Yes, but there is some good news.

In a similar article from CNNMoney.com, Greenspan is reported as saying that he believes that "...most of the negatives in housing are probably behind us...."

http://money.cnn.com/2006/10/26/news/economy/newhomes/index.htm?postversion=2006102610

Christina

>> In a similar article from CNNMoney.com, Greenspan is reported as saying that he believes that "...most of the negatives in housing are probably behind us...." <<

Plus, a lot of this is shaking off regional froth. In some areas where there are solid job markets and reasonable housing prices, there's really no "look out below" happening. It's mostly in the depressed economic areas and in the "bubblicious" coastal cities where the hits are being taken.

If I still owned my house in California (which I sold in 2003), I wouldn't care too much if it dropped in value from $600K to $500K when I paid $239K for it. Of course, those who bought into the froth in the last few months, particularly with adjustable-rate, nothing-down interest-only mortgages...

#29

If I still owned my house in California (which I sold in 2003), I wouldn't care too much if it dropped in value from $600K to $500K when I paid $239K for it. Of course, those who bought into the froth in the last few months, particularly with adjustable-rate, nothing-down interest-only mortgages...

I would care if I was about to sell the house. A lot of people tried to convince themselves during the popping of the stock bubble that the loss of their huge gains were only paper losses.

IF

>> I would care if I was about to sell the house. A lot of people tried to convince themselves during the popping of the stock bubble that the loss of their huge gains were only paper losses. <<

Well, sure. I realized right after I submitted the post that I should have included "...and I planned to live in it for a long time," knowing that a correction would soon be coming.

#29

I'm surprised, well maybe not that surprised that people are still thinking we would have a slowdown for a year then its all back up again like before.

We are in a long slowdown. Yes, occasionally you would see some uptrends, then its going back down again. You have to realize, we had one of the longest housing bull market in history, it was unprecedented and it shouldn't suprise you that we might have one of the longest bear housing market.

What these numbers don't show is the tons and tons of incentives/cash given back to some of those buyers. I've personally seen mercedez SUVs or $100K cash incentives being thrown to lure buyers. Prices have backtracked and unless you bought in the easly 2000's those gains are not a sure thing.

ibarz

Not to get too picky but it was the median new home price that fell 9.7% YOY.

The average new home price dropped about 2.2% YOY.





Decline in New-Home Prices
May Reflect Regional Factors
October 26, 2006 11:42 a.m.
U.S. new-home sales jumped unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market

http://online.wsj.com/article/SB116187328324104708.html?mod=Economy

Yes, but there is some good news.

Lower house prices are great news, as they enable more people to afford to buy their own home.

Lower prices are also great news for home-owners, since homes they might choose to move to will generally be cheaper. (Conversely, perceived benefits from house price rises are largely illusory, because the next house you move to will have probably gone up in price also.)

For whom are house price falls not good news? They are not good news for investors in residential real estate, as the capital value of their investments seems set for continuing declines in many areas.

[X-posted response at Mish's board, where I saw it mentioned first]

From the NYTimes
<<<Home Price Drop Is Largest in 35 Years
WASHINGTON (AP) -- The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.
The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record.
The price decline for new homes came while the sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes. It marked the second consecutive increase in sales following three months of declines.>>>
http://www.nytimes.com/aponline/business/AP-Economy.html?hp&ex=1161921600&en=256b9929902c8546&ei=5094&partner=homepage

It's really fascinating when you watch the media grab a drama point, and then completely blow smoke at the general public.

You DO realize, I trust, that the above figures DO NOT suggest that housing prices have FALLEN... but rather, that the liquidity-point (the price-point at which the majority of transaction are occuring) has dropped down.

