Dean Baker: The Housing Crash Recession of 2007

[marmar]

The Housing Crash Recession of 2007
By Dean Baker
t r u t h o u t | Columnist

Tuesday 05 December 2006

As we approach the end of 2006, the economy's prospects for next year appear more gloomy with each new piece of economic data. And, just like President Bush in his assessment of the situation in Iraq, the economic forecasters are gradually revising their forecasts downward, as it no longer appears credible to present the rosy pictures that they had been trying to sell.

The trouble began early in the year, when the housing boom that was supposed to continue forever turned into a housing bust. The rate of house price appreciation didn't just slow, as most economists predicted, nor did prices simply flatten in accordance with their revised predictions. House prices began to fall. Nationwide, house prices are now down between 1 percent and 2 percent from their levels at the same point in 2005. (The decline is between 4 percent and 5 percent, if we adjust for inflation.) The price declines in some of the most over-valued areas, like Washington, DC, and parts of Florida and California, have been considerably sharper.

In fact, the price declines are even larger than is shown in the data, because sellers now routinely make payments that are not captured in the contracted price, such as picking up some of the buyer's closing costs or making repairs to the house before the sale. Such practices were unheard of a year ago.

When the downturn in the housing market could no longer be denied, the economic forecasters assured us that the rest of the economy would remain strong. They noted the strength in non-residential construction, strong investment in equipment and software, and of course the resilience of consumers.

This picture is not panning out well either. The non-residential sector experienced a short boom earlier in the year. This should not have been a surprise. The housing boom pulled resources (workers and construction materials) away from the non-residential sector. In some of the areas with the most over-heated housing markets, it wasn't possible to get the workers needed to build stores, offices or other non-residential structures. This meant that when demand in the residential sector eased, resources could switch to meet the pent-up demand in the non-residential sector.

But, it was predictable that this boom would be short-lived. The residential sector is twice as large as the non-residential sector. And there just is not that much pent-up demand. There was serious overbuilding in the office and retail sectors in the late-90s boom, and the continued decline in manufacturing means demand for factory construction is limited. According to the most recent data, construction in the non-residential sector was already falling off by the end of the third quarter.

The boom in equipment and software investment also seems to have disappeared. The latest numbers in this sector have been negative also, suggesting that investment will be at best a very small positive in the economy in the next year. ...........

The complete piece is at: http://www.truthout.org/docs_2006/120506S.shtml

[Chipper Chat]

1. And I'm planning on buying a house in March.

Maybe I should play real hardball!

[marmar]

2. Looks to be a buyer's market.

:)

[David Zephyr]

4. Good luck, Chipper Chat.

And play some hardball while you are at it. :hi:

[David Zephyr]

3. The housing market did not "crash". The insanity is gone, but the market is stable.

Anyone can write scaremongering headlines that get attention, but the truth is that except for a few pockets, the housing market is far from crashing.

In Southern California, the real estate madness of wild speculation is over, but inventories are shrinking (not growing) and prices (except in San Diego County) are still appreciating, albeit modestly.

This is a healthier market now. And it's a great time for first time buyers to look at getting in as they now have more leverage with sellers than before.

Also, mortgage rates are still at very attractive historical lows.

It's still the only investment that you can live in, write of the interest from and most all the improvements, plus keep up to $500,000 of the profit tax free. Show me another investment that has those advantages.

[Warpy]

7. It didn't crash, but most areas are still experiencing a slide

and prices of existing homes have slid a good 15% in my own market which was already well under the national median. This doesn't indicate stability but it does indicate a correction in the market---a big one.

Whether or not home ownership is an equity sink or a good idea pretty much depends on what rents in your area are doing. They're continuing to climb around here, making ownership of a modest house a great hedge against high rent while conferring the advantage of a tax shelter. However, if one wants to view home ownership as an investment likely to appreciate, this is not the time to enter the market.

Although housing starts are now down by double digits and that will eventually help, I don't see much immediate improvement. Too many people who leveraged as much debt as they could via those teaser ARM rates are going to find themselves in foreclosure. Until that runs its course and the housing stock is once again sold to people who qualify for traditional financing, the market will be oversupplied and prices will not rise.

[central scrutinizer]

5. We need more tax cuts for the rich!!!!!!!!!

I can hear Bushco already. The fault isn't his, just that we haven't cut taxes on the rich enough to cause enough trickle down yet.

[necso]

6. Property values in my neck of the woods.

A little house (maybe 2-3 times the size of mine) sold like 6 years ago (when property started selling again after about a decade of little movement, except for the more expensive places) for $40-45K (I forget exactly).

The owners put a few thousand into it (to take it maybe to $50K) and then sold it like three and a half years ago to a someone (who became a good buddy of mine) for $80-85K. (I've got ones-column uncertainty between the two sales.)

Two septembers ago, he decided to sell (the air is thinner up here; and he had emphysema) and his house was appraised at $215K (which neighbors thought was high, even then, which was at near-market-peak). He couldn't sell it, even dropping it to $175K (a later appraisal).

He died last June (rest in peace, my brother), and all his properties were put up for sale in August/September. His relatives turned down an offer of $90K cash, but apparently accepted one of $110K (but then apparently the guy couldn't get the loan, which says a lot these days).

Now, this is something of a distress sale (the property (small condo) that he bought in SD, when he listed the house here, lost $29K off of what he paid: that is, $149K), and the market here is strange, but down is down.

(The broker and an agent were up here a while back -- and I shmoozed the agent in order to get some data.)

...

Sometimes I pretty-crassly shmooze people to get data. This can be useful, although it's a little manipulative.

For example, I've found out (to various degrees of confidence, from the service-techs) the following about my DSL:
* They wouldn't sell me service now.
* There are a limited number of ports to service my area; and they have a waiting list.
* They'd be happy if I gave up my DSL -- and if my line hadn't tested good, then I could have lost service as the price of making a support call.
* The connection on the line card (here) makes a difference in your service (mine got switched, DSL is better, but dialup dropped off in speed considerably) -- and they switch these around in order to get acceptable service levels for as many customers as possible -- although at some cost probably to those who get switched to a worse port.
* Verizon sucks.