just briefly
Aug. 23rd, 2009 10:05 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
solarbirdI've been also taking a bit of vacation from economics, but I did want to drop in one brief note on housing.
A lot of news sources were talking up the upsurge in housing sales, most particularly in the worst-hit areas of the housing crash. Most of them did not note that this is entirely normal; housing sales always surge in summer. Summer is selling season. That hasn't changed. Some of them, at least, were mentioning that much of this jump was due to a surge in sales of foreclosed homes, and that other sales remained quite low. However, they were making no distinction between foreclosure sales and general sales, which is misleading.
A foreclosure sale makes no one any money. It may limit the loss a bank has already suffered, but the profit is long gone - the money that interest was supposed to generate in return for the bank. That's not coming back in any of these sales. And they aren't just missing profits: they're taking capital losses as well, with the sharp and continuing drop in home prices, particularly in the area where these bankruptcy sales are picking up so strongly. All those bad CDOs and MBSes and all that? They were supposed to generate profit against the interest payments - the bank profit - not the principle. All that's gone, and none of this is helping any of that come back.
Further, foreclosure sales don't really spur additional economic activity in the way that regular sales often do. There's no house-seller buying up into another home, or down into a smaller home; there's no chain of resulting sell-and-purchases that drives up demand and which then drives up production, which is where value actually gets created. And foreclosure sales are still far behind the rate of additional houses falling into foreclosure, so we aren't even beginning to address the inventory issue. Finally, there's a negative-feedback loop effect here, where bankruptcy sales drop house average prices in an area, which in turn causes downward pressure on prices of all homes, and so on. It's a negative feedback loop, where these sales cause further downward pressure on prices of all homes.
Don't get me wrong; these sales need to happen and they're part of the cleaning-out process. But they're not a sign of a turnaround in housing. It'd be nice if they were, but they just aren't. Only once these sales numbers start to fall will you be able to talk about a bottoming of house values. We're still a fair ways away from that.
A lot of news sources were talking up the upsurge in housing sales, most particularly in the worst-hit areas of the housing crash. Most of them did not note that this is entirely normal; housing sales always surge in summer. Summer is selling season. That hasn't changed. Some of them, at least, were mentioning that much of this jump was due to a surge in sales of foreclosed homes, and that other sales remained quite low. However, they were making no distinction between foreclosure sales and general sales, which is misleading.
A foreclosure sale makes no one any money. It may limit the loss a bank has already suffered, but the profit is long gone - the money that interest was supposed to generate in return for the bank. That's not coming back in any of these sales. And they aren't just missing profits: they're taking capital losses as well, with the sharp and continuing drop in home prices, particularly in the area where these bankruptcy sales are picking up so strongly. All those bad CDOs and MBSes and all that? They were supposed to generate profit against the interest payments - the bank profit - not the principle. All that's gone, and none of this is helping any of that come back.
Further, foreclosure sales don't really spur additional economic activity in the way that regular sales often do. There's no house-seller buying up into another home, or down into a smaller home; there's no chain of resulting sell-and-purchases that drives up demand and which then drives up production, which is where value actually gets created. And foreclosure sales are still far behind the rate of additional houses falling into foreclosure, so we aren't even beginning to address the inventory issue. Finally, there's a negative-feedback loop effect here, where bankruptcy sales drop house average prices in an area, which in turn causes downward pressure on prices of all homes, and so on. It's a negative feedback loop, where these sales cause further downward pressure on prices of all homes.
Don't get me wrong; these sales need to happen and they're part of the cleaning-out process. But they're not a sign of a turnaround in housing. It'd be nice if they were, but they just aren't. Only once these sales numbers start to fall will you be able to talk about a bottoming of house values. We're still a fair ways away from that.
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no subject
Date: 2009-08-24 06:25 am (UTC)which is: house prices. they have seemed incredibly over-priced, and this over pricing seemed to get larger, while at the same time the actual value of homes was dropping. (by which i mean two things - older homes were costing more to buy, and yet still needed things like new roofs or to be totally re-wired, etc; contrawise, new-built homes were costing a whole damned lot, and yet the work seemed more shoddy than, say, houses built in the late-70s/early 80s - built too fast, edges still rough, etc. i know person who bought a new-built about 4 years ago, one of those "you pick the features", and every time there was a storm, the roof leaked, half the power outlets surged for no apparant reason, the septic line leaked into the garden area, and the one "feature" she actually added - a large picture window with a seat - was, well, not at all nice)
and i have to ask - why? houses seemed to increase in price *MUCH* faster than inflation, or cost of living, or whatever, did. i am from Northern California (although i now live in Ohio). when i was 12, so in 1989, my mother bought a house in Redding. at the time, the house cost her $120,000. (to continue the comparison - she is a nurse; when she bought the house, she netted right at $50,000 a year, after taxes and etc). ten years later, a house that was *exactly* the same, except smaller yards, not on the corner, and needed a new roof went up for sale down the street. the base "price" for the house (the least the realtor company would accept) was $300,000 (and my mother, at that time, was netting $61,000) so the price of housing essentially more than doubled, while wages only increased 25% or so - and i know that wages increased more for nurses and related fields more than most other jobs.