Example,
Imagine that previously a neighborhood had a sales distribution of ALL sales as follows one month;
Actual price, # homes
$500,000, 10 homes
$400,000, 12 homes
$300,000, 15 homes
$200,000, 17 homes.
TOTAL HOMES SOLD = 54
Median Price = $350,000 (in this extremely simple example)

NOW... let's assume that NONE of the actual home prices change at all...
HOWEVER, the following month we see a sales distribution as follows;
$500,000+, 0 homes,
$400,000, 10 homes
$300,000, 21 homes
$200,000, 23 homes.
TOTAL HOMES SOLD = 54
Median Price = $300,000 (in this extremely simple example)

Drop in "Median" = 16.67% (Whoooooaaaaahhh!!!)
Significance = not a lot, in regards to pricing.

It MAY be significant in demand at the higher levels...but it can't be assumed to be an indicator of dropping prices (yet.)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Dave, As you say, your example is "extremely simple". You are suggesting that it can help in interpreting figures covering the whole country.

You produce the drop in median price in your example by postulating a neighborhood with only 54 home sales, which are priced in steps of $50,000. The example is very different from data covering the whole country.

In the whole country, homes are priced at all kinds of different price points. There are not steps of $50,000 between adjacent price points.

In your example neighborhood, the top-price category which had almost 20% of sales in one month has zero sales the next month! While that could happen in a neighborhood of 54 house sales, it is not a credible depiction of what may have happened at the national level.

It MAY be significant in demand at the higher levels...but it can't be assumed to be an indicator of dropping prices (yet.)

Such a change in median price as there has been is almost certainly indicative that there has been an overall drop in market prices, even if those prices had been calculated on a basis that took account in a possible change in mix of properties from one period to the next.

Median price is not a perfect measure, but at the aggregate level (not just 54 homes), it is not flawed in the way or to the extent that your example would suggest.

Regards, Rog.

...home price drops 9.7% ....

Unless I missed it, there wasn't an inflation adjustment to get the decline in constant dollars. If you add inflation in it would be about 12% or so in real dollars.

Greg

Hi Rog,

In your example neighborhood, the top-price category which had almost 20% of sales in one month has zero sales the next month! While that could happen in a neighborhood of 54 house sales, it is not a credible depiction of what may have happened at the national level.

<sigh>.....

The data is irrelevant... it is the METHOD, and the presentation of its SIGNIFICANCE that is the point here.

I gave an extremely simple example to show how the MEDIAN can be shifted without ANY change in the underlying pricing of the proprties, but merely the shift of the TRANSACTION FREQUENCY BAND.

The key point is that a drop in the MEDIAN can merely be a seasonal slowdown in higher-end transactions... and perhaps a coinciding increase in mid-price transactions. There is no evidence presented to the contrary.

(For those rolling their eyes back & racing to the "next" button... we now return you to your normal non-statistical English programming ;~)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

I gave an extremely simple example to show how the MEDIAN can be shifted without ANY change in the underlying pricing of the proprties, but merely the shift of the TRANSACTION FREQUENCY BAND.

Dave, Yes, just about everyone who knows and understands what the median means will appreciate that it will be affected by changes in the mix of the properties sold.

The key point is that a drop in the MEDIAN can merely be a seasonal slowdown in higher-end transactions... and perhaps a coinciding increase in mid-price transactions. There is no evidence presented to the contrary.

You concluded from your example that [the 9.7% fall in median prices] "can't be assumed to be an indicator of dropping prices (yet.)"

Your example illustrated a shift in the median of 16.7% in a very small sample size. The example seemed extreme, because it is inconceivable to me that there has been such a big shift in the mix of properties nationally as there was in your example. (Note also that 'seasonal' factors will not affect year-on-year figures.)

If you don't believe that the figures indicate that prices are dropping, I suggest that you look at what change in property mix would be needed to slew the median by 9.7% nominal (c. 12% real), as you are suggesting it may have. It would need to be a substantial change in property mix, nationally. If you have evidence that changes in mix over the last year could indeed have been that extraordinarily great on an aggregate national basis, it would be really interesting to know the source of your evidence.

By the way, I can read lower case letters pretty well, so no need for CAPITALS, thanks ! Regards, Rog.

Hi Rog,

Your example illustrated a shift in the median of 16.7% in a very small sample size.

