Learning to love falling house prices

June 18, 2009

Christopher Swann– Christopher Swann is a Reuters columnist. The views expressed are his own –

Optimism has been all but extinguished from the U.S. housing market.

The number of Americans lining up for new home loans is shrinking again, according to Wednesday’s release from the Mortgage Bankers Association, and the best that can be said of homebuilding is that it has stabilized at almost 80 percent below its peak.

With no end in sight to falling prices, perhaps we should look on the bright side. Indeed, there are three good reasons why sliding prices are not such a bad thing.

Falling house prices are usually seen as wealth destruction. But they can also be seen as wealth transfer. The next generation of homebuyers will benefit from our loss. Those young homebuyers who have been able to cling onto their jobs are already reaping the advantage. The American dream of home ownership can now be achieved at bargain basement prices.

Take San Francisco. If you earned the median wage in San Francisco at the peak of the housing market in 2006, you would have needed to devote 75 percent of your income to meet mortgage payments on the average home. Now people will pay just 35 percent of their income, according to Ian Morris, chief U.S. economist at HSBC.

It would no longer be any surprise if prices remained stagnant for a decade – spreading the benefit of cheap housing for at least 13 million new households.

Americans may also reflect that much of their temporary housing wealth was illusory anyway. Since house prices in a given area tend to rise in tandem, the only way to cash out was to borrow against equity, or move to a cheaper area or smaller space, or die.

A second consolation is political. Tumbling prices have exposed the flaws in the American government’s efforts to subsidize housing.

It is now clear that these efforts did more harm than good. More thoughtful U.S. politicians must now question the mortgage interest tax deduction. The benefit of this tax was heavily skewed towards high earners since they paid a stiffer tax rate. Instead of fostering broad home ownership, the deduction encouraged rich Americans to borrow more and build bigger homes.

This is bad financial and even worse environmental policy. At the very least, Congress should now cap this deduction at $500,000.

The third source of solace is macroeconomic. For several years America borrowed money from abroad to make an investment that did nothing to expand its productive capacity or its ability to export. Residential construction in 2005 reached 6.3 percent of US national income — its highest level since 1951.

A more sober level can be gauged from the average since 1980, which is 4.5 percent. Rampant home building went far beyond the actual housing needs of Americans. Over the past five years around 8.9 million housing units were built and just 6.7 million new households were created, according to Harvard economics professor Edward Glaeser. The number of vacation homes jumped from 3.6 million in 2002 up to 4.8 million now.

An ever-growing number of U.S. homes were also vacant, as investors waited for tenants or buyers. Not only did houses become more numerous, they also got bigger. The average square footage of a U.S. family home expanded from 2,200 to 2,500 over the past eight years. “Mistaken beliefs about housing may have crowded out more productive investments,” argues Glaeser.

Since two-thirds of Americans own their homes, falling prices are never likely to inspire street parades. The economic loss has certainly outweighed the gains and the banking system may take years to fully recover. Even so, our loss is a hidden accounting gain for the next swath of homeowners. A more balanced economy and housing policy may now emerge. For more philosophically minded Americans, this is a cloud with a silver lining.


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I find all of this fascinating. Everyone is pointing fingers at everyone else. There is plenty of blame to go around, however, who in there right mind ever thought they should be able to buy a $700,000 home when they are at a $70,000 per year salary level? This is where the foreclosures are greatest, not with people who bought a home which is within their means to pay the mortgage. As a country we have been living well beyond our means for years, and now the government is forced to bail out the system.

Posted by Keith | Report as abusive

Mr. Swann suggests a paradigm shift this country needs to embrace – government attempts to artificially prop up real estate values will not work, and detract from what should be their true focus: preparing the U.S. to compete in the 21st century global economy by incubating new technologies that can create jobs and goods the U.S. can export.

Obviously a stable banking system is needed, but pouring billions of dollars to bailout people who, unfortunately, purchased homes at the wrong time will do nothing to pull us out of recession. Better yet, let’s give scholarships to the 10,000 brightest scientists in this country, then have them mentored by our best venture capitalists. Let them create the next Google, the next Intel, Genentech, and yes, the next GM.

Posted by Dennis Kao | Report as abusive

Regarding Psalms 15 and the issue of interest, we must also compare other scriptures having to do with interest to determine exactly what type of loaning Ps 51 was speaking about. Compare the parable of the Talents (Matt 25) where a wicked slave was criticsized for not at least depositing the talent with the bankers so that the master could receive the monies back with interest!

Clearly the Bible doesn’t condemn charging reasonable interest in a business pursuit. It is only when it is charged to the afflicted or needy one or your brother. However, the Bible does completely condemn usury – excessive and greedy interest charged to anyone.

Posted by Warren | Report as abusive

With due respect to Richard of “Best Comment Fame” the Housing Bubble started in 1995 and unsustainable property appreciation took off in 1997 on a national basis. Housing prices will drop to 1997 adjusted for inflation/income if we are lucky.