and i don't understand why house prices increased *that* much. yes, there was demand for houses, but from what i can see a lot of it was artificial, drummed up by banks. and the only way these houses could be bought anymore was through horrible, sell your first-born-plus-10%-of-your-soul type mortages.
i don't understand why so many people would dive into that? i don't understand how the banks let that happen, since ultimately *they* would be the ones to pay the price (i mean, individual home-owners are homeless, that is a price, and it's a damning indictment of our system - but banks are dealing with the loss of hundreds of thousands of mortgage payments. i feel ZERO sorrow or pity for the banks - they did this to themselves, fucked themselves over with their predatory BS. i just don't understand *WHY* - what was the logic behind these price-hikes?)
i also don't understand why prices in areas are different - my mother's house cost her $120,000 in NorthCA - my ex-husband bought a very similiar house, a difference of only 10square feer, in Montgomery AL for $50,000 (not a bid or forclosure - that was the listed price) in 1991; that same size-house would have gone for a good $400,000 in SouthCA.
here in columbus it's *extreme*. there is Victorian Village, an area of Columbus where every house is at least 100 years old. less than 5% have AC or other updated amenities - most are so weird that cell phones and networks don't work within the walls. but until last year, these houses (all need SOME work, most need *major* work) sold for 600grandPLUS. go a couple miles in any direction, and it's somehow "ghetto" (it's not) and your lucky to sell a house for what you paid for it - most of those were selling for 70 or 80 grand. go a but further, and it's right back to the 500-600 range. there are areas of Columbus where a freaking 3 bedroom single car garage cost over a million dollars - less than 2 miles away from areas where houses twice as big sell for less than 100thousand.
is there some place i can go that explains in non-Ph.D economics terms? or something?
(i canNOT imagine EVER paying more for a house than i make in 2 years. that seems to be my personal cap. i just can't imagine buying something that costs more than *I* do, ya know?)
no subject
Date: 2009-08-28 06:19 pm (UTC)True, as demonstrated by reality.
while at the same time the actual value of homes was dropping.
I'm not sure where you're going with 'actual value,' but after about 25-30 years value of older house stock starts to rise, assuming the stock in question is of good quality, for a variety of reasons, many of which have to do with style preference and style supply.
contrawise, new-built homes were costing a whole damned lot, and yet the work seemed more shoddy than, say, houses built in the late-70s/early 80s - built too fast, edges still rough, etc.
Part of any mania is a decrease in quality of whatever is produced in greatest quantity.
and i have to ask - why? houses seemed to increase in price *MUCH* faster than inflation, or cost of living, or whatever, did.
Well, I've talked about my opinions about the official inflation stat. I'm quite convinced domestic price inflation was higher from about 1998-2006 than represented, for a variety of reasons, not the least of which being the post-98 Gingrich/Clinton changes to the calculations method were specifically made to lower the number, in order to reduce social-security payment increases moving forward. This isn't a conspiracy theory; this was reported at the time.
Even ignoring that, the total price inflation stat was depressed by the China effect. A domestic-goods-only stat would have been quite revealing, I think. And houses, for the most part, are a factor of domestic production. Sure, a lot of fixtures and the like can come in from China (or whereever) but all that labour and all that wood and all that stone and such - that's mostly domestic.
But that ignores that there was a bubble, a mania, one created and encouraged with intent by a variety of forces, including the global glut of dollar outflow (due to the massive US balance of payments deficits) and specific and intentional actions on the part of the Federal Reserve under Greenspan to inflate a new bubble to replace the tech stock bubble which had previously collapsed.
the price of housing essentially more than doubled, while wages only increased 25% or so - and i know that wages increased more for nurses and related fields more than most other jobs.
Yes. This is one of the indicators of unsustainability. The only reason family incomes have even been reasonably close to even vs. cost of living (et al) is because most families are now two-income households rather than one. Take that out, and wages vs. cost of living have done horrible things over the last three decades.
yes, there was demand for houses, but from what i can see a lot of it was artificial, drummed up by banks. and the only way these houses could be bought anymore was through horrible, sell your first-born-plus-10%-of-your-soul type mortages.
