The series of tubes that Senator Stevens and I like to call the internet is buzzing with reports of another housing slump. Bloggers and think tanks and pundits are engulfed in this frenzied new thought that we’re heading for eminent disaster, all the while the National Association of Realtors chief economist Larry Yun strokes their collective cheeks with the back of his hand and does his best to shush them like Heath Ledger as the Joker in the Dark Night did to that poor guy who dressed up like batman. There sure are a lot of opinions on this whole housing debate, and since I haven’t weighed in for almost 24 hours, I figured I should do so.
My thoughts on all this? I really don’t care. That’s right. I don’t care one bit if the housing market stumbles through the rest of 2010 and into 2011, and I don’t really care if prices fall further as well- within reason. Blasphemy, I know. I read several articles yesterday by all sorts of different housing analysts, and while many thought prices might still tick upward in 2010 (I don’t, I see a flat line), others thought we were in for further price drops before the dust settles. What sort of price drops? Massive, earth shattering, eye poking, teeth gnashing drops that may be as much as 1.2% to 3.4%. Those are the numbers I read. Consider the horror of such a drop!
56% of analysts polled now think that these further price drops of anything but epic proportions are likely. Of course that means that 44% of economists think the values are actually going to inch up during the rest of the year, but that’s not the sexy aspect of the story. What is sexy is a soft market. And why is it so incredibly soft right now, according to those experts? Because new home sales fell 32.7% in May. Remember when the government offered tax credits to buy new cars? Remember how good the new car sales numbers were? Remember how bad they were for the quarter following the expiration of the tax credit? Remember everyone saying that the numbers were bad because everyone who wanted to buy a car already did buy a car as a result of the tax credit? Well this real estate number is just like that car number, which is such an easy explanation that no further explanation is needed. Every article crying about the 32.7% also mentioned this as the reason for that drop, but to a market and a public desperately seeking negative information, this explanation just isn’t good enough.
So if the tax credit worked, even though it didn’t work as well as it could have if the credit would have been structured differently, what do we do now? How on earth can we recapture the momentum of this genius, all encompassing tax credit? A tax credit that convinced hundreds of thousands of people to buy houses. A tax credit that was so effective even inmates couldn’t resist them? Well, I guess we’d just have to reduce the price of each house by $8000. That’s a whopping 8% drop for a $100k house, so there’s some of that negative pricing pressure that the economists are worried about. But what about when you apply that to a $200k house? Well it’s obviously only 4% then. Or $8000 off a $500k house? That would be a cataclysmic drop of 1.6%.
Perhaps this tax credit was only effective because it made buyers feel as though they should hurry up and buy something. Perhaps buyers thought that an $8000 tax credit was better than negotiating $10k off the price of a home. It seems to me that buyers lost their minds a bit, thanks in part to aggressive prodding from agents and that anything but slick commercial where Uncle Sam showed up at some persons house and gave them a check for $8000. Maybe the power of advertising and perception is greater than the power of good common sense.
These analysts also point to an increase in housing inventory, and label that a doom-maker for the national housing market. I look at an increase in inventory and see an immediate and obvious reason for the increase. More houses are for sale because more people feel like the market is improving- ever so slightly- so they’ve listed their home again. Everyone knew that 2008 was a bit of a bummer. People knew that 2009 was a real estate wasteland. So in 2010, when housing numbers looked better, the economy appeared a skosh more stable, and buyers returned in more significant numbers, owners put their homes back on the market. No big trouble sign for me, just a pattern that makes complete sense once you stop for a moment to think about it.
So let’s just assume that housing prices are going to tumble all the way down to a 2% loss for the rest of the year, even though I think they’re going to be flat in most parts of the country, including Lake Geneva. That means your $500k house is going to be worth $10k less. Can you sleep at night knowing that? Heck, your new car depreciated that much the moment you drove it off the lot, so surely a $10k loss on your house over a year isn’t going to make or break you. What if you buy a Lake Geneva vacation home this year, and you buy the sort of vacation home that you’ve been dreaming about owning for your whole life? What if you buy a vacation home in an exceedingly rare location, and that home is offered at a market sensitive price? What if that vacation home turns out to be the best thing you ever did for you and your family and friends? If that vacation home ends up changing your life, I’m of the thought that 2% doesn’t matter one bit. After spending a summer basking in the life affirming power of a Lake Geneva vacation home, a 2% price increase or drop is going to be the furthest thing from your mind.