Existing Home Sales 5.5 Million
Submitted by
CalculatedRisk on Tue, 09/25/2007 - 6:50am (60 comments)
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I need a house. My wife and I have a baby popping out in a month and a half and our 900 sq ft apartment is getting smaller fast.
We've agreed that we won't try to time the market, as soon as a house we like in a neighborhood we like comes into our price range we will buy it.
I have a smart brother, he pointed out to me that this is the American dream, any American would buy the house they like in the neighborhood they like for a price they can afford
My only hope is that others aren't sitting on a nest egg of down payment money or that they are trying to time the bottom of the market.
Given the credit crisis, I'm surprized that the decline was this small.
Of course this is from the NAR and I haven't seen the raw numbers, only the "adjusted" ones.
"My only hope is that others aren't sitting on a nest egg of down payment money or that they are trying to time the bottom of the market."
You should hope they are. The more people wait, the less buyers, the quicker prices will fall, the sooner you will find an afforable house.
Housing Novice,
Though it sounds like you are a troll, I will take your comment at face value. If you need more room, consider renting a larger apartment or single family residence. Buying a house now is almost certainly guarantees you will pay too much, in real or nominal terms.
NAR = "Never Anything Right"
Arson is so 2006.
Man Saws House In Half In Title Dispute - Cincinnati News Story - WLWT Cincinnati
What is a troll?
My take, cross posted from Zacks.com:
This morning the National Association of Realtors (NAR) reported that sales of existing homes fell to a seasonally adjusted annual rate of 5.500 million in August from 5.750 million (-4.3%) in July. This was in line with consensus expectations. A year ago existing home sales were running at a rate of 6.310 million, so the year over year decline is 12.8%. While sales are dropping, inventories are rising, currently at 4.581, up 2.9% from July and 19.2% from a year ago. That puts the months supply into double digits at 10.0 months, up from 9.5 months in July and 7.3 months a year ago. During the early years of the century, the months supply was routinely at between 4 and 4.5 months. The price of a median home dropped to $224,000 in August from $228,700 (-2.1%) and was virtually flat with a year ago (down 0.2%). However, median prices can easily be affected by the mix of houses selling or in this case, not selling. The Case-Schiller index (CSI) was also reported this morning. It is a much more carefully constructed index based on resales of individual houses in 20 markets (with a sub-index of ten markets with a longer history). It showed year over year price declines of 3.9% on the 20 city index and 4.5% on the 10 city index. The CSI is probably a better reflection of the actual situation than the NAR median price data. Based on the CSI data, the drop in housing prices was the worst in 16 years. That was during the recession caused by the S&L debacle.
Regionally, the West was hardest hit with sales down 9.8% for the month and 21.7% year over year. The West has by far the highest median price at $345,300. That means that a much higher percentage of the mortgages in the West are non-conforming Jumbo loans. Mortgages that can not be bought by Fannie or Freddie and sliced and diced under the GSE good housekeeping seal of approval. Jumbo loans have been particularly hard to get due to the credit crisis. The Midwest saw sales decline by 5.2% for the month and are down 10.5% on a year over year basis. The South saw a 2.7% decline for the month and is down 12.7% year over year. The Northeast is holding up the best with a 2.0% decline for the month and is down 5.7% year over year.
The rise in inventories is particularly disheartening. At the current sales pace, if not a single person additional decided to list their house, it would take until the end of June of next year to run out of existing homes for sale. Well at least the kids will be finished with the school year by the time the place is sold if you put it on the market today! The wave of mortgage resets is still building, and this will cause more foreclosures, dumping more supply on the market. There is simply no economic need for any of the homebuilders for at least the next year. The market is over supplied with houses, both new and used, and adding to the supply is a flat out misallocation of economic resources. Yes, stocks like
Arson is so 2006.
