Well, the long-awaited housing double-dip is now well underway.
So what went wrong? Why has the Fed’s money printing created huge inflation in stocks, commodities, food, and energy, but not houses? What separates houses from other speculative assets?
Answer: house prices are supported primarily by incomes, while other assets are bought by speculators using cash and leverage. The Fed has flooded the banks with money at 0% interest allowing the banks and their customers to have a speculative orgy in every asset class. Stocks, gold, silver, agriculture commodities, etc., are all up double digits — some of them BIG double digits — year-over-year.
But housing prices are not set by speculators playing with free money from the Dirty Fed. They are set by families who are limited by their ability to meet the monthly mortgage payment. And Bernanke’s party for Wall Street hasn’t done a damn thing to help working families.
Epic FAIL, Bernanke. You just drove up the cost of food, gasoline, and home heating oil, but you didn’t create any employment or increase any wages. Unless your plan all along was to enrich the bankers at the expense of working families.
What separates houses from other speculative assets?
Answer: house prices are supported primarily by incomes, while other assets are bought by speculators using cash and leverage.
Also, and I think related to the above, is that most of those other assets are widely ‘virtually’ traded on the commodity market.
By ‘virtually’, I mean that no delivery or receipt of the commodity is expected or desired. Someone who think that the price of copper, for example, will rise is matched up with someone who thinks the price of copper will fall. Neither individual has copper to sell nor wants to buy copper. It is a glorified bet, but these bets drive the market cost of copper.
No such market exists for houses.
It might be also worth noting that these commodities are bought and sold in standardized forms. One block of 99% pure copper is exactly the same as another. This is not true of houses.
And here I thought it was because there remains a huge inventory of homes on the market. I guess supply does not matter. Also, if you look at the long term trend, houses are still over priced. They probably need to come down a lot further.
Steve
From CR. First link is just supply.
http://www.calculatedriskblog.com/2010/12/november-existing-home-sales-468.html
Second link supply and price.
http://www.calculatedriskblog.com/2010/12/house-prices-and-months-of-supply-and.html
If you are not familiar with Calculated Risk, I would suggest looking at it every now and then.
Steve
John and Steve- Didn’t the various exotic financial instruments that eventually ruined the housing market turn real estate into a tradeable commodity? You had a classic commodity bubble . I know that where I’m living now, a local contractor built several houses on spec, and he hasn’t been able to sell them.
I also peruse realtor.com for listings in my old town similar to what I sold about a year ago. Prices seem all over the market. At least 1/5 of the homes seem to be in some sort of distress sale, and priced accordingly. The middling range seem to be going for about 3/4 of what they could have gone for three years ago, and a few sellers are in complete denial, believing the party never ended.
I would say that home prices are around what they were 10-15 years ago. There are some real bargains out there, and when we completed our purchase last June, the bank seemed willing to just throw money at us at4.5%. I think people are afraid right now to take on long term debt on a non-liquid and non-portable asset.
On a similar note, it seem the financial slicksters are still paying games. More on this as more news comes out.
Didn’t the various exotic financial instruments that eventually ruined the housing market turn real estate into a tradeable commodity?
Almost, but not quite – the tradeable commodity was house notes, not houses themselves.
And because the house notes were linked to actual real people who had to keep paying on those house notes, the financial instruments lacked the ‘virtualness’ of the commodities that Author Varones mentioned by way of comparison.
The mortgages were turned into commodities. While the housing crisis is national, the severity is quite different from region to region. In general, the Midwest has not been hurt as badly.
Steve
I was going to mention supply, but Steve already covered that. It should also be noted that last month’s BEA data still showed increasing income:
http://www.calculatedriskblog.com/2010/12/comments-on-november-personal-income.html
…so I’m not sure how much income has to do with it. The most direct channel for QE to affect housing would seem to be bank lending, but then, lending standards are pretty tight right now:
http://www.calculatedriskblog.com/2010/11/fed-banks-expect-tight-lending.html
FHA has also been tightening its standards:
http://online.wsj.com/article/SB10001424052748704023404575430321562606284.html
As for commodity prices, it should also be noted that these are set by worldwide supply & demand, and other countries (e.g., China) aren’t quite so economically moribund as the US.
Re. whether housing as a tradeable commodity: I’d say, “sort of.” I suspect the ~5-6% transaction costs (e.g., closing costs, lending fees, realtor fees) are higher than in commodity markets (though I could be wrong on this). Houses are also a good deal less standardized than commodities.
Fannie Mae also recently tightened their standards, and Freddie Mac is thinking of following suit:
http://www.nytimes.com/2010/11/21/realestate/21mort.html
Perhaps your co-Author, licensed real estate agent and national real estate writer Candy Evans could throw some light on this dilemma .
H. M. Stuart
Alexandria
Steve,
I agree that there’s an oversupply problem, but I view that as a result of the income issue.
If houses cost half what they do now and could therefore be purchased more easily by people of modest incomes, the supply problem would work itself out. Income is still the biggest limiting factor on price.
MI,
As the chart you link shows, income is still 4% below 2008 levels. And it’s lagging food and energy prices by a huge margin.
I’m sure income (ex food & energy) has some effect on housing prices; what’s unclear to me is whether it plays the dominant role you seem to ascribe to it.