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Falling house prices - A good thing?





hunterm
More and more reports are reaching the mainstream press in the UK about the falling property prices in the US.


Are falling prices such a bad thing? It may actually be a good thing. We in the UK have the perception that rising house prices are good for the economy and make us richer, but all it does is tie up wealth in property. If you're spending 90% of your income on bills,mortgage repayments and essentials then you've got less consumer spending power.

If property prices fall and it only requires 50% of your income to pay bills,mortgage repayments and essentials then, happy days, you have a lot more consumer spending power.

If you already have a property and want to move up the ladder and prices have risen then you're screwed - more debt. If prices fall, then the value of your house will have fallen, but so will that of the houses further up the ladder. As I heard a bbc economist say "I wouldn't care if my flat was 0.50p if I could buy Buckingham Palace for 5.00" - Obviously an unlikely scenario, but illustrates the point.

The only problem comes if people can't afford their repayments, and they need to sell up. They could end up in negative equity but these are people who are likely to have borrowed too much and would be struggling anyway.
jmwarshay
There is another problem with falling prices -- the loans having a higher value than the homes. Many people borrow the maximum. If the value of the home falls afterward, then they have negative equity in the home. This could cause people to walk away from their homes. It happened in Texas before the last recovery began.

Given the emphasis on consumer spending, many people have taken out equity loans to purchase cars, make improvements and refinance other debt. A loss in home values could cause defaults and slow consumer spending, sending the economy back toward recession.
Detremmerie
Not to speak about the effect on the sentiment alone.
Economic recessions are IMO rarely the consequence of only technical factors. By this I mean that once people are confronted with the first signs of recession (which on their own would not lead to it), they change their habits and go and live up to what they expect to be a recession. A typical example of a snowball effect, which can hardly be stopped until it stops itself.
Too bad that housing is marked in peoples mind as such a sign.
bogger
You say that your money is tied up in properrty, but that isn't true, people can take loans out against their homes, and then invest that money where ever they want to, they don't want to take the risk though.

The main problem with falling house prices are the snowball effect, alright
Let's go through it step by step:

1) House prices fall, ie. supply > demand
2) Builders stop building houses, due to lack of demand
(If it stopped here, supply would lessen and fix the problem, but it doesn't)
3) Builders stop hiring construction workers, because those workers have nothing to build
4) Those workers can't find jobs elsewhere, normally, so they go on the dole
etc.
hunterm
jmwarshay wrote:
There is another problem with falling prices -- the loans having a higher value than the homes. Many people borrow the maximum. If the value of the home falls afterward, then they have negative equity in the home. This could cause people to walk away from their homes. It happened in Texas before the last recovery began.

Given the emphasis on consumer spending, many people have taken out equity loans to purchase cars, make improvements and refinance other debt. A loss in home values could cause defaults and slow consumer spending, sending the economy back toward recession.


Good points, but I'd disagree with you that a loss in home values cause defaults. A drop in income, or a rise in the cost of servicing the loan causes defaults. As I mentioned, as long as you can afford the repayments, it doesn't matter if the value of your home drops. You can get home loans in the UK which are up to 125% the value of your home meaning instant negative equity. The banks don't care unless they get their money from you (plus interest, naturally).
hunterm
bogger wrote:
You say that your money is tied up in properrty, but that isn't true, people can take loans out against their homes, and then invest that money where ever they want to, they don't want to take the risk though.


They borrow more money from the bank, I agree. I'd say it's rarely used as an investment. More likely it's spent on holidays, cars and plasma TV's. It's what the governments rely on to keep the economy ticking over (consumer spending).

bogger wrote:

The main problem with falling house prices are the snowball effect, alright
Let's go through it step by step:

1) House prices fall, ie. supply > demand

If you're implying the only way prices will fall is if supply is greater than demand then I'd have to disagree. If it was really a supply/demand issue then we'd be seeing the same rate of price inflation in the rental market, but that's remained fairly static for years.

bogger wrote:

2) Builders stop building houses, due to lack of demand
(If it stopped here, supply would lessen and fix the problem, but it doesn't)
3) Builders stop hiring construction workers, because those workers have nothing to build
4) Those workers can't find jobs elsewhere, normally, so they go on the dole
etc.


Agreed. Builders retrain...?