Cincinnati News, Cincinnati, Ohio News and Local Headlines - WLWT Cincinnati's Channel 5 detail.html
safe_as_apartments | 09.25.07 - 11:21 am | #
What are you talking about, thes guys are ahead of the curve. Arson only goes up!!!
got cut off here is the last paragraph again:
The rise in inventories is particularly disheartening. At the current sales pace, if not a single person additional decided to list their house, it would take until the end of June of next year to run out of existing homes for sale. Well at least the kids will be finished with the school year by the time the place is sold if you put it on the market today! The wave of mortgage resets is still building, and this will cause more foreclosures, dumping more supply on the market. There is simply no economic need for any of the homebuilders for at least the next year. The market is over supplied with houses, both new and used, and adding to the supply is a flat out misallocation of economic resources. Yes, stocks like Lennar (LEN), Beazer (BZH) and D.R. Horton (DHI) all had nice bounces when the Fed cut rates. That was your chance to get out of them. Dont go near them again until the second major homebuilder files for Chapter 11. I dont know for sure which ones will bite the dust, but some will, and you do not want to be in the group until a substantial amount of capacity has been removed from the market. Yes, they may look cheap on a book value basis, but those books belong on the fiction shelf.
Safe as Apartments,
Me no troll, no actually I'm not a troll. We've been in our apartment for over seven years and we have rent control in this area so our rent is about $800 below market value. To rent a larger apartment would cost me probably an additional $1k a month.
I've been watching the housing market and waiting for nearly six years, I've had my down payment money in hand for about two of those years. I've been patient this long, I'll hold out for a reasonable to good deal.
Thanks
The Case/Shiller report shows home prices falling. The NAR release this morning shows YoY median price increase. Who to believe.......
I am not a troll either but I do have a silly question which has probably been covered on a previous post so apologies in advance.
Approximately what multiple of rent is reasonable for a house price? What about if no mortgage interest deductability?
"Given the credit crisis, I'm surprized that the decline was this small."
I think based on our discussion last month regarding how home sales are counted, there is a time lag in the reporting. If the numbers many suspect are actually reported over the next couple months then it is most appropriate the reports are sandwiched around the festive season of halloween.
A good rule of thumb is 10X annual rent.
Housing Troll,
You can buy six months time by turning a spare closet into a baby's room. They like it in there because it's small and safe.
Get a camera to monitor the closet, in case rats or spiders get in.
Don't be in a real estate rush just because of a baby. Keep your priorities straight.
Rent vs Buy? which is better?
If you go to link below you will see
that most often you will need a house price appreciation of at least
+4%/year for buying to make sense at
current prices and not -%4.
now go play with the calculator or
wait for CR to give you the signal.
I will wait for CR's buy signal which may be a few years away!!!
Should I rent or buy? - Financial Calculators from Dinkytown.net
Thanks edhopper
I think the rule of 10
x annual rent is for when you are buying an apartment complex. That is what I was taught when I bought a 4plex back in '94. Today most multi-family dwellings in the LA area are going for about 20X annual rents. Way too high in my opinion.
As to how many times your rent you should be willing to pay for a house? I have no idea. I am interested in Comments.
Dude, buying right now would probably be biggest financial mistake you will ever make. Are you new?
This baby is gonna blow. Stand back.
I'm talking about housing, not yer wife. She's got plenty of time yet.
An asset prices is an asset price. Whether you are buying to rent or live in, price should be the same. If I buy a house that I will rent out at 10X annual rent, should I pay more if I wish to live in the same house?
"I have a smart brother, he pointed out to me that this is the American dream, any American would buy the house they like in the neighborhood they like for a price they can afford :)"
That is one smart brother. Just coast along on his investing coattails -- you'll make out like bandits!
The Case/Shiller report shows home prices falling. The NAR release this morning shows YoY median price increase. Who to believe.......
Easy, only the larger homes are selling. But a 2,500 ft^2 home is now selling for what a 2,300 ft^2 sold for a year ago.
If you go to link below you will see
that most often you will need a house price appreciation of at least
+4%/year for buying to make sense at
current prices and not -%4.
Good point, but its accelerating. I'm now seeing homes dropping 1% to 2% PER MONTH. This is post the mid-August credit crisis. I'm predicting Case-Shiller will be down 11% to 16% (Nationally) for 2008.
