When it comes to affordability, the housing market has never looked better for many people. However, if you are looking for equity then things have not looked so bleak since World War II[1]. As a residential “double dip” in the market becomes a reality, Robert Schiller, co-founder of S&P Case-Schiller index, predicted that property values could decline from 10 to 25 percent more over the next five years. He believes that unemployment, a backlog of foreclosures that is dissuading builders from new construction and possible inflation will all combine to create the lowest home values seen since the Second World War We should note that Schiller does tend to be incredibly pessimistic, and that other experts like Brian Moynihan (a notorious optimist and Bank of America CEO), have said that additional declines in home equity are likely to be “incremental.” Schiller countered this by pointing out that if inflation picks up, “you could have flat nominal prices but still have it [equity] go down 20 percent.”
In 2001, average home equity, was more than 61 percent. This year in the first quarter, it was 38 percent according to a Federal Reserve report released last week[2]. These are the lowest equity levels since 2002. However, most analysts agree – even if they disagree with each other – that making predictions is hard during this time period. “There is no precedent for this statistically, so no way to predict,” admitted Schiller. Household debt is actually decreasing, although this is due “entirely to a decline in mortgages” according to the Fed. In this case, we may just have to watch, wait and see.
Do you think it would be catastrophic if home equity plunges to WWII lows or is this just part of the correction?
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[1] http://abcnews.go.com/Business/home-equity-sinks-lowest-point-world-war-ii/story?id=13807274
[2] http://www.usatoday.com/money/economy/housing/2011-06-09-home-equity-shrinks_n.htm
Having lost my job with IBM about 15 years ago (to off shore workers) gives me an interesting prespective on the housing crisis problem. It has never been that folks want to default on their mortgages, and it has never been that buyers do not want to buy a home. The problem is JOBS … or the lack thereof. Jobs that pay a wage that will allow purchase of a home and job stability that will allow paying the mortgage on said home. As I see it, we are stuck in a downward spiral until such time as wages and job avilability come up to afford homes at existing prices or until home prices sink down so those working at low wage jobs can afford them. Richard
Well you know if all the Cash Investors pulled together to form a Bank of Wealth, we could Buy all the Properties, and Notes at a Discount. Short sale our Own Deals and sell them all Owner Financing, This would Create such a large monthly Income we could Create jobs without the Government, because they can’t do it.
You know, all these small Guru’s that try to charge $975. for a Training course, if they could just get beyond that small thinking and realize that in that thinking is Greatness that can change the economy not just their little world.
This is the turning point, but if we only look at the rear view mirrors how can we see the Real Picture, Solutions are achieved from views of problems looked at from a higher level..
Despite national media’s reliance on it, Case-Schiller is massively flawed in several different directions, since it and the national media relying on it are consistently ignoring that there is NO NATIONAL REAL ESTATE MARKET.
Without far more than a sampling of the 20 large cities Case-Shiller uses, C-S’s stats are meaningless.
What C-S labels the ‘real estate market’ is significantly different from town to town, subdivision to subdivision, block to block and street to street. Case-Shiller’s stats are like the guy with one foot in boiling water and one foot in freezing water. On average, he’s comfortable.
In my state, Georgia, only Atlanta is measured by C-S and it’s both a cliche and a truism that there are statistically ‘two Georgia’s”, Atlanta and the rest of the state, making C-S’s stats worthless in my Deep South Georgia town.
If the cost of the bricks and sticks necessary to build a house go up — and eventually they will — and the cost of labor to put the bricks and sticks together goes up — and it will — and the cost of land and it’s development goes up — and it will, then those towns and cities where the population is increasing will see new homes sold at prices higher than nearby older homes.
Because of population pressure in my town (Valdosta, Ga.), there is an increasing number of people who will be buying new homes which, because of the increased costs of those items mentioned above, will be sold at higher square foot prices than existing homes, thus draggig up the value of WELL LOCATED existing homes.
The media has created a myth in the existence of a national real estate market that can be measured from coast to coast by Case-Shiller and others, but that’s all it is, a myth, although one of national proportions.
Agreed, Mike Hill! And just as there is no national real estate market, there also is no national “employment” (or unemployment) market. There are certainly national unemployment rates (skewed as they are!) but each state is different (right Texas?) and each metropolitan area in a state is different.
The national stat is only a barometer of the overall health of the country…and while it looks bleak…some areas are definitely better than others while others, including whole states are decidely worse (FL or CA anyone?).