I also see you're from Ireland. What do you make of this story? Irish property prices
LumberJack
What you want is a sustainable housing market. Unfortunately, you will never get one. The problem is that the housing markets are one of the stronger indicators of how an economy is performing. In order to build a house, it involves so many different aspects of a national economy. That house will require all its utilities, construction workers, the people residing there will pay taxes, buy food, go shopping, etc. The problems with the housing markets is the demand side. If no one wants houses, it means that no one is moving into the area, demanding the good. The people who are already there may also take a loss on their home, because of the money that they had invested in it.

Does that help?
deStructuralized
There are going to be about 1.1 million foreclosures on mortgages taken out in the last 3 years in the United States.

Not because banks dislike people with negative equity or with loans worth more than the houses they're paying for, but because people suddenly find themselves unwilling to pay the costs on a low yield investment.

The people who walk away are going to be the ones who paid little to no money down, hoping to cash in on a recent housing bubble.
LumberJack
Banks did it to themselves. I have absolutely no sympathy for them.
Azmo
Well for me that doesn't live in a house, or own one, this falling prices don't botter me. So lower prices only benfits me, still sux for people who have houses tho. It's so hard to forseen how things will look like in a year, when to sell and when to buy.. but those who can, and rly push them selves to use this price fall makes a hell lot of money, that kinda makes me pissed tho, ok they are smart, they know this shit.. ofc they should use it.. but making their good buisniess wile others lose shitload of money.. kinda unfair.. ok I'll buy ur house to the amoutn it's worth now.. 2 months later I'll sell it for 1.5 times the money..
bogger
hunterm wrote:
If you're implying the only way prices will fall is if supply is greater than demand then I'd have to disagree. If it was really a supply/demand issue then we'd be seeing the same rate of price inflation in the rental market, but that's remained fairly static for years.


Renting is mostly people buying a 2nd house, and then renting it out because they have no other use for it. renting prices have remained static because people aren't selling those rented houses, because they wouldn't make money out of it

hunterm wrote:

Agreed. Builders retrain...?

The multiplier effect means that more than just builders lose their jobs, the shops where builders used to spend their money have less business, so they let some people go. therefore, there will be a lot more applicants out there than just the builders.

hunterm wrote:
I also see you're from Ireland. What do you make of this story? Irish property prices


Election is coming up, one of the parties promised a lowering of stamp duty, so people are waiting until after the election because then they can avail of this (saving around 100k)
Bofia
It could mean more people are moving out to other countries
kevbailey
Isn't this one of the things that caused the Depression? I thought that it was buying using money that you don't have. People in markets that use their house as money will eventually have it come around and bite them in the but. The system needs to be corrected. If it is not, then there will be some serious issues later on:

1) Will people be able to afford their house if/when the bank asks for their money back
2) Will they be living in some old apartment five years later with a formerly brilliant 50" Plasma HDTV?


This one's an actual question. If you do not actually own your house (technically the bank does), can you still make a profit off of selling the house?
bogger
The bank only owns your house if you don't pay your debts.

If you sell the house, you can pay off the mortgage, and then make money
If you don't pay your debts, the bank takes the house, sells it, and makes a profit
TheGustav
Some houses are selling for cheaper than cars in Detroit now. Smile

Some as cheap as 7k I hear, one house went up for auction for around 7 or 10k I think and nobody would bid...
alkady
Hard to say, this is a double face question.

a) For someone who bought a house say a year ago at $300,000.00, it was sure a heck of an investment considering he needed a bank loan, now the problem is now the price of property dropped to $280,000.00, I don't think it would be good for that person because it will affect him in many ways, first, he'd have to pay money he will probably never recover and secondly, he ends up losing more when reselling. I'm not saying that's how everything should go, considering other products like cars depreciate all the time, but houses are pretty expensive investments for most people and losing a year's worth of working is a kick in the balls even if they are in for the long run, most people will live in a few houses in their lifetime.

b) low income earners will actually benefit from this, the lower the cost, the better it is for them. But on the other hand, most low income earners prefer renting because of it's low cost & limited liabilities associated with it.

c) If house prices are low, then those who end up benefiting from this are the wealthy who would use it for rent generating, I remember back in the 60's, houses where the equivalent of 1 year of today's salary. Imagine over 47 years of owning that one property, that would mean it's yield would have paid for a few extra properties. But the main point is even with a low cost, it's not those who really need it that will get it.
evilryu530
double edge sword. falling house prices = cheaper for people to buy houses, rent homes, etc....but also at the same time, everything else goes up to compensate leverage...without growth, there aren't more jobs created..more money circulating....with higher home prices, no one can afford to pay mortgage...like i said, double edge sword...
Afaceinthematrix
Well it depends on which side your on. If your just starting off, and are trying to buy a house than falling house prices would benefit you. Otherwise it won't.
sandyclaus
That's been the real story of the housing market, loose and creative debt. That's who is hurting the most right now, sub-prime lenders. I watched the money roll out of Tech and into Real Estate in the San Francisco market and figured this would happen.

