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Higher Prices Mark A Healthy Economy Where Real Estate Serves As An Investment

An editorial by Robert J. Shiller in the New York Times. “We are, once again, experiencing one of the greatest housing booms in U.S. history. How long this will last and where it is heading next are impossible to know now. But it is time to take notice: My data shows that this is the United States’ third-biggest housing boom in the modern era.”

“In fact, based on my data, it amounts to the third strongest national boom in real terms since the Consumer Price Index began in 1913, behind only the explosive run-up in prices that led to the great financial crisis of a decade ago.”

“The simplest narrative being given for the current boom is just that the 2008-09 financial crisis and the Great Recession are over and home prices are returning to normal. But that explanation does not cut it either. In September they were 11 percent higher than at the 2006 peak in nominal terms, and almost as high in real terms.”

“Perhaps the home price increases are now a self-fulfilling prophesy. As John Maynard Keynes argued in his 1936 ‘General Theory of Employment, Interest and Money,’ people seem to have a ‘simple faith in the conventional basis of valuation.'”

“If the conventional basis is now that home prices are going up 5 percent a year, then sellers, who would otherwise have no idea what to ask for their houses, will just put a price based on this convention. And likewise buyers will not feel they are paying too much if they accept the convention. In the United States, we may believe that the process is all part of the ‘American dream.'”

“It can’t go on forever, of course. But when it will end isn’t knowable. The data can’t tell us when prices will level off, or whether they will plunge catastrophically. All we do know is that prices have been roaring higher at a speed rarely seen in U.S. history.”

From Mortgage Professional America. “Tappable equity fell in the third quarter of 2018 with softening house prices promoting a decline in 60 of the 100 largest US metros. Black Knight Inc.’s  report shows that tappable equity (the among available for homeowners with a mortgage before hitting 80% LTV) fell by $140 billion in Q3 2018.”

“The average homeowner with a mortgage lost $2,300 in tappable equity and 272,000 owners slipped out of tappable equity altogether.”

“‘That is the first decline we’ve seen since the housing recovery began, and its cause can be traced directly to softening home prices in some of the nation’s most expensive – and equity- rich – markets,’ explains Ben Graboske, executive vice president of Black Knight’s Data & Analytics division.”

“The Q3 decline in tappable equity erased more than 20% of the growth seen over the first 6 months of the year. More than half of the total net decline was due to three markets in California; San Jose, San Francisco, and Los Angeles. Adding Seattle totals two-thirds of the net reduction in tappable equity.”

“What connects these four areas is home price growth that has far outpaced the national average in recent years, but where prices fell in the third quarter.”

From Northern Virginia Daily. “The National Association of Realtors hosted its first economic and realty summit for the Shenandoah Valley, assuring homeowners and buyers the economy and housing markets are favorable.”

“Keynote speaker Lawrence Yun, chief economist for the Realtors organization, compared a number of current economic trends to those from the beginning of the subprime mortgage crisis that resulted in the Great Recession.”

“Yun noted recent headlines touting scary times for the economy are short-term looks at a healthy market over the last nine years. ‘After the crash, it has been a steady upward trend except for the recent downfall,’ Yun said about existing home sales, ‘the recent headline said it’s a major crash. But it’s not a major crash.'”

“When consumers were asked how confident they were home values were going to be up in one year, an overwhelming number of respondents said they thought values would go up. Realtors were even more bullish on the question with more than 60 percent saying they believed values would be up.”

“On the other hand, Yun illustrated buyers’ reluctance to act on their intuition. When consumers were asked in 2016 if they thought it was a good time to buy a home, 45 percent said it was a good time. That number has declined over the last two years despite continued confidence that home values are increasing.”

“‘If you know for sure, with certainty, that gold prices are higher, would you want to buy gold?’ Yun said. ‘Generally, people would say if they believe prices will be higher, they should be optimistic about buying. But this is showing people aren’t as optimistic even though they believe prices are going to be higher.'”

“Higher housing prices, while raising the bar to enter the market, is good news for current homeowners and mark a healthy economy where real estate serves as an investment.”

From The Daily Mail. “Elvis fans are being offered the chance to buy the honeymoon residence where ‘The King’ and his wife, Priscilla Presley, resided following their secret wedding in 1967 – for just a quarter of the original price.”

“Built in 1960, the Palm Springs home was originally listed for $9.5 million. Last year the modernist home dropped its asking price to $5.9 million, according to the Seattle Times.”

“Now Elvis enthusiasts with a cool $2.695 million to spare could own the modernist home which comes complete with all furnishings and art, including portraits of Elvis and a jukebox.”


This Post Has 33 Comments
  1. ‘More than half of the total net decline was due to three markets in California; San Jose, San Francisco, and Los Angeles. Adding Seattle totals two-thirds of the net reduction in tappable equity…What connects these four areas is…prices fell in the third quarter’

    Huh, I wonder why the UHS haven’t reported this mighty wallop? They keep saying it’s just decelerated.

