Charts of the day, house-price edition

By Felix Salmon
April 11, 2012
Paul Kiel's magnum opus on the US foreclosure crisis, available online or as a Kindle Single.

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If you haven’t read it, I can highly recommend Paul Kiel’s magnum opus on the US foreclosure crisis, available online or as a Kindle Single. Kiel tells the national story using synecdoche: the story of Shelia Ramos is representative of millions of others. And Kiel makes it very clear just how typical her tale is, zooming back out to a big-picture view on a regular and welcome basis.

What Kiel doesn’t do is look forward, and give his informed opinion on whether the new rules being outlined by the Consumer Financial Protection Bureau are likely to work to prevent such events from happening again. The question isn’t whether the new rules are good ones; the much more important and salient question is whether they will be followed and enforced. I’ll believe it when I see it: as Kiel shows, servicers are really bad at this kind of thing, and there’s a strong case to be made that they’re simply not capable of following the rules that the CFPB is laying out.

Meanwhile, the weird cognitive disconnect in the housing market seems greater than ever. If you look at Fannie Mae’s latest monthly survey, it shows lots of new highs being set: the percentage of people thinking that house prices are going up, the percentage of people thinking it’s a good time to buy, and, especially, the amount that people think they’re going to have to pay for housing if they don’t buy.


And yet, the facts on the ground don’t support any of this. Check out the latest quarterly home price report from LPS, for instance. Not only are prices still falling, they’re actually falling at a faster rate than they were a couple of years ago:


The rate of relatively slow price declines, from January 2009 to May 2010, was the time when there were tax incentives for first-time homeowners. When those tax incentives went away, so did the artificial support for the housing market; in hindsight, most of those first-time buyers would probably have been better off just waiting, and buying a house now without the tax incentive instead.

What’s more, this index, unlike other indices, excludes short sales. If you include short sales, then the numbers are far worse. And as the mortgage industry moves from foreclosures to short sales (since short sales don’t require the lender having to prove title to the home), the discount on short sales is growing alarmingly, and approaching the discount on foreclosure sales.


In Kiel’s story, Ramos abandoned her house to the mercy of her lender, rather than suffering through a foreclosure: in that sense, when it was finally sold it was more of a short sale than a foreclosure sale. But the distinction is less and less important these days — and there’s still a shadow inventory of millions of homes being lived in by delinquent borrowers, which are going to come on the market sooner or later at discounts of more than 20% to their peers. So long as that’s the case, it’s hard to see how house prices are going to stop going down and start going up.

So what explains Americans’ optimism surrounding house prices, especially when they think mortgage rates are going to rise? My guess is that it’s the fact that the recovery is proving itself to be real, combined with a natural bullishness when it comes to housing, which somehow wasn’t eradicated by the 2008 crisis.

But color me contrarian: if house prices can’t rise even with mortgage rates at all-time lows and the government desperately underwriting nearly all the mortgages in the land, I can’t imagine how they’re going to go up in future when rates go up and the government manages to extricate itself from the market. And if house prices don’t go up, of course, then the number of underwater borrowers will stay high, and the foreclosure crisis is going to remain a big problem for the foreseeable future. That’s the real horror of Kiel’s story. Not that it happened in the past — but that it’s likely to be repeated into the future, as well, for many years to come.


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Is there really a contradiction between your first chart and your second? Don’t rental prices go up precisely because people further price decreases in the sale market and therefore hold off by renting? On a first glance there’s no inconsistency whatsoever.

On the larger point that expectations for SALE price increases are not justified, ok. But that’s not what these charts speak to, is it?

Posted by alexh | Report as abusive

Sorry, meant to write this in the second sentence:

people *expect* further price decreases

Posted by alexh | Report as abusive

Excellent post Felix. When population growth, employment, and income levels are taken into considersation, it’s hard to fathom why prices in cities like Los Angeles have not fallen further, while in other cities (e.g. Denver, Seattle, Dallas) prices have returned to trend levels. In real terms house prices are poised to continue to their fall.

Posted by maktbone | Report as abusive

Question: When that “shadow inventory of millions of homes being lived in by delinquent borrowers” starts to empty, where are those people going to live?

Answer: Rental housing.

But, of course, rental vacancy are now very low, and builders are scrambling to put up new units. This means that in terms of total housing units, the market is much more closely balanced. Yes, there is a mismatch between “owned” and “rented” units, but that’s simply because the wrong person is the current owner. Rising rents (and incomes) do wonders for house prices because they set the price at which an investor is willing to purchase a home and subsequently rent it out for income. In many, many areas around the country, home prices are near those levels.

Posted by MitchW | Report as abusive

Prices go up when enough people are in the market to compete for properties, which presumes they have the money to pay the mortgage. In real terms (inflation adjusted in)wages have declined over the past 20 years and are continuing to do so. Since wages aren’t rising to meet house prices, house prices will decline until they reach a point where enough people feel its affordable.

Posted by JimInPanama | Report as abusive

“I can’t imagine how they’re going to go up in future when rates go up and the government manages to extricate itself from the market.” (FS, Article)

Look a Japan, FS – and look at Fed debt levels, and tell me why you think rates are ever going to go up? Government couldn’t survive the experience; therefore, it will not be allowed to take place – no matter how much, or what type of, collateral damage that causes. Look at Japan, FS – and then tell me, “it can’t happen like that here”.

I just have to wonder if any of us will live to see how “the government manages to extricate itself from the (housing) market”.

Posted by MrRFox | Report as abusive

Or whether the government extracting itself from the market will make any difference. A decade of inflation solves a lot of evils.

Posted by MyLord | Report as abusive

You’re using national average housing prices, but prices aren’t uniform throughout the nation. There are pockets with extremely large amounts of unwanted homes; these tend to bring the average prices down a lot.In the areas where there was no over-building, and the economy has stabilized and unemployment has eased, there should be an increase in home sales, along with a leveling off of uptick in prices.

If you have a million homes that are sold, and 300,000 lose 25% of their value and the rest go up 2%, the average decrease could be 6%, even though the average price of 70% of the homes actually increased in value.

Broad statistics like this can be misleading.

Posted by KenG_CA | Report as abusive

Age demographics and the Fed policy are strongly deflationary pressures. The EU’s problems are a big question mark.

There is no particular reason to think that the next decade will bring inflation. Crashing home prices are instead a strong signal of the opposite.

Posted by BrPH | Report as abusive

Agreed with KenG and Mitch. In some areas (perhaps those that were the least overbuilt), rents are finally rising to the point where they can begin to support housing values.

Perhaps other areas of the country have further to fall?

And while I agree that rising interest rates will deal a further blow to housing values, the Fed has promised to do their darnedest to keep interest rates low for at least a few more years. There is a decent chance that inflation will keep this market afloat.

Posted by TFF | Report as abusive

Why buy a house now? Buy later after prices crater for 65% less.

Posted by LyingRealtors | Report as abusive

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