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Real Estate Market Needs More Tainted Hamburger and a Quick Hurricane or Two - 2007-12-22 |
The email was titled "Why Your Home May Be Worth 43% Less by 2011," and it was addressed personally to me. I should make it clear that I get a lot of email, mostly related to residential real estate issues, so I opened this one, although it already sounded gloomy.
Q: John, are you still in denial about falling home prices? I am still
looking for a real estate agent who can look at the market rationally and admit that prices are falling and it's best to wait and get the lower price. I guess if your living is made only when people buy it's hard to face the facts.
Choosing to ignore the barb at the end of his message, I responded.
I was pleased to be able to reply with the latest facts and figures from the Office of Federal Housing Enterprise Oversight, which produces the most widely watched study of residential housing price movement. It's called the Home Price Index, or HPI for short, and it comes out every quarter.
The HPI for third quarter 2007 had just been published the week before, so I thought it might be helpful to share this data with my correspondent, who seemed to have a rather bleak view of the future, based on his subject line.
I always focus on the price change over the prior twelve months as a way of telling me what's actually happening, since temporary and short-lived price swings can be misleading. And the numbers were positive, although modestly so.
I e-mailed him back:
A: The average resale home price from the OFHEO Index was released last week for the 12 month period ending September 30, 2007, and showed that the average resale home in the United States had increased in value by 1.79 percent. In Georgia, the average home increased in value by 3.54 percent. During the same period, homes in the metro Atlanta area showed an increase of 2.61 percent.
Then I asked him if he wished to restate his initial question.
His reply was swift and revealing:
Q: John, you above all should know those statistics are not worth the paper they are written on! Every where I look, home prices have and are and will continue to drop. I bet that data is at least 12 months old and not reflective of what is going on in the market.
So far I have not been able to construct an answer. I guess your reaction to the slowdown in home sales depends mostly on how much television you watch. And I believe he watches a lot.
My wife has stated a hypothesis that the television news industry is largely dependent upon either a hurricane, a case of tainted hamburger, or a housing industry crisis. Without at least one, that form of media might cease to exist.
Fortunately, the meat-packing industry has been helpful this year, but tropical weather has failed to meet even modest expectations, so real estate has really taken it on the chin in the public consciousness.
To be fair, homes are selling at a far lower rate than they were just a year ago. And those that do finally sell are taking much longer to sell. To make things worse, the metro Atlanta area has an alarming excess inventory of new homes that need to sell before we can even talk about any sort of housing equilibrium.
In addition, one can level criticism at the Home Price Index, claiming that its data includes only homes that were sold or refinanced with a loan balance of $417,000 or less. That's true, and thus it excludes the high end of the residential marketplace.
But the reality is that the vast majority of homes in Georgia are valued in a range that allows loans under that limit, and it is further true that those homes represent the heart of the real estate market - certainly as opposed to multi-million dollar specialty homes that are being hit particularly hard in this slowdown.
And the heart of the matter comes last.
Once you have made up your mind that home prices everywhere you look "have and are and will continue to drop," the future becomes crystal clear.
Don't get me wrong. I am not trying to sugar-coat the current housing slowdown. There are a huge number of homeowners facing dramatic payment increases in the next couple of years who may not qualify for the relief announced recently by President Bush.
Furthermore, I am aware that there are many builders in this town who are hanging on by their fingernails hoping to unload some of their inventory sooner rather than later.
But to deny the reality of year over year home price increases in our market when reported by the most widely based government statistics available is failure to deal with the facts.
Even the less widely based S&P/Case-Shiller Index shows Atlanta home values gaining in year over year prices, albeit at a statistically insignificant 0.4 percent.
When I see at least one major national index show a year over year price decline for our market, and when I see that decline last for more than a brief period, then I will be willing to abandon my condition of denial and consider the possibility that home prices have and are and will continue to drop.
In the meantime, I'm still buying real estate.
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