12 Responses to “Economist sees lower prices in the future” »»

1. Homes
   Comment by Homes | 05/13/08 at 6:38 pm

   lol…true true

   I wonder what his students had to say. i wonder if they made any good arguments.

2. Gus
   Comment by Gus | 05/13/08 at 8:06 pm

   Where to begin?

   1. The idea that the timing of bubbles are notoriously difficult to predict has been made many times by Robert Shiller. He makes the point emphatically in the original version of “Irrational Exuberance”, published in 2000. He has made it many times since in radio interviews I have heard.

   He was wrong most likely because the Federal Reserve held short term interest rates at an extremely low level of 1% to combat possible deflation. The Fed knew (and said) the danger of the policy was it might aggravate asset bubbles, but they thought it was worth it.

   2. Anytime, anybody (as it turns out later) correctly predicts an asset bubble they will, almost by definition, be wrong for a significant period of time, and will likely be wrong longer than they are right.

   Take the stock market bubble of the last decade. The excessive valuations were in place by 1997. That means that anyone who correctly saw it as a bubble at that time was seemingly wrong in 1997, 1998, 1999, and the first half of 2000 (3.5 years). He was right until the market hit bottom in October 2002 (< 2.5 years).

   Did you ever hear of Dr. Smith Dharmasaroja? He was head of the meteorological department of Thailand, until he was fired for his “hysterical” warnings that the country was unprepared for a tsunami. When he visited Phuket, they called him “Mr. Tsunami” and pretended to run for the hills while they laughed at him. He’s an even bigger loser than Shiller. This guy has been right only a single day in the last 10 years.

   3. As for losing money by following Shiller’s advise (if you take it as advise) in 2003, I don’t think so. The Case/Shiller index for the Boston area finished 2003 about 1% below where it was in February of this year (the latest number available). Had you heeded his “advise” and sold out and put your money in the stock market (up about 50%) or even a money market you would have made more money.

   And the fall might not be over, as Boston area prices have been dropping at an annual rate of over 15% since October 2007, when the closings after last summer’s credit crunch hit.

   4. Robert Shiller is a public figure who makes controversial statements, so it is expected that people will take pot shots, and that’s ok. The problem is it obscures the bigger issue that he raises.

   His main point is that prices have reached the current level because home buyers and their creditors are thinking about housing much differently than their counterparts did in 1994 or 1984 or 1974 or 1964 or 1954. People are willing to spend much more of their income (thus, national savings rate = 0). Creditors are (still) willing to lend on much more lenient terms than yesteryear.

   It can’t be the good economy, because there have been good economies before. It can’t be that the good cities are “full”, because many tens of millions have moved where land is nearly free. It can’t be population increase, because it is slower than years past.

   Maybe it’s that, for a while, people thought housing was a great investment that would safely and significantly appreciate every year, and now they are thinking differently. Or maybe the publics’ psychology has permanently changed and people love their houses more than they ever did before.

   That’s the debate we should be having.

3. anon
   Comment by anon | 05/13/08 at 8:22 pm

   Prices are below 2003 levels using the metrics that Shiller was referring to (inflation corrected, metro area single family prices). So he was right - I’m not sure why you’re laughing that him.

4. John A Keith
   Comment by John A Keith | 05/13/08 at 8:41 pm

   Thanks Gus, that makes a lot of sense!

   Appreciate the time you took to write it.

5. Gus
   Comment by Gus | 05/13/08 at 9:42 pm

   It’s worth taking the time to change the conversation from what a supposed buffoon Shilller is and turn it to the tough, hard, challenge his ideas present.

   So let’s get to it. Do you now think there is a deflating housing bubble?

   Or…

   Do you think that 2008 American has and will continue to have a fundamentally different view of housing than 1994/1984/1974/1964/1954 American had? If so, why? Do you think they will continue to spend this higher amount of their income on housing? Will they be able to get enough credit again to support it?

6. John A Keith
   Comment by John A Keith | 05/13/08 at 10:19 pm

   Dude, I just show people houses, I don’t know.

   BTW, I don’t think he’s a buffoon. I just like poking holes, on occasion.