On PBS, NOW had an insightful episode about it. You can watch it online I believe.

Also, before you buy, consult one of those "home-buying-vs-renting" calculators. In an upsidedown market, it may be better to rent, save, and pay off debt.
scrub
The coming housing crash is a great thing, as it will help scuttle the economy and slow down the destruction caused by not only the housing industry but all the rest of the economy linked to that. Remember, the faster the economy grows, the faster the earth gets trashed and the harder it'll be for us to live after civilization collapses. A ruined landbase equals a lower carrying capacity for humans and other animals, which equals a harder crash when our fossil fuel fix can't prop our artificial world up any longer.

On the other hand, a recession or depression holds out the hope of people rediscovering that their livelihood depends on the health of their landbase, not on the supermarkets, water taps, and "wage market".

Scrub
Kitten Kong
I agree with scrub, save your money and buy up after the crash, when the smoke blows over we can all be land barons!!!
bogger
@kitten...

Recessions are normally times of high inflation, so saving would be stupid, you'd just see your money get wiped out...

You'd be better off investing in a nice chunk of gold, or something, I think that the U.S.A is legally binded to exchange dollars with gold for it's citizens (which is the real money, the notes are only promises, like cheques).

@ scrub, you're a physiocrat, I see. Physiocracy has been discredited by almost all economists in our age. It is a well known fact that you can't base an economy purely on the land, one must also take the other 3 factors of production into account.
deStructuralized
bogger wrote:
You'd be better off investing in a nice chunk of gold, or something, I think that the U.S.A is legally binded to exchange dollars with gold for it's citizens (which is the real money, the notes are only promises, like cheques).

Not since WWII. What you're referring to is the gold standard, and the U.S. stopped pegging its dollars to commodities after The Great Depression.

Since then we've printed fiat money.

Also, it's true that gold can be a stable long term investment, but like any other commodity, its value fluctuates. You could lose money on gold just as easily as you could with any other investment.
bogger
deStructuralized wrote:

Not since WWII. What you're referring to is the gold standard, and the U.S. stopped pegging its dollars to commodities after The Great Depression.


I didn't know that, my mistake, sorry

deStructuralized wrote:
Also, it's true that gold can be a stable long term investment, but like any other commodity, its value fluctuates. You could lose money on gold just as easily as you could with any other investment.


Yes, but Gold doesn't fluctuate as much as other tradable goods, like shares. Gold is also more dependable than money, because gold will rise in value in tune with inflation, normally.

You also have to remember that gold will have at least some worth for a lot of time, unlike shares, where an enron can happen any day. That kind of thing won't happen with Gold
scrub
bogger wrote:


@ scrub, you're a physiocrat, I see. Physiocracy has been discredited by almost all economists in our age. It is a well known fact that you can't base an economy purely on the land, one must also take the other 3 factors of production into account.


Hi bogger,

Thanks for your reply. I haven't read much of modern economic theory, so haven't heard of the "physiocrat" term before, or the arguments pro and con.

What are the other 3 factors of production? Labor, capital, something else...?

I feel curious how economists in our age can conclude that an economy can't be based purely on the land, with the evidence of 90% of purely land-based human history (prior to industrial agriculture). Do they not consider hunter-gatherer people and local agrarian cultures to have an economy? Or do they not even address those scenarios? I could see that if you define an economy as something tied to a nation-state with centralized authority to designate currency and so on, that you're no longer dealing with a purely land-based system. Of course, that may not be a relevent definition after the next decade or few.

Scrub
bogger
scrub wrote:
I feel curious how economists in our age can conclude that an economy can't be based purely on the land, with the evidence of 90% of purely land-based human history (prior to industrial agriculture). Do they not consider hunter-gatherer people and local agrarian cultures to have an economy? Or do they not even address those scenarios? I could see that if you define an economy as something tied to a nation-state with centralized authority to designate currency and so on, that you're no longer dealing with a purely land-based system. Of course, that may not be a relevent definition after the next decade or few.


Land Labour Capital And Enterprise

Times change, while theory from the past isn't wrong, it is outdated, and as such should be taken with a pinch of salt.

