An Argument for a Hard Landing
July 31, 2006 — All the economists who missed the stock bubble—this is almost all economists—are just about to be embarrassed again. Several reports released this week provide the strongest evidence yet that the housing bubble may finally be deflating. Sales of new and existing homes are both down more than 10 percent from their…
July 31, 2006 — All the economists who missed the stock bubble—this is almost all economists—are just about to be embarrassed again. Several reports released this week provide the strongest evidence yet that the housing bubble may finally be deflating.
Sales of new and existing homes are both down more than 10 percent from their peaks last year. Mortgage applications are down 20 percent. Sale prices have barely risen from the level of last year, and are actually down after adjusting for inflation. Inventories of new and existing homes both stand at record levels, and the vacancy rate for ownership units has also hit a new high.
This is a very different picture from a year ago, when housing was considered the best investment around. At that time, homes in the hottest markets would routinely sell the day they came on the market for more than the asking price. The result of this frenzy was an unprecedented run-up in house prices.
The exact course going forward will depend to a large extent on how rapidly interest rates rise, but the basic plot is easy to see. With housing construction still far outpacing the growth in households, there will be a further build-up of inventories. In addition, many people who had been holding homes in anticipation of price rises will rush to sell, now that the market is headed downward. The supply of housing will be increased further by duress sales by people who cannot afford the jump in monthly payments on their adjustable rate mortgages. In addition, the rapidly rising foreclosure rate means that many financial institutions will be auctioning off repossessed homes.
–Dean Baker
The Coming Housing Crash [Tom Paine]
I’ve never thought the “hard landing” argument was very convincing. It seems to rely on the stock market crashes as a model, yet it’s pretty clear stocks and housing are two different beasts. (Namely, the latter is ordinarily not purchased simply for investment purposes).
Also, I think it’s high time that we regularly make an effort to distinguish between national trends and those specific to the New York City market. I’m not saying they aren’t related, but a recent post quoted a developer in, of all places, bubblicous South Florida (Ft. Lauderdale I believe). Unless we’re looking at real estate investors FROM NYC who bought in So. Fla. (as speculators), such a quote isn’t very helpful – to me at least – in assessing the current market, because to me, it’s OBVIOUS that speculative markets (like So. Fla, Vegas, etc.) will take a hit because they rely on unreliable sources of demand – (1) investors who do not intend to inhabit the homes they buy, and (2) baby boomers who will decide to retire there.
Dean Baker is a very knowledgeable Economist, however, when it comes to the housing market he is a little bit off track. He has been making arguments for a hard landing since 2002 (http://www.cepr.net/publications/housing_2002_08.htm). It appears to me that he is just sticking to his arguments without realizing that his predictions are not marerializing.
1. Mortgage rates are not being solely determined by interest rate policies of the FED. The tightening cycle by the FED is almost coming to an end, but mortgage rates are still around 6.25%, which shows that they are influenced by foreign investor’s interest in long-term US bonds. This will continue and therefore people won’t be driven into bankruptcy as Baker predicts.
2. When house prices go down some people may go into default, but not at a scale as Baker is predicting.
3. Yes, he is right that inventories of new constructions are rising. But developers won’t stop their projects, they will just rent the units they can not sell. Given the current low inventories in the rental market in New York, this will be a good thing.
4. While the time for investors who want to make quick money is over (and that’s good), long-term prospects are not so bad. You just have to be willing to live in your property for several years before seeing a rise in value.