Housing Numbers: Freefall? Meltdown?

If you Google[“housing prices” freefall] you’ll currently get about 265,000 hits.

Wow! Freefall sounds extreme! How bad is it? Well, there are certain areas that rose at very high rates, most notably California and Florida, with areas like Las Vegas and Phoenix also remarkably affected. And the excitement from these markets drove, to a certain extent, most others as well.

So, freefall. We’d guess from this freefall in national prices something on the order of tens of percent across the country. And from the strident tone of the articles, it must still be bad indeed.

Well — from the peak, in April 2007, the national average home price has fallen only about 6%. Surprised?

And the actual rate of decline is modest, as well — in fact, in the most recent published numbers, you have to “seasonally adjust” the home price average to get it to be negative. Here’s a chart of the change rate:

Housing appreciation rates, through second quarter 2008

Housing appreciation rates, through second quarter 2008

There are other subtleties. The numbers I am using are from the US Government’s Office of Federal Housing Enterprise Oversight. That somewhat clumsily-named organization looks at and reports price averages (including refinances) over about 280 areas around the country, covering the huge majority of the US geography and population. The index used by the news media, though, is the Case-Schiller Index — since it focuses on cities that rose rapidly, it produces more dramatic declines. It has only twenty areas of interest, and they are relatively small.

If you can pick your data, you can continue to say “Woe, Despair, Agony On You.” But I prefer a larger — and more accurate, picture.

And a couple of other points bear mentioning. The “reset” issue, where people who obtained short term rates that reset after, say, five years, is much smaller than it could have been. Those people got loans at typically 5% to 6% — but now, mortgage interest rates are … 5% to 6%. So, the resets are not particularly dramatic. There are people that got into very unusual deals, hoping that it would work out, and for some of them it hasn’t — but these are hardly the average case.

Nothing about a temporary drop in home value causes you to lose your home. Continue paying the mortgage, and it’s fine. People are being frightened into doing silly things, despite the fact that in five or ten years their homes will be far above even last year’s peak. We are too short-term a society — and this is what the media is counting upon. For the more misery they can convince you of — and cause — the more you are likely to vote their candidate in. Or so they evidently believe.

In the meantime, candidates both major parties are using the current climate of fear to call for large increases in government regulation.

“We caused this problem, let’s make it worse!”

Well, they don’t actually admit that — but it’s true that regulations forcing loans to un-creditworthy people are a big part of the problem, such as it is.

But note what is really happening: The failures of banks are the FMs are not <i>directly</i> the result of foreclosures — they are for the most part the result of the loss of investor confidence and resulting loss of stock value — which prevents them from using lines of credit and other financial vehicles that are a necessary part of the business.

So, to a very large extent, it is the cry of gloom and doom that has precipitated the actual problems in the market.

The housing rise will correct itself; it largely has already, and the prices are now, generally, back to 2005 levels. The average over the past ten years, and the next, will show a nice steady increase, and eventually the current blip will be hard to see on a chart. (Black Monday, October 19th 1987, was a gigantic problem, far worse than anything we see today. And now it’s a minor twitch on the DJIA chart.)

Hang in there — and don’t get spooked. Especially if it will cost you money, or push you to make decisions out of fear.

===|==============/ Level Head

  • More importantly, most subprime defaults are happening before the interest rate resets. The real reset problem is the negative amortization mortgages. They’re something like an extended balloon mortgage, at best.

    As for “don’t get spooked” — it’s a bit late for that in my case. Just because the rational plausibility of a bank holiday is absolute zero, doesn’t give me the proof I need to reprogram my emotional reasoning to ignore that.

    I’ve contented myself with paying scheduled bills as fast as possible. (Which does drive down my liquidity noticeably, but otherwise is harmless until the next fiscal emergency.)