Hunter Gatherers are themselves The Labour, one could say that he needed capital to buy his spear, and one could also say that the guy who decided to specialise and start making spears that are better than the rest full time is the entrepeneur. You can't have 1 without 4
scrub
bogger wrote:
Land Labour Capital And Enterprise

Hunter Gatherers are themselves The Labour, one could say that he needed capital to buy his spear, and one could also say that the guy who decided to specialise and start making spears that are better than the rest full time is the entrepeneur. You can't have 1 without 4


Hi blogger,

Thanks for clarifying. I can agree with those four elements being the components of an economy, whether modern globalization or a hunter-gatherer band. There are huge differences in scale and type, though...from my reading of hunter-gatherer tribes, there is no specialist who makes spears for everyone else. Rather, each person has the skills and the level of enterprise to make their own tools and procure their food and shelter to the extent required for survival, after which (and really, during which) they put their time into relaxing and enjoying life. So each person provides the labor and enterprise to make his or her own capital (tools), but the entire tribe is generally working from the same landbase (and I would consider the natural resources of the landbase to be the main source of capital--or is capital defined purely as human-created wealth?)

You do start getting some divison of labor once you get into more settled, horticultural societies, where some people have the skills and motivation (enterprise) to specialize in making something for trade with others, though I think generally everyone still has each skill necessary to survive. Of course as you get more into agriculture and especially modern industrial culture the division of labor goes way up.

Anyway, I don't see that the land/labor/capital/enterprise components change the fact that ultimately humans are dependent for survival on a functioning landbase, and that the faster this economy (based on destruction of the landbase) crashes, the better off the remaining humans will be. So come on, housing crash! :) Yes, it also takes labor, capital, and enterprise to live, but those are something every human can generate him or herself given a landbase to start from.

Scrub
bogger
scrub wrote:
Hi blogger,
Anyway, I don't see that the land/labor/capital/enterprise components change the fact that ultimately humans are dependent for survival on a functioning landbase, and that the faster this economy (based on destruction of the landbase) crashes, the better off the remaining humans will be. So come on, housing crash! Smile Yes, it also takes labor, capital, and enterprise to live, but those are something every human can generate him or herself given a landbase to start from.


You can't have any without all, so you can't say that land gives all, because I could say that labour gives all, no people, no economics... It's a really philosophical, non economical debate, tbh
scrub
bogger wrote:


You can't have any without all, so you can't say that land gives all, because I could say that labour gives all, no people, no economics... It's a really philosophical, non economical debate, tbh


Yeah, it seems to be just semantics at that point. :)

Scrub
Mannix
I believe it's good, because it gives folks who don't quite have the financial base a better chance at a nice home.... ...But beware, it also serves as a mechanism to further whittle down the middle class, and the rich are not as affected.

Personally, I don't own a home, but I'd like to. The interesting thing is a couple of the local landlords just raised rent, which doesn't make much sense to me. - Ah well.
bogger
Mannix wrote:
I believe it's good, because it gives folks who don't quite have the financial base a better chance at a nice home.... ...But beware, it also serves as a mechanism to further whittle down the middle class, and the rich are not as affected.


Falling house prices tend to affect the rich people more, surely, seeing as they own more houses? Falling houses are a bad thing. Read the whole topic to better understand my reasoning for saying that

Quote:
Personally, I don't own a home, but I'd like to. The interesting thing is a couple of the local landlords just raised rent, which doesn't make much sense to me. - Ah well.


It's because the value of their assets are now lower, therefore they have to make money elsewhere, i.e. the rents they charge
deStructuralized
bogger wrote:
Mannix wrote:
I believe it's good, because it gives folks who don't quite have the financial base a better chance at a nice home.... ...But beware, it also serves as a mechanism to further whittle down the middle class, and the rich are not as affected.


Falling house prices tend to affect the rich people more, surely, seeing as they own more houses?

First, good point regarding the gold issue bogger; I just wanted to point out that to be fair, you're comparing paper securities with ownership of a physical commodity Wink

In regards to this issue, while it's true that the wealthy class's assets will be harmed by depreciation, since they're the ones who own houses, falling house price levels as a whole kill the poor, at least in the short term. So Mannix, they're a bad thing for those with a poor financial base...

Here's why: those 1 in 5 sub-prime loans that are going into foreclosure are loans that were given to those who can't typically afford a 20% down payment. The logic here is that with appreciation, someone with an ARM can use their equity to refinance in order to manage their (inevitably) rising mortgage payments.