I don't know how more plainly to explain this;
The data I chose meant NOTHING! It was complete jibberish! ALL that mattered was the DISTRIBUTION. I spent less than 6 seconds pulling the numbers out of my ear, purely to illustrate the essence of MEDIAN (and the fact that it has nothing at all to do with the value of the transactions themselves.)

By the way, I can read lower case letters pretty well, so no need for CAPITALS, thanks ! Regards, Rog.

I used CAPS to emphasize in a less agressive manner than BOLD caps ;~)

Despite the missing of the point, I don't think the lesson about the meaning of MEDIAN needs to be targeted to you. I was illustrating for those who may have been duped to think that the "journalistic piece" linked actually had something valid to say (and I trust this doesn't include you.)

Best,
Dave Donhoff
Strategic Equity & Mortgage Planner

Oh, I believe they are dropping. But nowhere near 9.7% for the typical home, especially not in areas which weren't inflated by the bubble and fueled by adjustable-rate, interest-only mortgages.

#29

New homes dropped 9.7%. Not existing homes, but new homes. Builders have been making VERY good profits on homes and also selling a lot of very high end homes. In Richmond, new homes over $400 are being very heavily discounted and there are piles of them "move in ready" but under $250 you have to wait for the home to be built. While this is one local market it would very well support a mixshift and less profit from builders.

[from the original article] A glut of unsold homes on the market is forcing builders to throw in expensive incentives such as granite countertops and swimming pools in order to sell homes.

I believe that the sales price statistics exclude the effect of incentives. Increases in incentives offered to buyers suggest that the reported decline in prices might understate the drops in home values that may have occurred.

Builders are commercial people, without an 'emotional' investment in each property they sell. They are able to drop their prices to cost-plus-profit, to attract buyers. There is still some way to go before they reach that point, in many areas.

At least here in AZ, where inventories are very high in the major cities, sellers of existing homes do not yet seem willing to drop asking prices to a market-clearing level that buyers will pay. So, transaction levels fall and inventories stay high. The downward adjustment in existing home prices is lagging behind the decline in new home prices, it would seem.

I would care if I was about to sell the house. A lot of people tried to convince themselves during the popping of the stock bubble that the loss of their huge gains were only paper losses.

Yes. They mentally bank paper gains, but pretend paper losses are not real.

NoVa: A major local realtor supposedly broke listing agreements with 150 property owners because they would not lower price.

Bottom line is those people are not serious sellers.

Montecfo

It's really fascinating when you watch the media grab a drama point, and then completely blow smoke at the general public.

You DO realize, I trust, that the above figures DO NOT suggest that housing prices have FALLEN... but rather, that the liquidity-point (the price-point at which the majority of transaction are occuring) has dropped down.

They SUGGEST housing prices have fallen, though the figures are not conclusive on that point.

But Dave, guess what?

Housing prices HAVE indeed fallen.

Sorry to have to tell you.

Montecfo

I don't see it as a matter of being emotional or not. If builders have inventory, they want to get rid of it and fast. It does them no good to have an empty house sitting that they have no interest in keeping. If someone is trying to sell a house, it doesn't really matter to them whether that house sells or not unless they have to sell it. Usually sellers that need to move and don't want to keep a house either try to slash the price or try to rent it out.

Builders are really the ones that will lead the price drops because they'll lower prices until someone buys. In order to compete, home owners are also going to have to lower their prices. If some home owners are stubborn, they can hold onto their property but it better be a lot better than the houses that are being sold by builders or else it won't sell (or they find a specifically interested buyer).

I got a mailing yesterday that a townhome complex near here is offering plasma TVs as part of their incentives. I received the same flyer from them each month or so and over the past few months, they seem to be getting more desperate.

Hi Monte,

But Dave, guess what?
Housing prices HAVE indeed fallen.
Sorry to have to tell you.

No worries pal... apology accepted.

They've not fallen enough for me though (investor hat on at this point.)

