The purpose of this post is to give a realistic assessment of the USA housing market. Nothing negative or optimistic, simply reality based on the economics of supply and demand.
Why is my house not selling?
I have heard people say that they lowered the price of their home 10% or even 20% and it is not selling. They do not understand it. They say it is a bad market for real estate. This is not true. It is the price that is bad, not the market.
Their home is being offered at say $500,000 dollars and no one is buying. There is a simple reason why the house does not sell. The price is too high for market conditions. If the price the home was $1 dollar it would sell. Guaranteed for $1 dollar you could sell your house. Price is determined by supply and demand if the market does not clear inventory it is always a price issue.
I look all the time for houses across the US market. I am not impressed. I live in Poland (although I am a US citizen) and for the same house near a modern metropolitan area, in the USA it is 300% more. People might say oh but this is the USA. I say Oh but this is the center of Europe. Housing in the USA is very expensive. The only reason it was affordable was an easy credit. The market prices are still artificial. I look in the USA in states like CT and people say they are desperate to sell their homes, but nothing moves. This is because people have not really lowered the prices much. They prefer it to even be empty for years.
Why housing prices are downwardly rigid
Prices of homes resist adjusting downward because:
- The seller bought the home at a price that was too high, has a mortgage and does not want to sell it at a loss, as real estate is a highly leveraged investment. Therefore the seller somehow believes that selling price is connected to the price they paid, this is the case.
- Sellers believe the cost is somehow associated with the selling price. Builders will often use this argument that they can not sell the unit for less than they paid for it. The reality is they can, they do not want to.
- People’s expectations are too high for homes. Depending on how you calculate this and what do you consider the long-term the average appreciation in real estate is not more than 4%. A lot of the data on the Internet stops at 2008 or even 2009 somewhere. However, if you are honest about calculating the return, you will not find returns too much over 4%. However, many people are expecting a 10% increase and have factored this into the price.
- Government programs try to artificially prop up housing prices, however, these are usually only temporary as the funds will eventually dry up.
In all four cases somehow people believe that price is not connected with supply and demand or people can not afford to take a loose.
The opportunity cost of waiting to sell
I fully understand why people do not want to sell. It is because this highly leveraged investment will wipe them out personally if they sold it. So the question in the housing market really is a matter of opportunity cost. That is if I sold my house today could I buy some other investment and earn a better return? If housing will go down 5% a year for the next 5 years and take 15 years to return to the price I paid for it, it might be worth investing in something else during those 15 years of waiting.
The problem now is the return on other investments are equally poor across other asset classes. Bond yields are very low and the Stock Market is anybody’s guess. The gold market is at dizzying highs. Therefore, in an economy like this why would you sell your home at a loss.
When the US housing market will recover
The housing market will start to show signs of life after 2017 maybe. When unemployment will come down to about 5% the market will start to recover. Real estate is a lagging economic indicator, so income needs to increase, people need to feel safe and banks need to liberalize their credit policies. However, the problem is there is no return to the craziness of the last ten years and Fannie Mae and Freddie Mac the engines of this housing price increase are delisted from the market. 95% of the mortgages in the US are connected to these government agencies. Republicans want this to start the privatization of the housing lending market. But even so, it would take years for anything to happen. The housing market is gone and not coming back to life.
When you have a price collapse the price will move up slowly as people who need to sell will get out and not wait for a profit. They will feel lucky just to get out. This will satiate demand and prevent the price from moving up further.
Further, I know many people, including myself who just rent. They do not want to get burned in such a sluggish market. Inflation-adjusted housing prices usually take about ten years to come back. This crash was the largest since the Great Depression and it is global. It might not be for 15 years that earnings will have risen enough to make the home prices sell at close to realistic prices.
We are 3 years into a 10 to 15-year cycle.
Above is my (I am an economist, not an artist) graph of US housing prices with some key years. It is only the nominal prices not inflation-adjusted. Inflation-adjusted would show longer periods for prices to adjust. But to be optimistic let us look at nominal prices of homes. The main point of this graph is the peak was so high that the period of adjustment will be many years. The moving average price is certainly still on the way down. The trend is your friend. Do not buy when the moving average is going down, you will lose.
This market downturn is an anomaly. It is not a normal cycle, it is stuck in long-term disequilibrium. New home starts and the secondary markets have collapsed. Homes will not sell. If you are trying to sell a home now I would not be too optimistic. There is a coming second crash in the housing market to bring prices down to average US home prices to under 100K.
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