Friday, October 06, 2006

 

Study sees '07 `crash' in some housing

From the Chicago Tribune:

Paul Kasriel, director of economic research at the Northern Trust Corp., disagreed on the Chicago outlook, saying the prices here had not stabilized.

"Not in my neighborhood," he said. "The same houses that have been for sale for six months are still for sale. Some of them have lowered their prices, and they still haven't sold."

But Zandi sees a somewhat bright side.

"Even though this is a very serious correction, that these [market conditions] are things we haven't seen before, I am still arguing that the economy is going to hold together, that there's enough strength to overcome housing's weakness."

"That's nonsense," Kasriel said. "The housing market is an accident waiting to happen.

"We're already seeing a slowdown in employment growth, and a lot of it is housing-related. We're also seeing a slowdown in consumer spending, and that's housing-related.

"It's beyond me how something that has dominated the U.S. economy in the past four years and is clearly in a recession now won't have spillover effects on the rest of the economy." [Emphasis added.]


The question is how much will the recession in the housing industry affect the economy. A inverted yield curve at the beginning of 2006 pointed to a recession starting either at the end of 2006/early 2007. In the past, as one sector weakened the Fed lowered rates and our economy used the influx of cheap credit to speculate on something new. Is that game over? Will our economy not respond like the Japanese economy of the early 90s? Deflation means falling prices across the board and no amount of cheap credit can get people to borrow money on an asset they think will be cheaper in the future. It is a viscious cycle of spiralling asset deflation. After expecting this with the end of the dotcom bubble in 2000 I am a little sheepish about predicting another bout of deflation but at this point we have run out of assets to speculate on. I swear if the Fed cuts rates and Iomega rallies I am going to have a cow.

Update:

I happen to come across this article and it reminded me of Diego's comment. I don't know how common this is but it explains why prices are not dropping that much.

Denver-area home sales and prices were weak in September, according to reports released Thursday.

In addition, the housing market may be in even worse shape than the monthly reports based on Metrolist data indicate because of the way the statistics are being collected and because of rampant fraud, a top real estate executive said.

...

But perhaps an even worse problem is mortgage and appraisal fraud, Mygatt said.

"We have been seeing many more homes on the market, and average prices (in most months) are going up, which does not make any economic sense," Mygatt said.

Two days ago, a Coldwell Banker broker severed a listing agreement with the seller of a home priced at $850,000 because the broker suspected he was involved in a fraudulent sale.

"For five or six months, the home received zero offers," Mygatt said.

Out of the blue, the seller received an offer for $1.1 million, $250,000 above the asking price.

However, the seller would then contribute the additional $250,000 to a nonprofit limited liability company, so the seller is effectively receiving the $850,000 he wanted, Mygatt said.

The beneficiary of the nonprofit group is the buyer, Mygatt said.

Mygatt suspects the buyer will pocket the $250,000 and let the house go into foreclosure. But before that happens, the home will be listed as a $1.1 million sale, helping to skew the Metrolist numbers higher, he said.

He said these kinds of deals, often with lower-priced homes, are becoming increasingly common.

"This could not work without appraisal fraud," Mygatt said.


I would also add that it is normal to see builders offer sales incentives rather than dropping the price because they do not want lower prices showing up in the statistics. There is a theory of inflationary expectations based on the rational expectation of prices moving in the same direction they have moved in the past. Those expectations are the reason that prices often move higher than what is justified by underlying economic conditions. And if I am right, it will mean prices falling much farther than anyone would consider possible today.

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