SOME TIME AGO, I was talking about housing prices out at this-or-that event and after a discussion of the market, the older person I was speaking with expressed pity -- yes, pity -- at the fact I rent an apartment. Essentially, she said, it was a shame I and other young people had missed the run-up in home prices and generally wouldn't be able to afford homes.
I found this a bit much, but since I am rarely pitied I figured I would take it. I didn't mention the three key reasons why I haven't bought a home: the prices in my local market were higher than I was willing to pay; the state of the market made it economical to rent, and my real housing cost has decreased over time; and I've been able to put money in the stock market, which has seen some nice returns. It's been more than a year since I had that conversation, but these three factors haven't changed any. Until they do, I'm out of the housing game. (There's also that whole "not married, no kids" thing, but hey).
Hedge fund manager Barry Ritholtz, at Seeking Alpha, writes today that prices may well continue falling. Mr Ritholtz cites the continued rise in inventory of homes for sale -- now at 6.6 pc of the total housing market -- and says this real-estate cycle could be worse than the 1988-1996 bear/flat market in homes. Mr Ritholtz writes:
Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005.
Thus, supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve.
There is a psychological component to all this: it very much reminds me of the investors who when having missed selling Amazon (AMZN) at $400 and Yahoo (YHOO) at $200 and EMC (EMC) at $80 and Cisco (CSCO) at $60, refused to take 10% less. So they ended up riding the stocks all the way to multi year lows.
So they held onto stocks, hoping to sell again at higher prices, all the while prices fell.
One can imagine home sellers doing something similar. In their minds, their selling prices are "anchored" at the prices they imagined getting at the top.
Do read that article -- the graph along with it, comparing inventory numbers in the bear market of 1988-1992 and the present situation, will give you pause.
I do agree with Mr Ritholtz that there is a psychological factor to this. A friend of mine told me about his attempts to buy a home -- a home, mind you, which was not all that and a bag of chips -- but who was constantly frustrated due to the idiocy of the seller, who would not budge on the price. As one might expect, my friend did not proceed with the deal and the home remained on the market.
There are good reasons for why we're seeing a spike in inventory. Foreclosures are up, credit standards have been tightened, and there's continued economic uncertainty. The first two obviously have an impact on prices; adding supply while cutting demand. But it's that third one that's really the killer. It's a hell of a lot easier to take the plunge when there's a boom and everyone is getting rich than it is when things look shaky.
Besides, if the economy does fall into recession, it could push things over the edge. The striking thing about this housing downturn is that it's happening even as the economy remains fundamentally strong. Inflation is mild, we're doing well in terms of growth and there's low unemployment. If the wheels start coming off the bus, it could conceivably contribute to a widespread housing-market correction.
Of course, that's already happening in some places, like south Florida and Arizona and what not. Furthermore, since all housing markets are local, it's conceivable that some markets might actually improve as others collapse. That said, I do wonder if continued economic pressures will eventually push us into recession at some point. Sometimes it takes just a spark to set off a massive economic forest fire, and while I think it would take a lot to push us over the edge, perhaps we're heading towards the threshold.
Speaking of sparks that could set off a massive economic forest fire -- it would appear Northern Rock is finished, if this article in The Telegraph is correct. Customers have now taken out £2 billion from the bank (or 8 pc of its deposits), its share price has crashed and depositors, even today, are doing what anyone would do in this type of situation: they're crowding the bank and demanding their money. The authorities have tried to stem the panic, and have said the bank will not fail; but understandably that means nothing to the poor bastards queueing at the branches. After all, what else would they say?
The real question now is whether OTHER banks in the UK (or elsewhere) are facing the same type of mortgage-related troubles Northern Rock has, or are otherwise in a world of pain. Certainly the market is skittish about that; bank stocks on the LSE are getting hit in the head with a crowbar. And if the answer is yes, this could all possibly get worse rather quickly.
Happy Monday!Posted by Benjamin Kepple at September 17, 2007 06:07 AM | TrackBack