metals), and it’s jaw-boning in the marketplace. In our interconnected world, there will ALWAYS be collateral damage from various blow-ups, but I see the Chinese as at least trying to insulate itself… (At least more so than Western Europe and Japan).
HCF
October 1st, 2009 at 2:34 pm
Our terrible financial position dictates that the dollar weakens a lot, we’re the grasshoppers, the Chinese are the ants.
We and the Chinese are codependent. If they stop buying our deficit driven financing then the dollar goes into a tailspin, their US holdings collapse in value and they lose exports and the jobs the exports create, on the US side it’s even worse if thats possible!
October 1st, 2009 at 2:34 pm
@leftback:
So are we opening up the Pandora’s box of inflation vs. deflation? Personally, I subscribe to Michael Panzner’s idea that we’ll see severe asset deflation followed by central bank engineered high (if not hyper) inflation. Way for me to not sit on the fence, eh?
HCF
October 1st, 2009 at 2:42 pm
@HCF:
I think Lefty’s right about Our Fair City. The Mass economy is better than most and we are education/healthcare heavy in the Greater Boston area. Plus, don’t discount the Rainy Day Fund the legislature passed a few years back. I think we would really be up shit creek like a lot of states in terms of govt spending/employment without it.
My .02 is that overall job security/confidence among home buyers is above average and that will continue to cushion the drop in prices. Wells Fargo and Countrywide have some inventory I suspect they haven’t released yet though…
October 1st, 2009 at 2:56 pm
@Transor:
Agreed that Boston/Eastern Mass. is economically better off than the vast majority of the country. However, it is STILL overpriced. My wife and I are DINKS who make well above the average combined family income of this area and save > 1/3 of gross income and we still feel that buying a merely average house or condo would entail too much downside risk and involve too much leverage. My guess is that housing stays flat in this area and incomes, rent, and inflation creep up so that nominal values appear better than they really are.
HCF
October 1st, 2009 at 3:17 pm
@pmorrisonfl @Shnaps Traders and economists generally get housing wrong, because they think it’s a market like the NYSE. But it’s radically different for two big (related) reasons: speed and people. Where the stock market has trends in weeks, the housing market trends in years. The biggest factor fixing the speed is the human work required to buy or sell a house. I can buy stock in five minutes. It takes a minimum of a month to buy a house. Why are banks still sitting on property? Because it takes a lot of people a lot of time to handle all the work.
October 1st, 2009 at 3:18 pm
I know this is an unpopular opinion but I think China is more dependent on us than we are on them. Although it may be unlikely, it is not completely out of the realm of possibility that with both stocks and real-estate no longer a sure bet, Americans could dump even more money into government debt. I’m in the camp that the savings rate in this country will continue to rise over the next several years. What choice will we have? The easy stock market and real estate money is a thing of the past.
China is enormously dependent on exports to the west. I don’t see their middle class, no matter how large it ends up getting, ever replacing the debt fueled spending spree the US consumer has been on over the last 25 years. Their economy is highly dependent on cheap exports, they cannot continue to send us cheap exports without their currency kept artificially low. See the below article on asian currencies.
http://www.economist.com/businessfinance/displayStory.cfm?story_id=14539269&source=features_box3
October 1st, 2009 at 3:21 pm
PS – We have absolutely no idea what’s really going on in China right now. It should go without saying that any and all economic (GDP, exports, unemployment) numbers their government releases are nowhere near the real story.
October 1st, 2009 at 3:27 pm
The US is living 1984 (CNBC = Minitruth), but the Chinese communists are living Animal Farm.
(Four legs good, two legs better).
Every day out there I hear something else that isn’t true. So it’s either Kafka or Orwell, take your pick.
Winston Smith or Gregor Samsa?
October 1st, 2009 at 3:30 pm
I see someone is well read ;-)
October 1st, 2009 at 3:41 pm
The recession was there all the time. It was behind the telescreen.
October 1st, 2009 at 3:41 pm
@Thor: I see someone is well read
Nah, Lefty is just British. They’re born with a literature section in their brains. It’s why they talk all good and stuff.
