Monday, July 26, 2004

It's too bad this article is full of national statistics which don't mean much since there isn't a national housing market in the US. Still, some interesting data worth chewing on.
With the growth rate for home prices starting to slow, now may be the time to ponder what a bear market in real estate may bring. A recent study by two economists at Goldman Sachs provides some answers.

. . . the first three months of this year showed far slower growth than previous periods. Prices rose only 0.96 percent . . . More ominous, six states showed declines in housing prices in the first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and Nebraska. No state had price declines in the previous quarter. . . .

In nominal terms, United States home prices are up 60 percent since 1995; in real terms, adjusted for inflation, they are up 37 percent. Viewed historically, home prices are up twice as much now as they were in the bullish real estate markets of both the mid-1970's and the 1980's.

As a percentage of disposable income, home prices are more than 18 percent above the long-term average. Prices exceeded that average by only 4 percent in the 1970's and 8.5 percent in the 1980's boom.

Michael Buchanan, a senior global economist at Goldman Sachs, and Themistoklis Fiotakis, a research assistant there, reckon that at current interest rates, home prices are now overvalued by 10 percent, on average. Because this figure spans the entire nation, the hottest markets - California and New York - are obviously more overpriced.
Of course, we're bound to hear Greenspan-speak now, that this housing market has broken the mold, we can have dramatically rising housing prices indefinitely due to productivity gains, population growth and global warming. Do I hear calls for a book? Say, "Bungalow $360,000"?
Consumption would slip 1 percent, Goldman estimated, if housing prices fell by 10 percent, to the fair value level. But if prices decline to well below that, as often happens when overheated markets go cold, consumption may fall by 2.4 percent, Goldman reckoned. . . .

One risk that looms large, however, is that United States policy makers would have few tools to cushion the fall if a housing decline gained real momentum. Interest rates are already so low and fiscal policy so loose that little could be done to ease the pain.

"This is one of a series of risks and imbalances that suggest there has been a price to the low-interest-rate policy that led the recession to be much shallower than it might otherwise have been," Mr. Wilson said. "Fiscal and monetary policy are both already fully utilized. If things go wrong from here, the U.S. finds itself in a more fragile position."


At 11:55 AM, Blogger Chibi said...

Bungalow $360,000 was passed long ago in most California markets, General. To be talking up real estate here as a never-ending miracle we need to change the title of that book. How about The Millionaire in the Bungalow Next Door?

At 12:24 AM, Anonymous Anonymous said...

Chibi, General: Your suggestions of book titles, and the implied suggestion that the more common homes around here are bungalows, are an insult to quite a few (fairly basic but decent) bungalow-style working-class cottages I have seen in my earlier life.

At 9:10 AM, Blogger Gen. Glut said...


When I said "bungalow" I meant it. Indeed, the average home price in CA is far above $360,000, but when a one-story two-bedroom gets that high, I think we're crossing over into the land of the insane -- or should we say "animal spirits" after Keynes?

At 12:18 PM, Blogger Chibi said...

Ah, just to follow up, I have nothing at all against bungalows. In fact you could say I am an afficianado of the form (as well as the owner of a nice 1913 Craftsman myself). I think small houses in general are a good idea (less energy use, less room to keep the owners from buying crap they don't really need) and many of the craftsman-style bungalows of the early 20th century are very well-built with great features like built-ins, waiscotting, etc. And as the owner of a two-bed single story home, I also know that in the Bay Area, which is where I live, it is hard to find anything that actually sells for $360,000 unless you get into the rougher neighborhoods or further out into the burbs like Richmond, El Sob, El Cerrito maybe. In most neighborhoods in Berkeley, Albany, Kennsington and the nicer neighborhoods of Oakland, $360,000 is a serious handyman's special. Maybe three years ago we were at those levels for a decent house. If I sold mine today, I could get over half a million (Berkeley, decent but not super-desirable location). I agree with the general on price levels and some days I do feel tempted to put it on the market, take the money and go on a very long vacation. I expect a correction to begin any day now. I also hope I'm wrong. My comments were in no way meant to disparge the bungalow. I'm only commenting on the reality of the situation.

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