It could simply be math. If a bubble area ran 15 years ahead of a projection based on long term historic growth rates, and has now returned to the mean, then using historic growth rates it will take 15 years to get back using statistical projections. FWIW.

Media scare tactic? Hardly. Businessweek isn't really trying to lure people to buy their magazine from the front cover. This is typically why you won't see it by the cashier next to the mints and gum.

Housing can't veer from affordability forever. Either wages need to catch up to housing (inflation) or Housing needs to fall down to wages (housing deflation).

I wonder how far the average home price would have to fall in order for homes to be affordable to the % of people that own them?

People forget that we've been through this once before, and recently, too. Housing prices declined in many areas between 1988 and 1994 or so...and took 10+ years to recover (when inflation is figured in) back then, too.

This is nothing new. What is new now is all the "toxic" loans that people have used, the equity extraction that has taken place (treating the house like an ATM), and the idea that a house is an asset to be flipped for a profit. No one thought that way in the late '80s, when loans were mostly of the 30-year fixed variety and people didn't "trade up" unless they had a real need to move.

Homeowners then didn't pay nearly as much attention to what their houses were worth from moment to moment. Things are very different now.

Just had a look at the article finally. This quote struck me:

"Even if all they generate is low-single-digit price gains, they will look good by comparison."

I guess I'm really out of it. Isn't the historical average for residential real estate about 4-5% per year? Isn't anything above that gravy?

Aphilla, you're right. Over the long haul, real estate usually appreciates inflation plus 1. In reality, that appreciation can be quite volatile in the short run, just like other asset classes. Up, down, flat. So, housing doesn't always appreciate annually...macro and micro economics play a role.

Infomary is exactly right.

I feel that a lot of the problems in my area have been due to flippers (and two years of unrelenting hurricanes - but that's a different story) and the ridiculously low interest rates that spawned their rampage.

The market (at least where I live) was subjected to an unsustainable run up with some houses being flipped at 100% over purchase price, having made a minimum remodeling investment. Add to that the number of new homes (especially townhomes) being built with flippers buying two or three at a time and reselling them at a premium to an audience eager to get into the home ownership "game". These flippers are now desperate to sell their holdings because the expense of hanging onto these homes is really racking up and default is a real prospect. But there is just too much competition out there with more being built everyday and so the homes linger on the market. Then imagine the homebuilders who saw unprecedented profits over the past three years and now they are having trouble "getting their fix" because homes aren't selling and the bottom line is suffering. What are those guys going to do?

It's always an experiment when the government messes with interest rates and this experiment has been particularly interesting.

I feel as if we can consider ourselves lucky if it takes only 15 years for the market to recover after the abuse it took over the past three years.

Businessweek certainly IS trying to lure people to buy their magazine with the front cover (I'm in the business). They're walking a fine line between journalistic integrity and attention-grabbing sensationalism, like every other magazine out there.

And they'd LOVE to be positioned next to the mints and gum (but that's a pricey spot).

"It's always an experiment when the government messes with interest rates and this experiment has been particularly interesting."

What's that supposed to mean? The Fed started raising short-term borrowing rates in 2004, just about the time the huge run ups in home prices started. It stopped raising them in early 2006, just about the time prices topped out and started falling.

It's not so surprising there was no correlation between the two (except a negative one) because home mortgage rates track long-term interest rates which are not set by the Fed. So I'd like to know how you think the government "experimented" with rates and how that "experiment" affected home prices?

Gee, I guess it would depend on which part of the country you are in to know if home prices were going up or down.

Feedingfrenzy- All of the creative financing (except the relatively new fixed rate I/O loans) are based off of various short term rates. The fed keeping the rate so low and the banks realized they could give away the feds money and still make money, so they loosened underwriting standards. So you get a tighter housing market and rising prices, this brought in speculators, which tightened the housing market further, causing people to rush to buy and "not miss the boat", which fed even more speculators.

