Home Prices Tumble at Record Rate — Now What?
By Alan Stewart Carl | Related entries in 2008 Election, EconomyDuring the second quarter of this year, the Standard & Poor’s/Case-Shiller U.S. National Home Price Index showed home prices tumbling by 15.4% as compared to the same quarter last year. This is the steepest drop ever recorded.
During the mid-decade housing bubble, a lot of people purchased over-valued property. And while the value of your house does not affect your monthly mortgage payments, knowing your property is worth less than its purchase price is not exactly good for your sense of wealth and wellbeing. If the housing bubble made us all feel irrationally exuberant. The housing collapse is going to make a lot of people feel irrationally pessimistic.
Many people are going to want “solutions.” Except, there is no solution to falling home prices. It’s not like the related but quite different sub-prime mortgage problem. Politicians can doll out billions of dollars to prop up banks and homeowners caught up in that financial mess. But the government cannot increase the price of our homes. This is not a political issue, it’s a market issue and it’ll resolve itself in time. Prices will stabilize but a lot of people are going to have to work harder and wait longer than they’d planned before gaining equity in their homes.
I mention all this for one very specific purpose: bad news is the fuel for presidential elections. A tree can’t fall in the woods without one or both candidates proposing an anti-tree fall initiative. As a homeowner myself, I am naturally inclined to throw up my hands and say “hey, whose going to help out here?!” But I’d be foolish to buy into whatever pandering “solution” a politician feeds me. There may be certain helpful initiatives on the local level (civic improvements can raise property values, for instance) but national candidates can only use the issue to demonize their opponent as a “do nothing” or lionize themselves as the champion of the people.
I don’t know if falling home prices will become as big an issue as the foreclosure problems, but I’m on the lookout for demagoguery by either side. We’ve already had gas-price demagoguery, I hope we don’t have the same for housing prices.
This entry was posted on Tuesday, August 26th, 2008 and is filed under 2008 Election, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
August 26th, 2008 at 2:35 pm
Not to mention the incredibly stupid “lets borrow another $150 billion from the Chinese to be repaid by our children and grandchildren so we can each have an extra $600 in our wallets” stimulus package. This is why I fear Presidential election years.
August 26th, 2008 at 2:44 pm
This is actually a sign of the market truly bottoming out, and people reaching acceptance of reality. Volume sales of existing homes were down, what’s being sold are must-move properties.
August 26th, 2008 at 3:16 pm
I do feel bad for the regular folks who had the misfortune to buy at the top of the market. Not so much for the folks who used home equity as an ATM. Sadly for many, the price growth had reached bubble proportions, and now the bubble has popped.
Prices must go down until a more reasonable equilibrium is reached, one that has squeezed out speculators and flippers. I tend to agree with Tully. The stories I have read about my region have suggested that while prices are still falling, the number of houses sold is not that concerning. In other words, prices are going down because the perception of values has changed, but other than that the market is still functioning. It can’t finish bottoming out and begin to bounce back until asking prices come in line with the ability of prospective purchasers to buy.
Let’s not forget that in the old market, for every owner who was getting rich off appreciation, there was someone with pretty decent income who wanted to buy a house and really couldn’t afford to. And now, for every person whose equity has gotten hammered or is negative, there’s someone who can now afford to buy a house. The market balances out when the relationship between the bid and ask prices narrows. And that’s what’s finally happening.
Tully is right. It’s about accepting reality. And the reality is that even though “the economy” is not in a recession, the combination of decreased equity and higher prices mean that many Americans have experienced a substantial decrease in accumulated wealth and an unpleasant change to their relationship between income and expenses.
August 26th, 2008 at 3:21 pm
Before jumping to any conclusions about this, I’d want to know: to what extent is the price being reported reflect homes which have been foreclosed and are now being sold? That can move the market price for everything else, of course. But claiming that home prices are falling is going to be closer to reality if those foreclosed houses themselves are left out of the average prices.
August 26th, 2008 at 8:56 pm
As I said, wj, the sales volume indicates that it mostly reflects must-sell transactions. Bottom-fishing.
August 27th, 2008 at 5:24 am
While it’s true say that the value of your house does not affect your monthly mortgage payments it does affect a family’s ability to stay in your home. A real solution for some over-extended families being tossed from their homes would have been to refinance–however, banks will not refinance you if the value of your home is now lower than the amout you owe.
I, too, feel no sympathy for the investors and speculators who took a knowing risk, but I do feel for the millions of individuals who were misled into believing they could afford more home than they really could, and were doubly cursed with ARM deals, ballon payments and other nifty financial tricks put forward by unscrupulous lenders who were flipping loans as quickly as people were flipping homes.