US house prices in freefall -- redux

[Ben Kenobi]

Everyone benefits from stable markets. Hell, what we have right now isn't even a market, because people can't agree on prices.

Increasing prices != market stability.

The people who have been winning over the last while lose out when the market shifts. It's a fact of life. Houses are overpriced, and demand is dropping, therefore the prices are going to come down. It doesn't matter what you do. After the correction, prices will go back up again.

The idea of a 'stable market' is a myth unless you invoke price caps, to make an artificially stable market, which has massive massive problems when prices no longer match the supply and demand.

You used to be able to predict what the price of a house would be in the future.

Predictions are all only possible. Just because the market has trended up doesn't mean it will trend up indefinitely. You are taking a risk in betting that the market will continue to increase.

Now there is too much uncertainty. That means that people won't be able to sell or buy for what they think house is worth.

Sure they can. You make a bid, and if the asker is asking for too much, they either come down or you walk away. If people are asking too much, that means they will either accept the loss or hold onto their asset until it starts appreciating again.

And then of course there's the problem of actually getting a loan for the house. The banks are going to be extra cautious about the loans they give because they are also uncertain.

They should be. After this correction the markets will recover and credit will loosen again. It's all a cycle.

What I'm saying here is much
As well as they should. more important to understanding this problem than supply and demand analysis for the simple fact that there really isn't a market right now.

It's not a good market for sellers. It's a great market for buyers.

[Dinner]

It's not really a good market for buyers, Ben. A credit crisis means people have great difficulties securing credit and so prices are likely to continue to keep falling.

[Ben Kenobi]

It's not really a good market for buyers, Ben. A credit crisis means people have great difficulties securing credit and so prices are likely to continue to keep falling.

Depends on who you are. If you have the assets, they are still going to lend to you, and you are going to be much better off then you would have been paying an overinflated price.

Plus, if you can secure credit, the drops in prices mean you get more house for the same amount of money.

Finally, it's going to encourage people to put up higher down payment plans.

[Dinner]

Ben, the credit crunch means only people who don't need credit can get it. You honestly don't see how this will effect an economy fueled almost entirely by credit for the last 8-10 years?

[Ben Kenobi]

Ben, the credit crunch means only people who don't need credit can get it. You honestly don't see how this will effect an economy fueled almost entirely by credit for the last 8-10 years?

Yes, and this is a good thing, it's a natural part of the cycle. You don't see why cheap credit is a bad thing? People get over their heads and default.

[Apocalypse]

I don't know how I missed this thread earlier.

The biggest problem is people complaining that this is a freefall. The prices are still falling slower than they went up. All this SLOWFALL is doing is stringing the pain out longer until the market finally corrects itself.

[Dauphin]

Originally posted by Ben Kenobi

Plus, if you can secure credit, the drops in prices mean you get more house for the same amount of money.

IF?

If you have a $100,000 mortgage at 5.0% per annum over 25 years you pay $578 a month. If you have a $95,000 mortgage at 5.5% per annum over 25 years you pay $576 a month.

I don't know about the US, but despite the cut in interest rates the mortgage lending rate here is higher than it was last year by about 1% (and this is not an issue caused by the ability to repay or the quality of the assets available on the part of the person trying to borrow). So it is possible that despite cheaper housing, the more expensive credit can lead to housing costing as much as, if not more than, it did before.

[Agathon]

Originally posted by Ben Kenobi

Yes, and this is a good thing, it's a natural part of the cycle. You don't see why cheap credit is a bad thing? People get over their heads and default.

The problem was not caused solely by individual buyers IIRC, but by lax lending policies by banks.

The problem is that the government can't let the banks take a massive hit, or the financial system will crash. That creates somewhat of a one way bet for the banks who know that to some degree they can act more irresponsibly. A failure to repay a loan is often not only the fault of the borrower, but the fault of the lender for making the loan to someone who can't repay it.

[DanS]

Originally posted by Oerdin
Ben, the credit crunch means only people who don't need credit can get it.

This isn't quite true. Fannie Mae is buying loans up to 95% Loan-to-Value, and has even moved into jumbos. Somebody who can afford a 5% down payment or a 20% down payment still needs credit.

In many areas of the country, the declines have been so steep that it doesn't make sense for lenders to offer 95% Loan-to-Value. In Las Vegas, a 5% down payment will keep a borrower afloat for only a single month, as just one example.

Those markets most heavily impacted will just have to make do for a short time with buyers who can afford a higher down payment. I can't imagine that the 100% Loan-to-Value loans will be available for a while, but I don't think that's an indication of a credit crunch.

[Vanguard]

Inefficient allocation of capital is always a bad thing, either when people are paying too much for real estate or too little.

Of course some fluctuation of prices is necessary to establish what the "correct" price is. But large scale speculation, almost by definition, indicates market inefficiency.

The fact that this economic inefficiency took place 2 years ago (when banks were investing in building far more houses than the economy needed) and is only being recognized now (when prices of all housing has fallen) is not important. The economy still wasted a lot of its potential in building too much housing.

[Ben Kenobi]

I don't know about the US, but despite the cut in interest rates the mortgage lending rate here is higher than it was last year by about 1% (and this is not an issue caused by the ability to repay or the quality of the assets available on the part of the person trying to borrow). So it is possible that despite cheaper housing, the more expensive credit can lead to housing costing as much as, if not more than, it did before.

Dependent of course on your initial down payment. Frankly something that encourages people to save up for a down payment isn't a bad thing at all.

[Kidlicious]

Originally posted by Vanguard
The economy still wasted a lot of its potential in building too much housing.

There aren't too many houses. People just don't have enough money to buy them.

[Kidlicious]

Originally posted by Apocalypse
I don't know how I missed this thread earlier.

The biggest problem is people complaining that this is a freefall. The prices are still falling slower than they went up. All this SLOWFALL is doing is stringing the pain out longer until the market finally corrects itself.

No. The faster the prices fall the more they will fall, and the longer they will be down.

[Ben Kenobi]

The problem was not caused solely by individual buyers IIRC, but by lax lending policies by banks.

The problem is that the government can't let the banks take a massive hit, or the financial system will crash. That creates somewhat of a one way bet for the banks who know that to some degree they can act more irresponsibly. A failure to repay a loan is often not only the fault of the borrower, but the fault of the lender for making the loan to someone who can't repay it.

No, very true. The fault is on both sides, which is why the increased scrutiny on the lender side is a positive outcome. Both the lender and the receiver go down when the lender doesn't do his job and approves people who really cannot repay the loan.

The interesting thing is that 95 percent of those 'risky loans' are on a good repayment schedule, it's just the other 5 that are a huge problem.

Sure, they can't let everyone go down, but they can certainly punish the ones like bear stearns by letting them get gobbled up by their rivals like a pack of dogs and a steak.

[Kidlicious]

Originally posted by Ben Kenobi
Increasing prices != market stability.

Yes it does Ben. So long as prices increase by what people expect them to increase the market is stable. You are just way off.