Homes: Still Too Pricey to Stabilize

The Obama plan is a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization an/or housing bottom to form.

While houses are not as wildly over-priced as they were a year ago, but they still too high by most metrics. To effect a stabilization, housing bottom and recovery, they need to fall further. Propping up home prices and the desperate attempt to forestall foreclosures only serve to delay this inevitable process.

Why are prices so important to housing market?

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.

Can they afford that starter house? If not, then the entire real estate chain is frozen.

What’s left is mostly lateral moves, greatly reducing the overall sales.

House sales peaked in 2007 at well over 7 million units. We are now running about 4.25 million sales. A more normalized number would be between 5 and 5.5 million. That’s not gonna happen if the starter home market is dead.

The Obama plan is a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization an/or housing bottom to form.While houses are not as wildly over-priced as they were a year ago, but they still too high by most metrics. To effect a stabilization, housing bottom and recovery, they need to fall further. Propping up home prices and the desperate attempt to forestall foreclosures only serve to delay this inevitable process.

Why are prices so important to housing market?

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.

Can they afford that starter house? If not, then the entire real estate chain is frozen.

What’s left is mostly lateral moves, greatly reducing the overall sales.

House sales peaked in 2007 at well over 7 million units. We are now running about 4.25 million sales. A more normalized number would be between 5 and 5.5 million. That’s not gonna happen if the starter home market is dead.

The Obama plan is a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization an/or housing bottom to form.
While houses are not as wildly over-priced as they were a year ago, but they still too high by most metrics. To effect a stabilization, housing bottom and recovery, they need to fall further. Propping up home prices and the desperate attempt to forestall foreclosures only serve to delay this inevitable process.Why are prices so important to housing market?

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.

Can they afford that starter house? If not, then the entire real estate chain is frozen.

What’s left is mostly lateral moves, greatly reducing the overall sales.

House sales peaked in 2007 at well over 7 million units. We are now running about 4.25 million sales. A more normalized number would be between 5 and 5.5 million. That’s not gonna happen if the starter home market is dead.


Originally published at The Big Picture blog and reproduced here with the author’s permission.

2 Responses to "Homes: Still Too Pricey to Stabilize"

  1. Elliott Van Reamer   February 18, 2009 at 2:25 pm

    This article has a lack of merit in considering that RE transactions are “different” from any other market product on the retail side. You granted a very forgiving process to the economics here that apply to RE transactions versus typical subsistence/other purchases. Of course we can all recognize and value the difference of wholesale to retail purchases, however! A RE transaction does NOT need the assistance of the other elements to support growth, or to fuel trends in housing or related transactions. For instance, there are numerous hands involved in subsistence/retail trends as well (consider farmers/growers, distribution cycles, wholesalers/retailers for goods and services… numerous elements to get products to market ALL with risk! There are many calculations to consider when making this a correlation. Then there are components to the housing industry, new purchase, re-sell, construction, all conditional to contracts, and all which rely on a considerable amount of scheming/marketing (call it what you will!)to get interested parties involved in transactions. One doesn’t exactly have to comply with or relate to the multiple channels to be considered a legal or relevant transaction. I can sell my house to Mr. Jones on contract if I want, without any additional party involved, if that’s what we agree to, and so on. Therefore, I can’t agree with this analysis that there’s a traditional risk inherent to or that may justify this review of market conditions and what the Fed’s or new President may conjure up for us to share equally on a Nationalized level. Just my opinion.

  2. Guest   February 19, 2009 at 12:49 am

    The understands that more than the buyer and seller are involved. The housing supports a system that benefits from high prices — RE agent and loan agents take a percentage off of each transaction. The local govt take a percentage each year. They have a vested interest to keep housing at unsustainable levels, but low interest, subprime, alt-A, option ARM, slick to sick marketing. When the hype can’t be maintained, best to have a slow release to get a couple more round of sales, financing, and taxes before going to proper cost to income ratio of 3.