Housing: Not At The Bottom

Here is a public service announcement for those of you who might be younger or who did not live through past housing bubbles (such as the mid-80's bubble in Texas).  Housing bubbles take a long time to sort out.  The typical pattern is that one sees a big build-up of yard "For Sale" signs around town, but no real movement or sales.  What happens is that people selling their houses resist accepting that a change in pricing levels has occurred, and list the homes at the old, higher price levels, particularly when any price cuts would put them underwater on their mortgage.

Eventually, the dam breaks, as sellers are forced to accept lower pricing because they can no longer bear the holding costs any longer.  In Texas, I had at least two friends who just left the keys in the mailbox and walked away, leaving it all to the bank to sort out.  But it can take a really long time for this to play out -- I am talking years, not months, depending on how inflated the bubble got.  From my experience (confirmed in the futures markets here) the bottom will not come until at least a year from now.  In Texas in the 1980's, it took as long as five years for the whole thing to play out and for prices to start recovering.

One Comment

  1. bill lever:

    W, thanks for the great blog.

    I agree 100% that young buyers should wait out this bubble. I was a 33 year-old who bought right at the 1989 peak. I was unhappy to watch the house next door sell for 33% less than my purchase price 3 years later.

    I recommend two websites that are very helpful in seeing the current housing bubble.

    http://www.thebubblebuster.com/ shows inflation adjusted housing prices in about 30 metropolitan areas of the U.S. from 1975 to 2006.

    One example: Los Angeles had price spikes in 1981, 1989 and 2006. The first two ended with real prices at the end of the bubble at the same level as before the bubble.

    It also shows how much mortgage pain (mortgage payment to income ratio) buyers are willing to accept at the peak of the bubbles. This willingness to borrow recklessly correlates with the run-up in prices.

    I would be interested to hear from readers about something I cannot explain yet: Why have homebuyers in the South (see Atlanta, Charlotte and Houston) apparently refused to take on monthly mortgage payments greater than about 20% of income, while homebuyers throughout the rest of the country agreed to payments approaching 50% of income?

    The second website is http://bubbletracking.blogspot.com/ where the "supply" in "supply and demand" says about all you need to know about the near-term future of housing prices.

    Take a look at the "Inventory Graphs"

    Looking at Phoenix: in July 2005, 10,000 houses sold. At that time, the inventory of houses for sale was about 10,000. Conclusion: your house would sell in about a month.

    Now, monthly sales have dropped to about 4,000 per month. And 65,000 houses are for sale. Your dilemma: are you supposed to wait 16 months for your house to sell, or will housing prices drop? (Hint: Choose the latter).

    There are tons of interesting links from the second website, eg a blog about Countrywide how having over 15,000 REO properties. Up from almost zero in mid 2006.

    I would say they have an unaddressed problem there.