More Bad News on Home Sales
Steven L. Taylor
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Tuesday, August 24, 2010
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9 comments
Via CNNMoney: Existing home sales plunge 27%.
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored
A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog).
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Yikes.
This is bad on many levels I think, and will likely be reflected in the New Home Sales numbers that come out later this week.
The funny thing is that the more bad news like this we see, the more the spinmeisters on TV tell us that there’s no chance we’ll end up in a double-dip recession………me thinks they doth protest too much.
This is being misinterpreted. When you time-shift sales (which is what the home purchaser’s tax credit did), you shift them from the future to the present. Now it’s the future and what we’re seeing now is no remarkable drop, just a reversion to trend less what would have been sold absent the credit.
Also, I strongly suspect that the drop in velocity reflects a psychological barrier. According to a recent poll a preposterous percentage of people still think that their house is going to appreciate at 10% a year. That means that they’re going to be less willing to accept a lower, more realistic price than they should be.
Houses should depreciate, like cars. That used to be the case before the demographic hump represented by the Baby Boomers came along and I strongly suspect that’s the future.
Dave,
Point taken about time-shifting.
However, in regards to depreciation–I am not so sure that that is correct, as it is not just an issue of the house, but of the land upon which the house sits.
Further, a house will last a lot longer than a car and still be able to achieve its original purpose. Try using a 50 year-old car vice a 50 year-old house.
Dave,
Yes you are right about the time-shifting — and the housing numbers that have come out since it ended just provide further evidence of what a bad idea it really was.
At the same time, we should not discount the ripple effect that a continually weak housing market has on the economy.
I tend to agree with you that we’re entering a “new normal” rather than in the middle of a sustained downturn, but the adjustment costs are going to be huge.
Ten people trying to buy eight houses—prices go up;eight people buying ten houses—prices go down.
Also that a house’s depreciation period is longer than a car’s doesn’t mean it doesn’t have one. Additionally, I would rather drive a 20 year old car than live in a house in most projects built in California 20 years ago.
Dave,
But that’s not a depreciation issue–that’s a market issue at a specific moment in time. The easy counter is that 12 people trying to buy 10 houses makes the price go up. That is independent of the depreciation issue.
And true about the length of time–eventually a house will become unusable if not kept up. However, as noted, the land upon which it sits is still yet another matter than make the car analogy problematic.
For example, I have little doubt that a plot of land a few blocks from UCLA will continue to appreciate.
More to the point, the issue would be what has been the historical trend within the real estate market, and I don’t think, even cutting out boomers, that we have ever seen it function in a way that resembles cars.
I take the basic point that expecting real estate to be a cash cow in perpetuity to be problematic.
Could be. However, people who make $30,000 a year aren’t part of the marketing universe for million dollar homes. Unless the trends change, the land values may go up but the likelihood of it being used for single-family residences diminishes.
Messrs. Case and Shilling would tell you homes appreciate – before the bubble, and before the boomers – basically at the rate of inflation.
Oddly, there are those that believe that retirements areas – Florida, NC, SC, Tennessee, Arizona etc – will recover and see baby-boomer retirees driving prices back up at above normal rates. That of course is a regional issue……………..and what does it mean for MI, IL, OH, PA etc. Ouch.