  2. ‘It can’t go on forever, of course. But when it will end isn’t knowable. The data can’t tell us when prices will level off, or whether they will plunge catastrophically. All we do know is that prices have been roaring higher at a speed rarely seen in U.S. history’

    One reason I took this break from all the slashin’ and a sawin’ (except for the King, that is) is I wanted to nip something in the bud. We are starting to see, especially in Australia, the establishment using scare tactics. Yes, after years upon years of soaring shack prices, suddenly – Oh no, we could have a recession! We gotta do something!!

    If “do something” means the usual throw some gravy at the REIC, horse-hockey. And that is what they mean. I for one and not going to roll over and let these same people who created the conditions that gave rise to these bubbles, gave it intellectual cover (how many “there’s no bubble you doom and gloomers!” quotes have we read?), and only now become concerned.

    Lower basic needs prices are not just good, but great! We have more money for other things in life or to save! (Gasp). I could go on, but here they come. The establishment. See we really need them to tell us we should spend 30 years paying off a shack that our parents or grandparents paid a 10th for. We can only be wealthy by paying lenders practically all our free cash – for decades! And we should be grateful! They keep us from eating gruel everyday.

    I say balderdash. Who should set shack prices? An honest question. I imagine in a capitalist system, the market. So stop monkey with the market governments/central banks, and lets let this find it’s level. And as for recession, that’s an economy healing from stupidity. Where would this country be if we meekly cowered from people whining about the occasional recession? Would we have built great cities, factories or Graceland?

    1. How can we stop the coming ‘gravy’ pour so that prices actually stay linked to household incomes?

      It seems like stepping in front of a freight train.

      Aren’t they just gonna goose the market with rate slashes and money printing and free crap like always?

      Chooo Chooooooooo

      1. First you have to challenge them. Point out that’s the stuff that got us in this situation in the first place. If governments could set up a perpetual money machine around shacks or stocks, they would have long ago. Bubbles make you poor and then they pop. And there’s nothing to prevent it. Take Australia: they have many thousands of people who simply can’t afford the loans they took out. They got interest only, subprime, mortgage fraud, you name it. It worked until the music stopped and bam!

        Let’s not forget, the US bubble was central bank policy:

        Central banks may do more harm than good, says head of India’s central bank

        Published: June 18, 2016

        “Perhaps the most cogent critic of Fed quantitative easing policy, Rajan says the asset-price boost that comes with it may disappear if these assets can’t grow into their valuation. That risks still haunts the U.S. economy, he said.”

        “‘A bridge that relies on wealth effects, you better hope that you got enough growth to justify the asset price increase which created the wealth effect in the first place.'” -Raghuram Rajan

        Now we know: it doesn’t work.

        1. Now we have a sitting President who is criticizing the central bank’s tightening measures (which is what’s needs to take the legs out from under this nonsense), saying he wants more of those low rate policies and bubbles. I see nothing that’s going to change in the short term.

          1. President who is criticizing the central bank

            That’s really not unusual. However, we would prefer he did what Andrew Jackson did.

    2. “Lower basic needs prices are not just good, but great!”

      As a wise man once said, Nothing accelerates the economy and creates jobs like falling prices to dramatically lower and more affordable levels. Nothing.

      He’s right.

      Provo, UT Housing Prices Crater 18% YOY As Salt Lake City Housing Prices Collapse

      https://www.movoto.com/provo-ut/market-trends/

    3. “We are starting to see…the establishment using scare tactics.”

      Just look at some of the Marketwatch headlines:

      “Stock market on ‘cliff’s edge’ as S&P 500 tests this crucial support level: chart watcher:

      https://www.marketwatch.com/story/stocks-threaten-cliffs-edge-as-sp-500-dips-below-2616-chart-watcher-2018-12-10

      Meanwhile, stocks are at an absolutely eye-popping 24,339 bubble level as I type, down a meager 52 points.

      The media is a vile, disgusting machine, and that includes every single person who works for such filthy regimes.

    4. Once you go lax, it’s hard to go back. Trump can’t even attempt to bring jobs back to America; when he does, he crashes the DOW.

  3. “…Realtors were even more bullish on the question with more than 60 percent saying they believed values would be up.”…”

    60% ??

    Not that long ago 100% of Realtors would tell you that not only are prices going up, they can *only* go up, and go up like a rocket headed to the next solar system.

    I’m sure those dissenting 40% will be quietly purged by the REIC realty police. Reality is not acceptable in the world of Realty!

  4. Schiller says this is the third biggest housing boom in history. But then he goes on to say that only bubble 2.0 was bigger. I’m missing something here.

  5. “All we do know is that prices have been roaring higher at a speed rarely seen in U.S. history.”

    What typically happens after asset prices roar higher at rarely-achieved speed?

  6. “The simplest narrative being given for the current boom is just that the 2008-09 financial crisis and the Great Recession are over and home prices are returning to normal. But that explanation does not cut it either. In September they were 11 percent higher than at the 2006 peak in nominal terms, and almost as high in real terms.”

    Success!