Got popcorn?
Neil
My parents rented houses until I was in 2nd grade. I turned out just fine. Or maybe I didn't - I read subversive websites like this one.
The urge to buy before the baby comes is a marketing trick that you are falling for. Your brain knows the truth, let it do the reasoning.
Regarding P/E ratio's for housing:
All markets are not created equal. Some markets will almost always have higher P/E ratios than the national average, while some will have ratios significantly less than the average. There are a number of factors to consider but I think both Leamer and Shiller have produced papers on Housing P/E ratios.
I think a P/E ratio of 10 in normal times for housing, i.e., non-recessionary, non-bubble times, would be a steal in most major metro areas.
Rent versus buy is a question you can only answer yourself. If buying while interest rates are low and houses are going begging is bad, then you may be bad. But from experience, adding a new house to a new baby is asking for a lot of trouble. Put up with the apartment for a year. The Fed can't raise rates for a while, and might even lower them some more.
As for the drop is annual rates- only a half million more to go to hit my 5 million mark. At the rate of slowing currently manifesting, I might actually be on target. My prediction of July as the high is so far accurate too.
Somedays I amaze myself with how lucky I can be in making a calculated guesstimate.
Bravo CR and Tanta!
The race to find a bottom in housing is on, I for one bet it is a marathon with national prices only recovering after the next federal election in 2009- but of course first inflation must be allowed to rise to meet those falling house prices.
Housing Novice,
I'm going to infer from your comment about rent control that you live in NYC. I'm not aware of anywhere else in the US that has these laws, but if this assumption is false than ignore what I have to say.
Guessing also that you want to buy outside of Manhattan ... that's a world unto itself. Outer boroughs, LI, NJ, something like that?
That out of the way, my advice is to be patient. Housing busts take time to play out, and the New York area is probably later than most in seeing price drops. Buying in the dead of winter may seem like a smart move, but I'd wait until at least next spring when desperation will likely be in the air.
Don't just believe me, go back and study past housing busts, look at how the price drops lag the sales drops. The period from 1989 - 1996 should be instructive.
Housing Novice,
You still have time to wait. In the first year of the baby's life, it will be sleeping with you in your bed, so it won't need it's own room for a while yet.
Or put a little cot at the end of your bed. You don't have to walk so far when he cries.
"You still have time to wait. In the first year of the baby's life, it will be sleeping with you in your bed, so it won't need it's own room for a while yet."
I think this is a bit optimistic to say the least. What should be said is that the baby will sleep duing the day while you are awake and not need a bed at night which is also a time you will be awake.
Past prediction threads so you can see how you are doing:
supply: HaloScan.com - Comments
sales: HaloScan.com - Comments
Upon examing NARs real NSA data, June appears to be the highwater month for the year after revisions. July was revised under June. Anybody want to bet that August will be revised under July? Judging by the steep dropoffs that happen every fall, and projecting the decline in percentage terms, I would say that 5.1 to 5.2 million total for the year would be on target. However, if the South finally starts suffering in percentage terms like the west, the 5 million will be the number. Revisions galore!
Of course, that posits that financing resumes availability- if that temporary becomes permanent, a likely event given the mortgage company implode-o-meter- then next year might be lucky to hit 4 million I will go out on a limb and make that prediction today!!!
With 1 million reos to boot.
I have a smart brother, he pointed out to me that this is the American dream.
That's the biggest bunch of crap that ever came down the pipe. I don't know who in the hell came up with the term American Dream. I have a lot of dreams being being a debt slave to own a a liability isn't one of them.
F. Frederson,
Thanks for the links. Obviously some of those forecasts have already been blown through and I expect over the next couple months many more will bite the dust eventually leaving only me, the last bear standing.
Bobby - yep, my prediction for inventory is almost blown already. I was trying to be a rational pessimist rather than a seal-the-bunker pessimist when I guessed. A lot of good it did me.