The Fed tightening of the monetary supply came in quarter point increments and it finally reached the affordability threshold beyond which even creative financing could bridge (even though it just bridges it temporarily). So you get the slowdown (pricing is lagging, watch volume), as people see things slowing they dont rush to buy, speculators dump inventory, people who cant afford their stupid decisions cant let the market bail them out, banks start tightening their underwriting because loans are going bad, etc etc.

There is no doubt the Fed cuts were a catalyst for this housing boom, creative financing is based on them and creative financing is what fueled the boom.

Well, the current housing boom started back in '98 or '99, well before the Fed started lowering and continued on for awhile even as they were increasing. It could be true that the low rates kept it going for a short while longer than it might have and maybe should have, but I would blame that more on the stupidity and greed of the lending institutions than the Fed.

It is, after all, the job of the Fed to regulate short-term interest rates, and rates were lowered to stimulate the economy in the early 2000s and raised in response to infaltionary pressures in mid-decade. You might take issue with the particular timing and extent of the drops and hikes, but I'd hardly call it a "governmental experiment" specifically to control housing prices.

FF: "You might take issue with the particular timing and extent of the drops and hikes, but I'd hardly call it a "governmental experiment" specifically to control housing prices." Don't put words in my mouth. I didn't say that.
Lowering interest rates is hardly an exact science and the Feds don't really know how the markets will be affected until the rates have been lowered. What is so hard to understand about that?

By definition, any media outlet is going to sensationalize any story they put on the front page, or cover, or whatever.

There really isn't any truly reliable, impartial source of information on the housing market these days, unless maybe you want to count Economy.com (but I suspect their motives a bit too). The figures from the Realtors' associations are always rosier than everyone else, the developers are always "turning the corner", and the media are always trumpeting a housing boom or a housing bubble bursting...whatever they think is going to sell papers.

Also, they tend to be way behind the curve with the reporting. By the time they were reporting all the housing boom stories, the boom had already peaked. When it turns around, the media will still be reporting about the bust.

My attitude is that I need a place to live, so I'm owning a house regardless of whether Business Week says it's a good investment or not. However, I'm not stupid. I have a 30yr fixed mortgage at 5%, 25% down and I'm planning to be here for a good long time. If I had to sell tomorrow, I would probably lose some money on the deal, but I'd be able to get out cleanly.

"Lowering interest rates is hardly an exact science and the Feds don't really know how the markets will be affected until the rates have been lowered. What is so hard to understand about that?"

Nothing. But that's not what you said in your first post. Pardon mean if I thought you were blaming the housing boom and bust on the Fed because of "the ridiculously low interest rates that spawned their [the flippers'] rampage, one of the "interesting" things that happens when the government decides to "experiment" and "messes around with interest rates."

I have a somewhat different view. The biggest part of the housing Boom was due to the simple fact that investors (and by that I mean both professionals and just ordinary homeowners) couldn't find anywhere else to put their extra bucks (the equities markets were stagnant and fixed rate intruments yielded tiny returns) and turned to real estate as the Last, Great Hope. Everyone seemed to think they were going to get rich buying and selling houses.

FF said: "Everyone seemed to think they were going to get rich buying and selling houses." Excuse me, but isn't that the exact definition of flipping?????

"...My attitude is that I need a place to live, so I'm owning a house regardless of whether Business Week says it's a good investment or not. However, I'm not stupid. I have a 30yr fixed mortgage at 5%, 25% down and I'm planning to be here for a good long time..."
*******************

THAT'S the reason we buy a home! I bought my house to raise my family in. I maintained the home and when I sold I made a profit. I now have my "retirement" home and I still just look at it as my HOME instead of my "investment". The houses I owned never were opulent. Just houses. I always disliked the big house on the postage stamp properties anyway. I call those 4,500 sq ft houses the SUVs of housing. They use 2,500 gallons of precious oil to heat.

I now have a 1250 sq ft home on two acres on a dirt road here in Vermont. If the value increases my taxes go up. So I am looking foward to a flat real estate market for a while. Like maybe the next 20 years.

Chris, hate to burst your bubble, but taxes go up for many other reasons then increased value.School improvements,road infrastructure,municipal needs, county needs, etc..Just because your home increases in value, doesn't mean your taxes go up.If the area where you live goes under a revaluation, in theory, your value increases, and your tax rate decreases..Sure some people see tax increases, some stay the same, others decrease somewhat..