I want the absolute best of all worlds... all of my client's holdings to be stable and increasing, while all of my (and my clients') acquisition targets languishing in bloody despair ;~)

So far... so good...

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

The key point is that a drop in the MEDIAN can merely be a seasonal slowdown in higher-end transactions... and perhaps a coinciding increase in mid-price transactions. There is no evidence presented to the contrary.

Seems to me sellers and anyone working in the real estate business have been using the "seasonal slowdown" excuse since about June. They all thought things would pick right back up after Labor Day; when they didn't, somehow it's still a "seasonal slowdown". Some just don't want to accept that people willing to buy at the high prices levels homes got to in many parts of the country have already bought, and anyone looking to buy now, with actual dollars to put down on a downpayment, are waiting for home prices to come down. In my area, my mom and I are both in a situation where we're both looking to buy but at different price points. When she tells me about $700K SFH in the most desireable neighborhoods around Washington DC have come down to $600K, that definitely makes me look at $400K towhomes in somewhat-less-desireable neighborhoods as overpriced. So I wait.

...I want the absolute best of all worlds... all of my client's holdings to be stable and increasing, while all of my (and my clients') acquisition targets languishing in bloody despair ;~)

Similar to my own MO: Buy from the desperate, sell to the hopeful :-)

~aj

The good news is that housing price data is mostly bogus. It is not serious until you see plywood over windows and unfinished construction projects.

The good news is that housing price data is mostly bogus. It is not serious until you see plywood over windows and unfinished construction projects.

Theres a large gap between 'bogus' and 'serious'. Btw, the comment about plywood, etc, has more to do with sales volume than sales prices.

Prices can decline substantially, and be harmful to many homeowners (at least those with minimal equity and cash reserves), but yet can still be selling. Volume and prices are not particularly strongly related.


And yes, sales mix can indeed have an effect, but these are year over year numbers, so its not seasonality. I'd like to see evidence than the mix accounts for it before jumping to that conclusion. Otherwise I believe the phrase whistling past the graveyard may be appropriate.

If only I were rich, we could do that once a week or so.

Kahuna,CFA

*******************

But isn't your net worth on the order of $60 million?

I'd consider that rich enough to buy a very nice dinner once a week or so.

On our trip we saw several open houses in Old Alexandria that were not as nice as my daughter's 2BR town house worth maybe $135-$145K. That townhouse would cost $475 - $575K in Old Alexandria.

We flew back to Kansas with most of our money - except for the dinner for four, one glass of wine for my wife, her birthday was 24 October. The dinner was great - $365 with tip. They of course asked us if we wanted desert and or after dinner drinks. We declined. The waiter when he returned the paid check brought four glasses of Sherry and desert. We were going to object, but he gestured to the owner/manager and said complementary. A very nice gesture we thought.

I have a nice 2br townhome (worth around ~$170k) in Denver that I am currently renting out but I live in the DC metro. Personally, I rather live here in the DC metro than Denver or other smaller cities and obviously others feel the same. Basics of supply and demand. :) Although I like old town Alexandria, I'd probably never want to live there.

Also, where did you go to dinner that was so expensive? (just curious) I think the most expensive place DF and I have been to was around ~$100 for two people and that is the most I'd ever want to spend on a special occassion.

I gave an extremely simple example to show how the MEDIAN can be shifted without ANY change in the underlying pricing of the proprties, but merely the shift of the TRANSACTION FREQUENCY BAND.

Dave,

You can argue that a report on a dropping median price may indicate nothing more than a change is sales distribution. It's certainly a possibility. Probably even a likelyhood at this phase.

However, claiming that this has no relationship to actual pricing on available homes is jibberish. There is a secondary effect of your example. A redistribution of sales today leads DIRECTLY to a redistribution of prices tomorrow. The demand for lower priced homes is increasing while the demand for higher priced homes is falling, as your simple example illustrates. The supply will soon follow.