   I have never completely bought into the idea that people’s view of housing changed during the past decade, into wealth creation, etc. I know that is not necessarily a common view.

   Do I think, based on what I have read and what I feel in my gut, that home prices are going to drop every year for the next several years? No. I think the majority of appreciation is here to stay. I think prices will average the rate of inflation, from here on out. So, no “return to mean” or any of that stuff people like to talk about.

   I think with a stable economy and level unemployment and low interest rates, that the sales volume and prices will remain about what they are now. Also a big factor - the drop in inventory. I am amazed at how quickly builders stopped building, this slowdown versus previous slowdowns. In a matter of months, everything stopped.

   There are still people buying homes, there are still homes being torn down due to obsolescence, etc. There will always be demand, just as there was during the Great Depression and the oil crisis of the early 1970’s, etc. And, there may always be limited supply, especially within popular destinations, such as neighborhoods in the city of Boston and in towns and cities such as Brookline, Weston, etc.

   A generation ago, not many people would have predicted the influx of buyers into the city. It very well may happen that people move back out. That would mean a drop in prices, since there would be a shift in demand.

   But that has nothing to do with the economy and state of the housing market. If all things stay constant, then I think we will move forward slowly but surely.

   I don’t think people are spending a “higher” amount of their income on housing. Some people are, those who got loans at 40-50% of their incomes, of course. But plenty of people are spending from 25-35% of their incomes on housing, and that’s been the norm, right? And, their salaries are going up every year, while their home payments stay constant, or increases like a ladder, every time they purchase a subsequent home.

   And, don’t forget that the majority of homeowners in the US own their homes outright, without a mortgage. There is an immense amount of equity built up in these homes, that even a 25% drop won’t wipe out.

   I never bought into the “changing demographics” theory that we would have higher home prices every year because of immigrants, etc. I think higher home prices happened because demand increased due to low interest rates, easy credit, and the wealth transfer of the older generation to the younger generation, a transfer that continues today and will continue for the next 20 years. That’s where all the down payments came from (and, for some, from savings - imagine that!).

   I was only able to buy my home because my parents died and we sold their house and I used $40k as a down payment.

   I assume the majority of homebuyers over the past half decade has been the same type of homebuyers from previous years - married couples (male/female) with one or two kids. This is going to continue. Most of these families want homes, they want to own, they want stability. Either because they think it makes sense, financially, or maybe it’s because they feel it’s what they’re “supposed to do”, since their parents and grandparents did it.

   Regardless, I think that “tradition” will continue.

   In the city, it’s a microcosm of what might happen across the nation. Or, we might just be in our own little bubble. But, what I think is happening is that prices drop due to a drop in demand due to tighter credit, but the drop is mitigated by the sheer numbers of people who still make lots of money or have access to money. For each dollar drop in price, another person finds homebuying within reach, or as the preferred alternative to renting. Each time these people buy, they prop up the prices for everyone else, keeping home purchases out of reach for other people.

   One of two or three reasons we haven’t seen price drops in Boston (Proper) is simple supply and demand. You can’t find a one-bedroom downtown for under $350,000, and you need to go above $400,000 for anything good. Does this mean that prices will need to drop 30% in order to find buyers? No, buyers are still willing to pay $350,000 - $400,000.

   Housing does not exist in a vacuum, and everything else seems to be going alright, or, at least better than maybe we should expect, what with inflation out of control due to careless government spending and higher food and goods prices as a result of rising gasoline and commodity prices.

   I can’t believe we’re still in such “good” shape.

   Would I like lower prices for buyers? Sure, why not? It would mean more business for me - my condo might be worth less, but I can pay down my principal with all the new commission checks I’ll be receiving. Ha ha!

   I just don’t see that as the logical progression. Even in Las Vegas and Southern Florida, there is a bottom to prices - it comes when the supply dries up. After that, as I said, I think you’ll see the rate of inflation, 1-3% per year.

