In 1987, I bought a piece of property here in California. Seventeen years later, I sold that property for a price some 450% higher than I paid in 1987. This one example from my real estate career demonstrates the sheer amplitude of the wave of greed that drove the housing bubble. The 450% rise in price in 17 years averages out to 26.5% appreciation rate, a ridiculous appreciation rate by any standard, which brings me to the current viewpoint on the real estate market. The message is not right nor is it helpful. For example …
The March Case-Shiller composite housing price index for 20 major U.S. cities showed that housing prices have dropped by 32 percent from their 2006 peak.
The rate of drop over the last 4.5 years hardly makes a dent in the extraordinarily fat prices achieved through 2006. In other words, housing prices are still too high, and I think potential buyers know this, which, despite the lowest mortgage rates in 50 years, it is one reason people are reluctant to buy. The others are difficult lending processes and fear about losing one’s job.
So, it is not helpful to suggest that a 32% drop in the price of a median home in the U.S. is a bad thing. True, those who own houses with inflated loans and devalued prices see this as bad, and I understand that, but the truth is that the housing market cannot go back to those inflated prices. They do not reflect real market value, nor do they allow for a stable and growing housing market, something the USA needs desperately. The same holds true for how we view housing starts. It too is not helpful, as it communicates the wrong message, and to come out of this crisis, we need the right message.
The annual rate of new housing starts has been bouncing around between 500,000 and 700,000 for the last two years. That range is alarmingly low compared to the high of nearly 2.3 million new starts in January 2006 as well as the rates of the late 1990s and early 2000s, before the peak of the housing boom, when starts averaged around 1.6 million per month.
The inflated high in housing starts of 2006 reflects the bubble and it is unsustainable, as were the rates at the end of the 1990s. Perhaps, a reasonable rate is what it is now, not what is was when the bubble burst. The right and more helpful message is that a decline in the annual rate of new housing starts is a good thing, at least until the inventory of unsold homes is reduced considerably. The last thing we need is to add more houses to the inventory of unsold homes. I understand that building houses creates jobs, but, unfortunately, until the housing market returns to health …
The moribund housing market is a drag on the U.S. economic recovery, and that creates uncertainty in the market. In my eyes, suggesting that a healthy housing market means returning to the 2006 levels of price and construction is both misleading and shallow. It is the easy way to report the news or analyze the market, and, once again, the “bad” news creates a perception that does not reflect the reality of where we need to go to get out of this housing mess.
Trade in the day – Invest in your life …