One way to think about the price vs. rent question is what is known as the Cap rate, or annual rent/price. At 10x that would equate to a 10% cap rate, or effectively a 10% return on your money, if you were to own the property and rent it out (think of it as renting to yourself). That assumes no appreciation or depreciation of the sales price over time. In today's environment, a 10% rate of return is good, but not great, 15x gives you a 7.5% return. If you can get a 7.5% mortgage that would be about break even. However, remember that as a homeowner, you have to pay property taxes (although you do have the mortgage interest deduction) and in most apratments, heat is paid for, and heating homes this winter is going to be an expensive proposition. I suspect it will be an expensive proposition for many many years to come. Also homeowners insurance is generally much more expensive than renters insurance, factor that cost in as well. I dont think you can count on any price appreciation for about a decade, so look at it relative to your current cash flows, not in the hope that you get a big capital gain when you sell the place.
sterlingerl: The latest rule of thumb I saw (no guarantees) was 150-200 times monthly rent - which would be greater than 10x annual. I doubt the markets have really gotten back to 150 x except in places where the rent is continuing to drop because of an overall bad employment/income situation (Michigan maybe). The places I'm familiar with seem to be at 200+ and while 200 isn't crazy for a strong economy with limited supply, I'd only do it if I were truly in for the long term.
I agree Kevin, we seem to be selling the American Dream real short....
Checking the inventory stats versus the current inventory brought up the revision bugaboo. July was revised down from 4.592 to 4.561, making a misleading increase to the 4.581 that is preliminary for August.
If August is adjusted downward by a similar amount, my July peak thesis will prevail.
I think inventory will continue to drop as houses are pulled from the market and reos begin to finally weigh on prices.
I'd say that a fair annual price/rent ratio is closer to 15. Check out the affordability ratios for Minneapolis (a currently reasonably priced town -- in aggregate):
HousingTracker.net: Home Affordability Measures for Minneapolis, Minnesota
Their salaries allow residents to pay roughly 17.5% of their income on home (compare to over 60% in L.A.). The mortgage/rent ratio is just below 1.0, and the price to income ratio is 2.9. All in all, I think this says that the monthly price/rent ratio of 193.6 (16 if you put it in annual terms) is close to fair. Maybe a little bit high, but not crazy high.
To get a ratio of 10 you have to get down to a monthly price-rent ratio of 120 which is pretty tough. No place that I'm studying (I'm linking to my website here) achieves that:
HousingTracker.net: Affordabilty Measures
Just my opinion of course.
Well, I grew up until I was 13 on the top floor of a three family house in Boston, and I think I turned out fine too lol.
Look, there is an emotional side to the purchase and a rational one. If you always wait for the rational, you'll never do anything and if you go with emotional one, you'll get screwed most of the time. Balance the two. If you are going to stay for 20 years, will a 10 to 15% decline in the price RIGHT NOW matter to you 20 years hence?
When I bought my house 11 years ago, part of my raionale was that I would be there for at least 5 to 10 years and I looked at house in those terms. I was willing to pay NOT to move for 10 years, and that was part of my process. Make it part of yours. If you are not going to be somewhere for a long time, then rent.
Enjoyed reading all the posts and figured that it was time to comment for the buy vs. rent with a baby on the way. It depends on your timeframe. If you expect to be in your new house for a long time (over 8 years), then you should be okay but don't expect a gain on your house. In my case, my wife and I decided to rent a house near DC after our first child. We stayed in our one bedroom apartment with our first baby till we found the right rental house. We looked at buying when our second baby was due but were not comfortable with the price (over $500K), financing, seller terms, and housing quality (plenty of house search stories). We wanted to get a house closer to DC for quality of life (commute > 1 and 1/2 hours for a lower cost house) since I work in DC but could not get the numbers to work. Renting made financial sense because the rental cost is approximately $4K below what the purchase price would cost when you include the mortgage cost, taxes, and other expenses. While I make good money, I do not want to risk my familys financial situation to purchase a decreasing asset. Also, your cost structure changes with additional food, healthcare, day care, and misc baby costs. Just run the numbers for your timeframe and make your decision without looking back. Remember that a home is where you live and what you make of it and is not necessarily a house. Cheers.