October 1st, 2009 at 3:46 pm
@Thor:
Don’t feel like re-hashing our China debate from months back, but I do have to say your argument is very well thought out and worthy of deep consideration. Anyways, it’ll be interesting to see how this story unfolds.
HCF
October 1st, 2009 at 3:53 pm
HCF – sorry, I’m not so good with “The Memory”, I forget who I debate with :-)
October 1st, 2009 at 4:08 pm
Thor says-
“I know this is an unpopular opinion but I think China is more dependent on us than we are on them. ”
?????
who said it’s unpopular???? the whole decoupling nonsense is fanatsy- and those who say EM are the place to be- very high risk in that assumption
October 1st, 2009 at 4:15 pm
The metaphor is a huge mistake.
How is it possible that a bubble can only half- burst?
The search begins for a far more accurate descriptor because as is becoming quite clear, the bubbles have a lot more empty air to lose.
October 1st, 2009 at 4:19 pm
Boston and Mass. generally aree better off because that dead politician Teddy Kennedy like his sycophantic succubus in West Va., Byrd, have swiped money from the rest of the Country’s taxpayers.
In other words, they are heavily subsidized by the rest of us in the other 48 states.
And that’s the truth.
October 1st, 2009 at 4:24 pm
@flipspiceland: Links and/or data to back up that assertion, please? I’m quite sure that states like MA and NY send far more to the Feds to dole out to other small states than they receive per capita, but I may be wrong. Please prove me wrong with some facts.
October 1st, 2009 at 5:02 pm
Boston and Mass. generally aree better off because that dead politician Teddy Kennedy like his sycophantic succubus in West Va., Byrd, have swiped money from the rest of the Country’s taxpayers.
In other words, they are heavily subsidized by the rest of us in the other 48 states.
And that’s the truth.
—-
Err … no. In federal dollars spent per dollar of taxes paid, in 2005 Massachusetts taxpayers received only 82 cents in federal funding for every dollar they contributed to the federal budget. Massachusetts is 40th among states in federal spending received per dollar of taxes paid by the state. The largest freeloaders on the federal weal are New Mexico ($2.03 received for every $1 contributed), followed by Mississippi, Alaska, Louisiana and West Virginia.
Source: http://www.taxfoundation.org/research/show/266.html
October 1st, 2009 at 5:23 pm
Exactly Douglas. Thanks for the link. I figured “flipspiceland” wouldn’t provide me with any actual data or links to support his assertions. Why do that when you can just make shit up? FOX News does it all the time and it seems to work just fine.
October 1st, 2009 at 5:24 pm
@Douglas: And just as I figured – all those “free-loader” states are red states. Of course they are……
October 1st, 2009 at 6:05 pm
@tm2mc your bank doesn’t have to market their REOs on their website, they can certainly sit on them and lose more money via holding costs, taxes, etc. for as long as they want to. But they would be in clear violation of accounting rules if they hadn’t realized the loss at the time the property was taken as an REO asset. About a year ago, the FDIC reiterated guidance on how to account for REOs (or as they call it, ORE ). The key point being you are supposed to realize the hit between your loan balance and the fair market value of the property the day you take title. So letting your REO inventory sit around in a declining /stagnant market only results in further loss.
October 1st, 2009 at 7:21 pm
@LB and Thor:
The truest happiness he said, lay in working hard and living fugally. Somehow it seemed as though the farm had grown richer without making the animals themselves any richer–except, of course, for the pigs and the dogs.
“Comrades!” cried an eager youthful voice, “attention, comrades! We have glorious news for you. We have won the battle for production! Returns now completed of the output of all classes of consumption goods show that the standard of living has risen by no less than twenty per cent over the past year.. . .”
“Under the spreading chesnut tree
I sold you and you sold me:
There lie they, and here lie we
Under the spreading Chestnut Tree.”
See: http://www.ritholtz.com/blog/2009/08/10-for-tuesday/#comment-203094
Welcome to Red October, The Second Worst W America has Ever Seen™