When depreciation happens, the people who took out subprime loans can't make their payments anymore. Mortgage rates continue to rise, because foreclosures = less income for banks = less reserves = higher federal funds rate = higher prime rates. Prices continue to drop, because foreclosures = people wait for prices to bottom out before buying = demand drops further. In other words, it becomes a self-fueling cycle. So poor people lose their homes.

SIMULTANEOUSLY, the construction industry slows down to account for inventory change (too many houses)...construction workers lose their jobs and (through the multiplier) reduce spending. Let's assume for a second that construction workers aren't the best paid workers out there, and that as a result they tend to buy inferior goods. That means poor are affected twofold here as well. Given the source of this economic slowdown, if a recession occurs, the poor are going to be hit first.

For the poor to benefit from this process, (1) they'd have to be unaffected by a coming recession, (2) prices and rates would have to drop low enough to become affordable, and (3) inflation would have to let up a bit.
johnBdoe
It is definitely a good thing for buyers who have been holding on until now. But not a good sign for the economy as it indicates that the housing market is doing badly, which translates to less demands and hence less jobs, etc.
standready
Mannix wrote:
I believe it's good, because it gives folks who don't quite have the financial base a better chance at a nice home.... ...But beware, it also serves as a mechanism to further whittle down the middle class, and the rich are not as affected.

Personally, I don't own a home, but I'd like to. The interesting thing is a couple of the local landlords just raised rent, which doesn't make much sense to me. - Ah well.


To answer your last first. If your landlord's property taxes increased 30 percent, like mine did, the landlord would need to cover that expense.

Nice home, I agree. The problem in my area is nobody is building a reasonable house any more. Everything is huge with huge price tags. People jump into these things without considering the property taxes and utilities for all that unused space. Live beyond your ways and means!

Banks don't want to foreclose on borrowers. They lose on it! They have the expense of maintaining/refurbishing and trying to resell the house. That is WORK and money out of their pockets. Far easier just to sit back and collect interest on a loan if at all possible.

I feel for some (not all) of the people who bought in the last couple of years that now have a house valued at less than they owe on it. Greedy speculators, who drove the prices up in the first place, be dam!
lasikprices
bogger wrote:
deStructuralized wrote:

Not since WWII. What you're referring to is the gold standard, and the U.S. stopped pegging its dollars to commodities after The Great Depression.


I didn't know that, my mistake, sorry

deStructuralized wrote:
Also, it's true that gold can be a stable long term investment, but like any other commodity, its value fluctuates. You could lose money on gold just as easily as you could with any other investment.


Yes, but Gold doesn't fluctuate as much as other tradable goods, like shares. Gold is also more dependable than money, because gold will rise in value in tune with inflation, normally.

You also have to remember that gold will have at least some worth for a lot of time, unlike shares, where an enron can happen any day. That kind of thing won't happen with Gold


Although all of this makes sense in terms of pricing, the price of gold (and fiat money for that matter) is directly related to both its supply and demand. Gold holds its value (which means its implicit buying/exchange power for other goods) directly with how much gold there is (if people mine a lot suddenly, or any national bank dumps gold reserves on the market, its price will fall--people will want less of it. If people decide that they don't want to buy gold to store value anymore, its price will also fall.

For example, let's say that gold and platinum aren't used for anything but as stores of value. In other words, we all have gold, and we're willing to work for gold, because we can use it to buy other things. If suddenly, we all decided that we wanted to use platinum instead, suddenly the value of gold would plummet--nobody would want it because it would be useless (this is what happens to paper money when people decide they don't want it anymore--this is one inflationary mechanism). And, the value of platinum would rise from zero (worthless, since we weren't using it before) to the original value that gold had (the implicit value of being able to store wealth temporarily), weighted by the relative quantities of gold and platinum in the economy.

Thus, the same thing can happen to gold as happens to anything else. Its value can fall if the demand for it falls or the supply for it increases. Industries which have very constant demand have very low volatility in their stock prices. Industries which have very variable demand for their products have much higher volatility in their stock prices, but also give higher returns on holding those assets. While what you say about gold being a good store of value is true, it is also one that gives very little return in the long run than say, stock in Google (this is a supposition--it may be false, yet the long-run value of Google has yet to be proven).

Happy investing!


LASIK Prices: http://lasikprices.frihost.net/
Billy Hill
Good or bad depends on how you bought. If you bought within your means then you're fine. If you're one of the many that was taken advantage of by loan companies (by drastically lower the requirements to get a loan), then you're prolly screwed.

I sold my house two years ago for well over 4x what I paid for it and bought a house with half down. For me, since owning my first home since 1994, it's all a wash almost no matter what the housing market does.
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