  7. Shiller, always a day late and a dollar short. It took this expert Yale economist until 2016 to figure out that low interest rates may cause bubbles, and until 2018 to call it a bubble. From the HBB archives:

    May 8, 2015 – QE is great! – “Shiller said that the Fed was right to go ahead with quantitative easing when it did. ‘Nobody knows for sure because it’s a new experiment, and yes the boom in the housing market and the stock market are partly the Fed’s doing. But on the other hand, we were close to a depression and they had to do something.’”

    Jan 3, 2016 – QE might not be great! – “Shiller is concerned that once again markets may be showing over-exuberance. ‘I’ve tried to inquire why we are having these booms right now at a time of so-called secular stagnation with low interest rates, and arrived at the thought that low interest rates are promoting these bubbles. Central banks caused them but that’s only part of the truth.”

    Sept 29, 2016 – This time is different! – “I was tempted to say that there is no chance of the Chicago area currently being in a bubble but the fact is that just about anything is possible so I settled for ’slim chance.’ As Robert Shiller (of Case Shiller Home Price Index fame) said in a recent interview ‘There’s always reason to worry [about a coming collapse].’ However, he goes on to say that the difference between now and 2006 is that back then people had crazy expectations of where home prices were going and they don’t feel that way now.”

    Aug 29, 2018 – Uh oh! – “‘This could be the very beginning of a turning point,’ said Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles… ‘If you don’t sell now, you may have to wait another 10 years to get that money back,’ warned Shiller.”

  8. “If the conventional basis is now that home prices are going up 5 percent a year, then sellers, who would otherwise have no idea what to ask for their houses, will just put a price based on this convention. And likewise buyers will not feel they are paying too much if they accept the convention. In the United States, we may believe that the process is all part of the ‘American dream.’”

    It helps to have federally-guaranteed, low-downpayment loans to cover the purchase price at whatever level of valuation is reflected in runaway price appreciation.

    1. And annual increases in FHA loan limits. And ever lower lending standards. But Shiller is really a mouthpiece for blaming consumer and business psychology for bubbles rather than the easy money/easy lending policies that spark and fund the mania. For him it’s the narrative, buyer FOMO, and get rich quick greed. Never mind the falling living standards and inflation that lead people to such desperate gambling, or the easily-available loans that pay for it.

      From May 20, 2017, Shiller wrote in the NYT: “The explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through ‘flipping’ houses and shares of initial public offerings — that constitute the shifting mentality of the era.”

  9. It’s funny how Shiller seems to have overlooked historically low interest rates in his eagerness to find a psychological basis for the rampant rate of post-2009 home price appreciation.

    1. Totally. See my post above – Jan 2016 was when Shiller “arrived” at the thought that low interest rates might be a problem. He was still defending QE in 2015, long after the massive asset bubbles it caused were evident to all of us non-experts here.

    2. “It’s funny how Shiller seems to have overlooked…”

      What Schiller really needs is a four year degree in Agrarian Socialism from Pol Pot University.

  10. “Elvis fans are being offered the chance to buy the honeymoon residence where ‘The King’ and his wife, Priscilla Presley, resided following their secret wedding in 1967 – for just a quarter of the original price.”

    Really? 25% of the 1967 price? I doubt that.

      1. That’s what I think too. But I think it’s odd they would describe that as “the original price”.

  11. “That number has declined over the last two years despite continued confidence that home values are increasing.”

    What gives rise to this misplaced confidence?

    Lynn M. Fisher, Edward J. Pinto
    December 5, 2018 | American Banker
    Risk is building in the housing market
    Economics, Housing Center, Housing Finance

    A recent American Banker article speculated about financial system weaknesses that might lead to the next economic crisis. Some of the issues on the list, like student debt, seem unlikely to lead to a crisis but are more likely to re-emerge as a serious problem for the financial sector once an economic downturn occurs. So, too, the U.S. housing market. If the economy were to experience a downturn or worse in the next few years, home prices, which have boomed over the last six years, will surely realize a price correction and foreclosure rates will increase dramatically.

    This will be a surprise to many who say that this time is different and that a lack of supply will sustain prices. However, house prices adjusted for inflation are growing almost exactly as fast six years into the current price boom as over the same period in the last boom. Real prices are currently increasing around 4.2% per year through the middle of 2018 compared to 4.3% annually through the third quarter of 2003. That equates to about a 27% cumulative run up in real prices over six years. The reason this is concerning is that, in nominal terms, recent house price appreciation is far outstripping wage gains for most Americans. When house prices run way above longer run trends in wages, the gap between wage growth and house price growth constitutes territory ripe for a price correction. That gap does not exist in every major metropolitan area, but it exists in most.

    While we don’t know when the market will slip into a correction, we do know are that those that are “last in” with the most leverage will be the most vulnerable. First-time buyers are an increasing share of homebuyers, comprising more than 54% of purchase-money borrowers. They are younger and they have lower incomes, less savings and lower credit scores than repeat buyers. Repeat buyers, who are fortunate enough to have equity in the house they are selling, are typically able to put more down on a home, while first-time buyers typically require a bigger mortgage for the same house.

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