I was warning about these circa 2006, iirc. But yes, indeed. Housing prices had "never" gone down - meaning "never" since "the last time they did," which was the Great Depression - so therefore, there was no risk. Any loan could be made because you would sell the loan off into CDO shares and all you had to do was hope they stayed good long enough to hand them off into these magic devices that people actually believed eliminated risk. And even if the mortgages went bad, there'd be no loss - house prices would rise forever! You'd be able to resell at a profit, even in a foreclosure.
And that worked until 2007, when it didn't.
I had arguments with people - several places, including one I remember in
But I did, I think, convince the original poster not to buy at that point in time.
no subject
Date: 2009-09-04 09:13 am (UTC)i didn't friend you (and start following you) until well after things had started falling apart - i know that you were explaining what was happening in a way i understood (correction: i understood, in general, what was happening - you explain what the "economist" are really saying, and what the lies are...)
i guess... i guess this is one of those Things. i can look and see what a "bubble" (or whatever else the call it) is, going back to the Tulip bubble in... 1640? somewhere in that area. i just don't understand *why* people are that damned foolish. i mean, a few, yes - but *everyone*?
but then, i've always been opposed to owning a house - you have to mow the lawn, do the maintenence, pay for the new roof... for what? a thing you share with the bank until you're 30, but the bank isn't helping keep in shape? i'm weird - gimme a place for the books and an outlet for the computer and a bed, and i'm good.
thanks for trying, though. you put a lot of work into the reply, here, and i appreciate it. if nothing else, i now know that i'm *right*, and not just making it all up or something. i've been complaining about the 2-income-*required* thing for years - not because i don't want to work, but because there are too many people who *have* to and also have to spend most of that check on childcare. which is also a reason i don't want kids...
how the hell do we have a property market problem like this at the same time as we have a housing shortage? head, meet desk. i'm off to try and find those economics books, now that the surgery is over and i can (almost, but that's why i have a boyfriend, isn't it, to do the lifting) finish unpacking.
thank you again
Part 2
Date: 2009-08-28 06:28 pm (UTC)Well, they haven't, have they? Oh, sure, a few have, but not many - and their CEOs and CFOs and boards and such have all been rewarded handsomely with millions and billions in payoffs. And now they have a tax-money funnel flowing taxpayer dollars into their gullets. Privatising the gains and socialising the losses absolutely continues to be the game, and there is no hint of regret in the air.
i also don't understand why prices in areas are different - my mother's house cost her $120,000 in NorthCA - my ex-husband bought a very similiar house, a difference of only 10square feer, in Montgomery AL for $50,000
Well, that's another story entirely. Compare average incomes across those two locations and you'll get a lot better idea as to why.
here in columbus it's *extreme*. there is Victorian Village, an area of Columbus where every house is at least 100 years old. less than 5% have AC or other updated amenities - most are so weird that cell phones and networks don't work within the walls.
Consider also fashion. Fashion - particularly where higher prices are concerned - is as important as anything else. You're paying for exclusivity. Is a Louis Vuitton shoulder bag worth $1100 to $3000? Not to me.
(i canNOT imagine EVER paying more for a house than i make in 2 years. that seems to be my personal cap. i just can't imagine buying something that costs more than *I* do, ya know?)
The greater average, long term, is three times annual income; the average house costs three times what the average buyer household earns. Historically, the market has returned to that. And probably will do so again.
Re: Part 2
Date: 2009-09-04 09:20 am (UTC)i guess that part of my confusion, re: location, is that i'm an Air Force brat. didn't matter where we lived, dad got the same. come to think of it, really so did mom - nurses tend to make about the same everywhere, it's more dependent upon field and hospital size (and i have seen some damned small towns with really big hospitals...)
fashion. yeah... i'll just accept that, you are very correct. didn't think about that, just knew it bugged me, that's got to be why.
3 years? even after all the interest? really only 3 years?
no, you mean that is the historic average, not the now. or, at least, the past decade and change. got it.
really, to fuck with social security? i know they spend it before the collect it, and then pay it with the money that's supposed to go for when *I* retire... so, ok, yeah...
incidentally, i voted for Newt. just sayin' :)
one last time: thank you!
no subject
Date: 2009-08-24 12:20 pm (UTC)(It's distressing on the one hand to think of what the prices were up to last summer, but on the other hand, meh. I get to now _buy_ in the same market, so my purchasing power isn't that different, and I'll catch the rebound out here just as well. Which I don't really expect to happen for real until next summer.)