The problem is that ALL the fundamentals which determine asset value are MUCH worse than in 1997. As such, there is no reason why property values should stabilize at the pre-bubble level. Don’t buy a house unless you don’t care about losing money.

I think the nation is finding it difficult to recover from one of the deepest downturns of the housing market so far. Despite a lot of federal efforts to improve the situation, the market is not showing very bright signs of easing. The recession in this market is still increasing every day as the unemployment rates are also reaching red alert.

There are very little chances of housing reviving. No signs of recovery

Posted by daveinfo | Report as abusive

Great Article Mr. Swann, My sentiments are with you across the breadth of the article.

Now a little context from me. On point one: My Wife and I were priced out of the market in Chicago from 2005-mid 2008. We made a conscious decision to sacrifice and rent a studio apt in a family owned building to save money and wait for the bubble to deflate. We consciously avoided taking out an option ARM in order to afford a nice house in a nice area as the prices were artificially over inflated and we did not buy into the lie that \”housing only goes up\”. Thankfully my wife and I chose not go down the dark path and are not in a bad situation.

Where is the empathy for people like us who had our dreams of owning a home delayed due to the bubble? This is why I have little empathy for many people who screwed themselves by buying too much or taking out that huge HELOC. Most of these people are getting what they deserve.

When we started actively looking in Sept 2008 on the northwest side of Chicago, when the liars were saying it was great time to buy(compared to the \”peak\” of the bubble) we found that this was not so. There was a lot \”junk\” relative to the price/location/features and the affordability just was not there. As of the end of April In 8 months we looked at 250+ properties on our MLS and walked thru 70+. Of the 250+ homes only 5 houses excited us as to the price/location/features. Thus only 2% of our listings we looked at have been good. You would expect under normal conditions to find at least 10-20%of the listings to excite us Of these Five listings: 2 went CTG before we could get a walkthrough, 1 went CTG before we could do a second walkthrough (shame on us), 1 was a short sale that we backed out of after a house inspection, and 1 we were outbid on by a cash buyer, and we are a strong buyer as we have golden Credit, can put 10-15% down and, have no contingency of having to sell a home.

It has been really frustrating to us as we want to own but until the prices correct more we are still looking. The good news is that now we can look in nicer locations, the houses are nicer needing less work and the listing prices have come down on avg 10-15% in the past 8 months and those that are overpriced are selling on avg 9-10% off of list vs. 4-5% off of list 8 months ago. This has translated into reductions of $40-75K on properties that we track for comparables.

In Chicago according to the Case-Shiller data (which is not perfect, but is the best index out there) the bubble went up to 168 in Sept 2006 and as of Mar 2009 it was 122. However many sellers want to ignore the other declines. Why is it they will accept positive news from an index to justify higher seller prices, but reject negative news that justifies lower selling prices?

I agree with Gordon Richards. I see that housing prices here in Chicago are still not a great deal. They are better than 8 months ago but still we need to see another 15-25% decline in prices to actually be good. Until then we will continue looking and waiting.

Posted by Tony Flores | Report as abusive

House prices should be 3-4x median household income in a given area. Period. Anything higher will lead to a correction. People were scammed into get rich quick schemes by “investing” in a liability, a house, which carries the loads of maintenance and taxes and interest.

Fellow Americans, you truly are mostly idiots, and you need to curb your debtor’s appetites. Do this for yourself, or brutal competition with India and China will make your living standards drop precipitously. Ron Paul doesn’t seem like a moonbat now, morons.

Posted by Mick Russom | Report as abusive

We bought our first home in Dublin, CA. We’ve been waiting since 2002 to buy into the SF Bay Area, and were accumulating the downpayment. I am glad we were able to buy a very beautiful home (no, its not a short sale or a foreclosure), with a very nice (not huge) yard for my daughter to play in. When I compare my rent (2 bedroom apartment, 1800) vs. my mortgage (3 bedroom SFH, 2209) with a 4.875 30 year fixed, I frankly do not care if the house value falls. We make mid-100k combined, and the conforming loan that we took fits our budget. The point is, housing is heavily driven by affordability more than anything. In the bay area, the homes in the 500-600k range are selling simply because they are competing with rents (provided the buyers put 20%+ down). I am hoping to get break even after 10 years. I have been renting for about 10 years, we raised our daughter for 5 years without a backyard to play in, getting nagged by our downstairs neighbors when she used to run or jump. Believe me, that is not a good feeling. Now that the prices have fallen about 30% from the peak in our area, and we can afford this house without any creative financing, we are happy. Will the prices fall further? Certainly. Will we find a house that we can afford and *like* to live in for 10+ years? Not so sure. Will we end up paying more in rent over 10 years? (216k if the rents stay at 1800/mo)? I’d think so. How much interest will the cash savings from renting generate over 10 years? Probably 1-2% after taxes. Is it worth it with even minimal inflation? Not for us.

Posted by Manish | Report as abusive