Look What They're Saying About the Housing Market

by: Toro December 14, 2007    

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Every bubble spawns a certain amount of idiocy, but some ideas are so ludicrous, you have to wonder about certain investors' cognitive abilities, especially when such mantras are spoken by professionals.

Housing prices aren't falling. Only the prices of houses that are being sold are falling. Prices have not fallen for those who have not sold their houses.

During the Tech Bubble, the dumbest thing I ever heard was the argument that rising interest rates and rising oil prices do not effect tech stocks because tech stocks have no debt and do not use much energy. This was even purported by a well-known Wall Street strategist/tech cheerleader employed by a large bulge bracket firm whom shall remain nameless. Never mind that the latter is outright wrong, considering the amount of power server farms require. Even those who attend Podunk U learn in the second class of Finance 101 that the value of an company is the future cash flow generated by the company discounted back to the present, and higher interest rates lowers the value of future cash flows and thus the value of a stock. But during a time of mass delusion bred by easy money, even Wall Street's best and brightest, educated at the world's finest universities, take leave of their senses and become unhinged regarding the most basic aspects of finance.

That is no doubt true today, as the perma-bulls have foisted the above quote onto the market, one that I have now heard several times over the past few months. It is staggering in its stupidity when it is articulated by those who should know better.

For in the housing market - as in any market - it is the marginal buyer and seller who sets the price. What matters is not what those who have not sold the asset think the the price should be, since the price is the price set in the market place.

The whole point of a market is price discovery, the clearing prices at which buyers and sellers agree in which to execute a transaction. Yet, the above argument is propagated by those who claim a belief in free market capitalism. What is free market capitalism if not a mechanism by which prices are freely set by those who enter a mutually beneficial transaction?

To say that prices have not gone down for those who have not sold their houses is tantamount to saying that stock prices have not fallen for those who have not sold their stock. Did you buy JDS Uniphase at $1000 and still own it? Fear not, because that is its true price to anyone who has not sold the stock but bought it at that level, even though today, it trades at $14.

Staggering.

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This article has 14 comments:

  •  
    Dec 14 07:43 AM
    Look. Paper losses are usually not actual losses--the caveat being whether the asset is likely to be, or should be used for leverage. Under current circumstances very significant: fin. ind. transformations in the last 25 years drew a mass American cultural misconception that the house you live in is a margin investment account. It ain't, never has been, never will be. Bubble: hell. What the suckers (both subprimies and clever derivitive mongers) have been playing is strip poker. Look around the table. You'll note little more that a sock on, a belt, a bracelet. Everyone is a loser. And this is only the first round.
    Fin. Inst. write offs. Are they merely "paper losses"? If the money was funny when it surfaced its eventual dissolution is inevitable.
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  •  
    Dec 14 01:03 PM
    Actually, real estate has a couple of price-finding mechanisms that operate even on players not in the market: taxes and loan appraisals. Every 3-10 years, depending upon jurisdiction, your municipality is going to tell you what they think your house is worth in the market and charge you a real percentage of that. Those tax appraisals will, at the time you do finally sell, be the basis for your selling agent's suggestion on what to ask in the market, so the number has a lot of reality to it. Also, if you refinance or get a home equity line of credit, your creditor is going to make an appraisal that tells them the base price they will use for their loan to you. So, unlike almost any other type of market, real estate essentially does not have "unrealized" gains or losses...
    Reply | Link to Comment
  •  
    Dec 14 01:09 PM
    Housing prices aren't falling. Only the prices of houses that are being sold are falling. Prices have not fallen for those who have not sold their houses.

    ***** ***** ******
    So much fun I have in reading this article.

    Yes, it does look funny. About 95% home owners didn't sell their houses, right? Literally I can say: nothing has happen to them, except some property tax hike in some area (not in Cali since there is a Prop. 13). They are "inactive" factors in the market. And house price will fluctuate ONLY by those "active ingredients."

    No, their equity is shrinking is a life fact. But look the other way, "equity" is a imaginery thing, if not a phony one. It has never been a real "cash" until it is "realized" ("sold and move on", in real estate terms).

    Asset-based security market is based on a false assumption: all the houses increased its value when, in fact, a small part (5%) of the assets increased its price. Gee, our mortgage lenders have been using the assumption or "appraisal module" to make its decision to lend.

    It sounds like the housing market is really a "perfect market." But it is NOT the reality. Let's suppose ALL the home owners are willing to sell at the same time. The market house price will be decided by "Supply & Demand" principle. 19 times the supply, what's going to change the demand & price. You get the answer and you will see what's happening in your mind.

    Have difficulty to imagine? Just look at what happened to British big bank North Rock a month ago. It is called "banking run."

    My point is clear. It is true that "Housing prices aren't falling." I know you don't believe me, but you will agree with me if those guys use "Housing real value aren't falling," instead of "housing price."

    Gee! what is "real value" I am talking about? Hmmm! Sounds like "real purchasing power" of your money, not the dollare face value?

    Reply | Link to Comment
  •  
    Dec 14 02:17 PM
    I have become convinced that no matter what is said, written, or brought forth in any manner, by anyone, most homeowners will NEVER believe that Their House is not worth what THEY think it OUGHT to be worth, until they try to sell it. And when Selling Day finally arrives, they are fit only for a rubber room.
    Reply | Link to Comment
  •  
    Dec 14 04:55 PM
    Well, now that my power is back on (4 days without due to ice storm) my house is worth the same to me as it was last week. Even more than it was 2 yrs ago, because now I have a child and need the extra room it provides over an apartment.