Finally seeing a real slowdown in new housing starts - should help both new and resale inventories.
EnergyEcon: Does anyone else get the sense we are on the cust of a tectonic change in sentiment? I have a hunch the GM strike is going to crystallize a lot of the 'wrong track' sentiment, tied in with results like the July Shiller index
Yeah I've been thinking the same. We may be somewhere between "bragaining" and "acceptance" now. Even the holy ones are acknowledging a slowdown, but cannot quite bring themselevs to say the R word is coming.
BBC NEWS | Business | Credit crunch 'hits world growth'
Housing Novice
I was in pretty much the same situation, except my house was 400 sq ft, I kid you not. Hey, they raise kids on boats for godsakes. I promised the wife we'd move before the choice of schools issue came up. Due to some wacky stuff in San Diego I ended up moving to a larger place when my daughter became ambulatory. So my take is stay put as long as you can. Further, what you should pay is what works out for your finances. Set your price according to your income, not by whatever someone else thinks you can pay. And work hard at maintaining the thought that this will be your first place, not your last- or "dream" house. Save that for later. Get into something you won't lose and plan on moving at the next up turn.
Franz and all the others who replied,
Thanks, I appreciate all of your thoughts on the situation. I won't jump into an untenable situation, I try to make the smartest investment decisions I can and do ask for and consider advice. I've waited this long to buy a house, I can wait a little longer. If the baby has to live in our small apartment for her first year or so we will make do.
Here's to price drops steepening soon.
Ben E. I think we're on to something: price< 200 x monthly rent starts to make sense, and I think Mpls is a good example. Downtown DC is similar because incomes are high and the metro saves you a bundle in time $ and aggro.
We are in the midst of something big, already happening, and moving very fast. Looking at 30 plus day old stats is a big risk.
What I see on the streets:
I know a Maryland Home Inspection company, in the DC metro area,
that in past years has averaged 104 inspections a month,
Worst month was 63,
As of today 25 September, on a pace to do 24 for the month.
What I see on RealtyTrac:
An explosion in just the last few weeks in the percentage of houses up for auction.(distorting any MLS stats.)
And take a look at the US$, since September 1:
INO Equities Stocks Indexes - US DOLLAR INDEX (NYBOT:DX) Price Chart and Quote
.something big, already happening, and moving very fast ..
I took and passed the Appraisal exam here in california last year.my 2000 text showed a rent multiplier for the classic middle class SFR of 125x monthly rent(15 year old home in good shape in a stable neighborhood of a town with a stable economy).My dad was an appraiser,and I can recall converstions in the 1960's about rental multipliers and cap rates,125 x rent was what you paid for a GOOD house in a GOOD AREA.when I took the Real Estate Brokers exam this year,my appraisal text showed the same SFR at 200X monthly rent...with some comments about the "new reality" of housing.Crap.
Im not an economist, broker or otherwise industry professional, but 10x strikes me as unachievable.
Think about that for a second. IF it were possible to buy at 10x annual rent, THEN you'd be making gains (assuming a 7.35% for a 30yr jumbo) of 2.65% off the loan itself, appreciation and homeowners subsidy aside. If that were possible everyone would be doing it, driving the prices quickly back to the break-even point.
In Orange County, for example, similar places to mine rent for 2,800-3,100 after checking Craigslist and the OCR classifieds. That's about a grand over what it used to be back in 2000, when this whole mess really got rolling.
30yr fixed jumbo in 2000 was around 7.5% (similar to today) so ($1,900 x 12) x 15 = $342,000 which is about right for OC at that time.
Right now in my area were at about 20x, so a drop to 15x represents about 20% decline in prices from where we're at today, which is in line with Roubini's claims, based on other factors.
OCs median sfr is currently $640,000 and falling. A 20% decline would bring that price down to $512,000. In come the LOLyaRIGHT it has to come down way blah blah blah
Look at the rents. My house is a bit above the median, but ($2,800 x 12) x 15 = $504,000 to ($3,100 x 12) x 15 = $558,000. It's definitely in the ballpark after a 20% decline.