Interest rates aside, where the Fed *did* screw up was in not regulating the banking and lending industries better. They allowed all this no-down-payment, interest-only, living-way-beyond-one's-means financing to go on without oversight. That's part of their job, is regulating banks. They haven't even made the banks set aside enough in reserves for when all these bad loans finally go sour.

REal estate moves in cycles. That's nothing new. But now, we have all these people upside-down in their homes. That's new. And it shouldn't have been allowed to happen. That's the factor that very may well make this downturn worse then previous ones.

jg

It's a bit more complicated than that. The outright flippers paid a big role, of course. But you can't forget the "regular" homeowners who, unfortunately, started to view the "equity" in their house as a giant piggybank, and took out second loans and HELOCs and to buy stuff with it. They assumed the run-up in prices would mean they'd still make a killing on their houses when it came time to sell them.

housenewbie, how do you think personal responsibility fits into the financing picture?

To me this whole RE financial mess that you described is just the result of the me-first consumer mind of many Americans. No delayed gratification - why wait? Get that high-end washer/dryer combo now and make no payments until next year! Order that furniture now and pay for it in 2008! You can drive a new car off the lot today with no money down!

And the sense of entitlement - "What, me buy a used washer off craigslist? I *deserve* to have that new German front loading kind, even if I am behind on my school loans and have 6 maxed-out credit cards."

It invades the RE market too and that's why people are buying houses they can't afford. I don't think the government can regulate people's mindsets.

ff: I totally agree with you there! But, it's funny, because even the "regular" homeowners having flipping in their hearts. I am a regular on the kitchen forum and I can't tell you how many people remodel with resale in mind. It gets a little silly when you are trying to select cabinets for a phantom buyer from the future. I actually place a lot of the "blame" on home improvement shows which have given people a new way of looking at real estate. Traditionally, real estate was a long-term investment - I don't think people view it that way anymore.

housebewbie

The Fed does not have the power to regulate banks and lending instituions on the level you're talking about. The Fed is more of a bank for bankers. It sets the lending conditions for the insitutions in its system by raising and lowering the interest rates it charges them and tightening or loosening its standards for their finacial soundness, but it doesn't really have a direct say in what its lenders do with the funds when they get them. It can't for example say to a lending bank "don't make no-down-payment loans." What it can do is make it harder for such bank to borrow money from the Fed.

Of couse, when the Fed lowers rates, it frees up money for the instutions within its system. Thus, the Fed has a major effect on how easy or hard it is for consumers to borrow money. If the Fed should start to lower rates next year, that may lead to lower mortgage rates, partiularly for adjustable-rate loans, but that should be balanced against the raising of underwriting standards which is happening in response to the big increase in defaults and foreclosures. Plainly put, these don't make the bank shareholders very happy and when they're sufficiently upset, they tend to dump their shares.

Two mindsets I've come across: The exuberantly optimistic (folks who do creative financing because they assume their income will only increase so they will eventually be able to pay that loan) and people who view mortgage brokers as the permission police. ("I was approved for an interest-only, zero-down loan, so it must be an OK thing to do.")

My brother actually falls into that second camp. He's started looking into homebuying and asked me at one point, "If the mortgage broker tells me that he can get me X loan, does that mean it's the right thing to do?" I explained it was his responsibility, not the broker's, to figure out which loan product was right for him.

Interest rates aside, where the Fed *did* screw up was in not regulating the banking and lending industries better.

Yeah, that's just what we need. Just a little more government control over what you can or can't do. No need to actually take any responsibility yourself, just depend on the state to protect you from yourself.

People in this country see something they want and believe that sight translates into a right to have whatever it is. People need to get over that. Take the tow truck driver I met this week who was on his third $500 cell phone this year. WTF? Huston, we've got a spendig problem down here...

Ironically, the overspending that we Americans have been indulging in for so long might just be a following of the example set by our dear ol' guvmint. Taken a look at deficit numbers lately?