    I don't plan on selling and I really don't care how my home "sale value" fluctuates over the next 5 years. I think most real homeowners are in the same boat as I am.

    So, carry on. I am sure the sky will fall and we will all be crushed, but thankfully, I have a roof over my head.
    Reply | Link to Comment
  •  
    Dec 14 05:12 PM
    What on earth are you talking about? Who exactly is saying that house prices have not declined in some areas?
    Reply | Link to Comment
  •  
    Dec 14 05:46 PM
    property taxes in CA are assessed based on a formula of 2% per year compounded. there is no appraisal, in fact employees of the assessors department are not appraisers and are not licensed. even if you are not selling your value is probably declining because occupancy cost are rising. that said, a home is not an investment since my definition of an invest is something that pays you income, certainly "equity" build up in a home associated with a monthly cash outlay is little more than a form of forced saving to benefit the tax collectors of the state, county and city. the goal of government sponsored home ownership is to benefit the collection of taxes and nothing more as far as I can see. if the governments(s) were really worried about the home owners and those about to lose their properties they could always waive taxes, fees, assessments etc. to help. no they would rather interfere with contract law so it appears they are doing something in an election year.
    Reply | Link to Comment
  •  
    Dec 15 10:52 AM
    If housing prices haven't fallen if they haven't been sold, does it also not reason that if the price never went up either?

    Clearly, housing prices have fallen. You cannot take out a home equity loan today at the price of your house that you could have a year ago.
    Reply | Link to Comment
  •  
    Dec 16 01:43 AM
    Sounds nimble!

    Yes, you still can take out a home equity loan today at the price of your house that you BOUGHT 5 YEARS AGO.

    To a lot of homeowner such as my father-in-law who bought a REO for $230K 10 years ago house, I advised them to sell, make profit and move on when they can easily sell their house for $800K.

    They just looked at me and said: "No, it is my home. I don't sell it no matter what."

    To them, housing price IS NOT CHANGED. No falling down, No going up. Housing bubble is irrelative, Period.

    Reply | Link to Comment
  •  
    Dec 16 11:48 PM
    Housing is generally illiquid (even real estate agents admit this, by saying all housing is local, albeit as an argument to inflate prices) and not a commodity. Most owners feel their homes are special and certainly feel no need to reduce the "value" of their homes if they are not selling or borrowing against them. The market will set a price for the home which they can ignore if they neither want to or need to sell.

    Unfortunately, the market will set prices around these dreamers. And in the long term, house prices are determined by wages and affordability (interest rates and access to credit). House prices world wide are inflated well beyond long-term, reasonable measures of affordability, especially now with so many financial institutions insolvent or nearly so. The irony is that even the odd bearish realtor who speaks of reverting to mean values (median prices matching long-term median income multiples like 3.5x income) fails to understand that in order to revert to the mean, the market needs to dip below in a manner which yields an offsetting value to the value (time and ratio) spent above the mean.
    All in all, this means a long, painful decline in house prices. Frankly, it is long overdue. If homeowners don't need to or want to sell, then they won't care.
    Reply | Link to Comment
  •  
    Dec 16 11:49 PM
    Housing is generally illiquid (even real estate agents admit this, by saying all housing is local, albeit as an argument to inflate prices) and not a commodity. Most owners feel their homes are special and certainly feel no need to reduce the "value" of their homes if they are not selling or borrowing against them. The market will set a price for the home which they can ignore if they neither want to or need to sell.

    Unfortunately, the market will set prices around these dreamers. And in the long term, house prices are determined by wages and affordability (interest rates and access to credit). House prices world wide are inflated well beyond long-term, reasonable measures of affordability, especially now with so many financial institutions insolvent or nearly so. The irony is that even the odd bearish realtor who speaks of reverting to mean values (median prices matching long-term median income multiples like 3.5x income) fails to understand that in order to revert to the mean, the market needs to dip below in a manner which yields an offsetting value to the value (time and ratio) spent above the mean.
    All in all, this means a long, painful decline in house prices. Frankly, it is long overdue. If homeowners don't need to or want to sell, then they won't care.
    Reply | Link to Comment
  •  
    Dec 17 02:36 AM
    Correction: house prices need to revert to 2.5x income
    Reply | Link to Comment
  •  
    Dec 17 07:21 PM
    I am watching HGTV, "My house is worth what?", and the houses on this show, show prices are still going up.

    Ditech.com says people are SMART.

    GW said today (Dec. 17th, 2007) that the "Housing Bubble" isn't as bad as it is being made out, and that the economy is fine also.

    So, it's OK right????

    Life goes on, just print more Dollar Bills.
    Reply | Link to Comment
  •  
    Dec 25 09:17 AM
    Housing is generally illiquid (even real estate agents admit this, by saying all housing is local, albeit as an argument to inflate prices) and not a commodity. Most owners feel their homes are special and certainly feel no need to reduce the "value" of their homes if they are not selling or borrowing against them. The market will set a price for the home which they can ignore if they neither want to or need to sell.

    Unfortunately, the market will set prices around these dreamers. And in the long term, house prices are determined by wages and affordability (interest rates and access to credit). House prices world wide are inflated well beyond long-term, reasonable measures of affordability, especially now with so many financial institutions insolvent or nearly so. The irony is that even the odd bearish realtor who speaks of reverting to mean values (median prices matching long-term median income multiples like 3.5x income) fails to understand that in order to revert to the mean, the market needs to dip below in a manner which yields an offsetting value to the value (time and ratio) spent above the mean.
    All in all, this means a long, painful decline in house prices. Frankly, it is long overdue. If homeowners don't need to or want to sell, then they won't care.
    Reply | Link to Comment
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