Wednesday, August 25, 2010

Your parents' advice is wrong!

Now that all the Obama adminstration housing gimmicks are finished, housing is heading back down after a brief bounce the past year.

I believe that all these gimmicks did is postpone the decline, waste taxpayers money and favor those that made mistakes with their housing decisions.

Housing sales dropped 27% to their lowest level since 1995, and point to a renewed drop in prices in the months ahead. The news was not unexpected, and adds to the recent dismal news in retail sales and unemployment. The only positives that I can see in the US economy right now is the ISM is still positive and corporate profits are strong. The ISM may turn soon and it will be interesting to see if there are any earnings pre-announcements in the coming weeks that point to weakening profits.

I also found this WSJ article interesting:

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
In the US (and especially California), people STILL expect housing to go up 10% a year! With inflation near zero, that is an astronomical assumption. That would put housing prices at record highs (even after inflation) by the middle part of this decade. These people just assume that what happened over the past few years was just a correction.

It is interesting how the housing wisdom of the Baby Boomers and the Silent Generation (in the parlance of Howe and Strauss) is actually not sound advice. And I hear it all the time from people my age and my parents generation. Even after the events in the US of the past few years. Renting is throwing away money in their view. Throughout most of their lifetimes, it was and housing has produced incredible wealth. In reality, it really was but a rare confluence of "a 100 year flood" type events concentrated in about 25 years.

Even in the best of years before the 1997 housing bubble, housing returned about 1% above inflation. I think it will take another 5-10 years to kill this 10% mentality (via a renewed 20-30% drop in home prices in the US over the next few years, followed by little or no appreciation for another few years). Then, maybe, housing will return to its traditional role as a necessary consumer durable but not an investment for most people.

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