The fact that these prices/rents are not affordable for many people is irrelevant, because Orange County itself is not affordable for most people. Those that do live here either have the money to live here or sleep 6+ to an apartment.
10x represents a 45% drop and is unachievable without 80s style interest rates unless Im missing something huge. If I am, Im all ears to someone capable of pointing out the gaps.
Thank you everybody for your comments on rental multiples that was very helpful.
HousingNovice:
For the world's most complete interactive Buy vs. Rent calculator look at this one from the NYTimes:
- NY Times
You can monkey with the appreciation rates of home prices vs. rental costs. This calculator makes it crystal clear why you don't ever want to buy in a market with declining home prices - especially if your rental rate is frozen.
Be sure to check out the ADVANCED SETTINGS on the right side above the graph.
You may need a free NYTimes account to see this and it is well worth the 20 seconds it'll take to establish such an account.
somean
the house I rent is 2500 per month. the asking price of a similar house is 700k.
my formula is 2500x12x10 is 300k, so the price has to drop about 50% (57 to be accurate). OC is in for a rude awakening.
somean-
We are not going to have 80's style interest rates. If we do, confederate flags and the right to bear arms will quicky become in vogue.
Case Shiller historically graphs 10-12 (including expenses) P/E ratios in housing. But that was before Greenspan and those multiples cannot be allowed to happen again.
A six or seven cap in a nice area could be the rule of thumb in the next two to three years.
MMG-
If prices drop that much, we will all be in for a rude awakening and not just you and your OC world.
Some of you really need to get a clue at what is at stake here especially if you and your formula were to actually occur.
There is a good chance you and a lot of people you know would not have a job if asset values were allowed to collapse by that amount.
Sorry it's just not gonna happen MMG.
I know there are people looking at the historic trend going back 50 or so years and saying that prices will have to fall in line, but in some areas like OC they wont.
Orange County is an example where the middle-class got replaced with 1%'ers and those working below the poverty line.
The prices are going to come down, but the rents don't support some of this wishful thinking I see, because the demographics have moved away from mostly middle-class to what we have now.
The graph has shifted upward and the only people that can afford to live here that are middle-class are those that stretched in while Richie Rich and Friends started streaming in in the late 80's (my parents as an example).
I do agree that there as some in OC that are in for a shock, but it's only the extreme bulls and bears at the opposite ends of the 0-50% decline debate.
Somean, time will tell.
Quincy K, it actually did occur about 15 years ago, people survived and lived on to see an even bigger bubble. thats the nature of the beast. BTW my job has nothing to do with housing prices, but I see your point that many people will lose their jobs when this is all said and done...that I agree.
a year ago when you said prices will be coming down people actually made fun of you , price per sq ft was around 400-500 not so long ago, now around 300 and going down.
By the way 50% is from the peak, I forgot to say. since we already are seeing 20-25% in some markets. all we need is another 20%. wouldnt you agree over the next few years that doesnt sound so crazy
MMG-
What I am saying is that it cannot be allowed to happen. During the mid-90's, LA became a violent city. You may not have realized it at the time but when you look back yes, violent. Peak to trough was about a 30 percent loss but the nominal amounts were far, far less than if that were to occur today. The King riots were no coincidence. That was an event just wiating to happen because of the deflationary effects of the recession.
The Fed and all the FCB's have no choice but to protect asset values to save the system. For these reasons, I wouldn't be holding your breath for any secure ten-caps in any asset, real estate or not. That kind of deflation cannot be allowed to happen in a debt-based system.
I'd be willing to bet that housing prices in 2010 will be higher than housing prices in 2009. (usual bet size is assumed)
A late comment. It appears "impossible" to visualize, but with inflationary printing of money, rents could go up a little while prices come down a lot, achieving 10x price/annual-rent.
In Japan prices dropped 70% from the peak. You only need sufficient imagination