   I never compare renting to buying. It’s a fun game (see the Boston.com real estate blog for more), but senseless. I don’t think we’re going to see a generational shift from owning to renting. Well, maybe in the cities, actually. If I was moving to a city such as San Francisco or NYC or Miami, I’d rent, not own, for mobility sake. And, the prices. Perhaps that’s the wave of the future. I don’t know, necessarily, why anyone would want to set down roots, there.

   I would love for housing to be considered “cheap”, but i just don’t see it happening. I read an article once where it talked about South End home prices. One person was quoted as saying, “I don’t think these prices can go any higher … who are buying all these places???”

   The article was written in 1963.

7. Gus
   Comment by Gus | 05/13/08 at 11:56 pm

   It’s a thoughtful post, but I’ll make a couple of points.

   People are certainly spending much more of their income on housing, and that’s the key to Shiller’s point. If it wasn’t true, he would have no argument. between 1/1994 and 2/2008, inflation was 44.8%. Taking into account a 3% drop in mortgage rates, buying power was increased by 93%. Prices are up 142% in that time. That’s a big gap.

   As for renting, it’s not for everybody or even most people. However, the buying decision is that much harder for first timers to pull the trigger when purchasing is so relatively expensive. Plus, if the landlords, all of whom would be better off selling, start to bail, that adds to inventory.

8. confused
   Comment by confused | 05/14/08 at 8:31 am

   John: A question….What area was Shiller talking about? I googled the quote and only found this site. I assume it was not just the area this Web site covers.

   Gus: Excellent points. As to your point that the fall might not be over, I might argue that the fall has just begun. Plot price and sales for Boston via the MAR site and see what you get. I did the first quarter condo sales and prices. The peak of both was last year. 2008 prices fell 1% while sales dropped 38% compared to 2007. Watching the numbers John puts up suggests the sales drop is continuing.

9. John A Keith
   Comment by John A Keith | 05/14/08 at 10:13 am

   I believe it was the entire US. The Globe article didn’t specify; it may even have been a quote he gave during some other interview, that they grabbed for the article.

   Yes, lower sales volume would make you think prices would have to drop, in order to find buyers. Don’t know if I agree with that, though.

   Okay, I’ll give myself an out. Yes, “average” home prices may fall in Boston, because the number of high-end properties listed for sale seems to suggest a glut may be forming. If these high-end properties have price adjustments, it would obviously have an effect on average price.

   What I don’t believe will happen is that anything priced $1 million or less will drop.

10. Steven
    Comment by Steven | 05/14/08 at 10:30 am

    Gus, I agree that overall there are some serious problems…and overall there will be a correction. My view is there will be a combination of price declines and eventual long term inflation to get the numbers back inline. However interest rates are the interesting thing here…I really don’t see this fed putting rates significantly higher in the next decade. I think they are going to try keeping assets propped up at the expense of the dollar and pray they can get wage growth. I’m not even going to speculate on what’s going to happen but that’s my gut feeling..nobody really knows.

    I also think that prime and dense areas are not going to be affected at much as the outlying areas. As much as I hate sounding like a bull…the reality is there are enough people flush with cash over the last decade to keep the desirable areas in dense communities in good shape. Location and quality properties will always command a premium because they are a very limited commodity that attracts people who are able and willing to pay. As for the other markets…Dorchester..most of Florida..California..Nevada…well all I can say is things look very bad for them. A lot of burbs got bid up to ridiculous levels.

11. Steven
    Comment by Steven | 05/14/08 at 10:38 am

    I would also caution against the use of volume data as a price indicator. I’m not dismissing it, I am just saying…lower volume does not directly translate into lower prices. In fact, lower volume can cause higher prices if inventory is limited for example. “inventory” meaning comparable properties that fits whatever buyers are looking for at the moment….not overall inventory. Obviously if there is a tremendous inventory of like properties such as in California then they means downward pressure. I don’t that condition in boston..at least not where I’ve been looking.

12. John
    Comment by John | 05/14/08 at 11:04 am

    Gee a conversation. Excellent.

    by Michael L Member since:
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    I couldn’t verify the souce cited.

    …Based on US census data the percentage of units owned free and clear was 38% in 1999. Round numbers, 25M homes without a mortgage out of 65M homes.

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