The housing market is crashing again. There are no positive indicators—none. Housing will be a drag on the U.S. economy for many years to come, but nobody knows how many. Demand for housing is in the toilet, and inventories are very high. Nobody knows how high. Amherst Securities estimates that the "shadow inventory" of available houses—the number of homes repossessed or in default that eventually will be offered for sale—stood at 7.3 million in the first quarter. That's over and above the huge unsold inventory we already know about.
From Calculated Risk. Inventories are rising after the expiration of the 1st time home buyers credit
This morning we learned that existing home sales dropped an astonishing 27.2% in July with respect to the downwardly-revised June level. Sales are 25.5 percent below the 5.14 million units sold in July, 2009.
From Calculated Risk. Cliff diving in existing home sales.
Demand for houses is directly tied to high under-employment. Obviously, being unemployed or unwillingly part-time puts a crimp in your ability to buy a house. Since it reasonable to expect that under-employment will remain very high for most of the next decade, the ability of the housing market to bounce back will be impaired for just as long.
The only mystery in the housing market is why prices are still so high. With demand deteriorating rapidly, average home prices nationwide have no where to go but down. Falling prices will destroy wealth in the Middle Class over the next year or two (at least).
In the longer term, flat inflation-adjusted prices will not add to household wealth. In the 15 years preceding the collapse of the Housing Bubble, and because wages were stagnant or falling for ordinary Americans, the only way to build a nest egg was to own a home. With house prices going up & up, homeowners, especially in bubble areas (e.g. Arizona, California), felt wealthy. And on paper, they were as long as prices kept rising. When people feel wealthy, they spend money.
The New York Times talks about these problems in Housing Fades as a Means to Build Wealth, Analysts Say—
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow... Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
The Times also gives us a short history of the American Dream—
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Robert Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Now that owning houses is no longer a potential source of wealth, the last recourse of the Middle Class to create a cushion is gone. The American Jobs Machine is broken and there is fierce downward pressure on wages. That's all she wrote for the Dream of tens of millions of Americans. Perhaps they can invest in the stock market? That's not a viable option either—they're likely to lose their shirts in that crooked casino. So what's left? Nothing.
We know now beyond any doubt that you can Say Goodbye To The American Dream. Raj Date, executive director of a financial policy think-tank called the Cambridge Winter Center, told NPR's Audie Cornish—
Ultimately, Date said it might be time to rethink homeownership as an American ideal.
The White Picket Fence Reconsidered
"The world we live in today is not quite the world that existed in 1950," he noted. "The nature of households and the rate at which they dissolve and reform, the nature of work and its transient nature across geographies are all things that suggest that maybe, just possibly, a middle-class American shouldn't stake themselves to an illiquid, very large, concentrated, leveraged asset —- that is to say, a house."
Maybe, just possibly, a middle-class American shouldn't stake themselves ... to a house. No shit, Raj. Here's an entertaining CNBC video (hat tip, Tim Iacono) called Defending The American Dream. Some people never give up.
Bye Bye American Pie:
http://www.youtube.com/watch?v=S6uEjifqTaI
Sort of catches the mood. This train has been coming for a long time and is just arrivng in the station. The end of the American Dream.
Posted by: Edward Boyle | 08/24/2010 at 01:35 PM