So you're right in that the $500K houses in your example neighborhood are still asking $500K and therefor you can say, "Home prices have not declined, people are merely buying the lower priced ones." The reality is that after those $500K houses have sat on the market for a while, the builder will lower his pricing to get rid of them.

When you look at it this way, it makes sense that the median trend is likely a leading indicator of the average value.

xtn

It MAY be significant in demand at the higher levels...but it can't be assumed to be an indicator of dropping prices (yet.)

As well as the effect of incentives, which seem to be much larger now than during the RE boom, another factor which could lead to over-stating of home prices in the statistics is mortgage fraud.

http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_5111365,00.html

This article suggests that mortgage fraud could be significant although, of course, as with all crime, it is difficult to quantify the impact.

"Mortgage fraud has reached epidemic proportions," said Ivor J. Hill, owner of Pueblo-based I.J. Hill Appraisal Services. .....

Sonja Leonard Leonard, owner of Leonard Leonard & Associates, said that in one case, a Denver home was purchased for $1.3 million in December, listed for $2.25 million in April, and the price was lowered to $2.15 million in June. Then in August, it was placed under contract for $3.1 million.

This is not focused on #29. I am just using what that person wrote.

Oh, I believe they are dropping.

RE markets are very local. There are parts of the US that kept hearing that we were in a bubble with rising prices yet they drove to work looking at homes where the prices had been flat for another year (multiple years with next to nothing happening in terms of prices).

We now are reading that prices are falling. Yet there are large parts of the country where prices seem to be flat still.

Prices are falling in some areas. Mostly the same areas that were going up really fast. In other markets where prices were slow to go up or the trend started a lot later the prices are still pretty solid. In markets where the rent is higher than the cost of ownership the prices are still pretty flat and boring.


John Corey

They mentally bank paper gains, but pretend paper losses are not real.

The builders have commercial reasons to move to the next project. Be that a manpower management issue or the fact that they have short term financing so the loan terms force the builder to sell the inventory.

Home owners historically will remove their home from the market if they have no requirement to move. A floor develops for most people where they will not accept a price below some figure as they can just stay and continue to enjoy the use of the home.

Those who have to move (job loss, divorce, etc) will be forced to sell at what ever price they can achieve.

Unlike the stock market where certificates might have no utility value a home still can offer shelter. The seller has the option of not crystallizing the paper loss and still receiving the benefits of ownership.

John Corey

But Dave, guess what?

Housing prices HAVE indeed fallen.

Sorry to have to tell you.

You are talking about an index as if someone can buy and sell the index.

RE is very much a collection of local markets. In many markets prices are up, down or flat. There is no universal trend.

Even when markets were up some were selling below market as there are many factors to determine the price. Most experienced RE investors buy at a discount in any market.

What the average says means a whole lot less when you are dealing with unique product where no two transactions are interchangeable.

Talking about a national average or medium makes for good press and a fun discussion. How much it matters when a buyer and seller are trying to agree a sale is not clear.

John Corey

Agent is also a RE Investor. He told me that to buy an investment he likes to see the PITI payment = 0.70 X gross rental revenue(GRR). I agree this would be attractive, but I would have thought (0.90 - 1.0) X GRR would work too. I have never voluntarily owned Rental RE property. Was the number he quoted accurate?

Kahuna,

He is an active RE investor and you are not. At least that is what you have said. It shows in the numbers being used by him vs. you.

Neither of you adjusted for repairs. The 0.70 number is a magic number used by rehab investors. It does not adjust for repairs but does adjust for hard money lending requirements.

John Corey

PS. Using GRR is generally a poor indicator for almost any rental decision. It was more popular back when people could not use a calculator or computer. It has almost no meaning for residential property (1-4 unit) unless the property is in rental only area (no appreciation expected).

What the average says means a whole lot less when you are dealing with unique product where no two transactions are interchangeable.

Yet somehow sellers/homeowners didn't have this same mentality a year ago.

Yet somehow sellers/homeowners didn't have this same mentality a year ago.

Which is why inventories are rising.

John Corey