Will prices ever fall? Should I just buy now?
Sunday, April 8, 2007 at 10:49PM This report continues my series on home prices. Yesterday, I debunked the myth that rising NODs (Notice of Default) cause prices to drop. The fact is that the cooling market is causing prices to drop, not allowing homeowners to refinance, and thus causing more of them to fall behind on their payments. So lower prices are the cause, not the result, of more NODs. I hope this puts to rest the idea that rising NODs, short sales, or REOs are causing price drops or that they could be bought at a discount.
Let's also put to rest the idea that median, average price, or $/sq ft is of any use. The average price in San Diego increased last month, while house prices were still falling. The report explains why this is happening. I wish journalists would stop with this garbage. Stop writing about the median, the average, the OFHEO or Case-Shiller indices. There simply is not a number that captures the big price drops so far. So when I am talking of price drops, I want to be clear that I am not using any of those useless numbers. I am talking of actual real price drops, meaning that someone gets less money for their home than one year or even one month ago.
If NODs cannot predict price drops, what does? Is there anyway we can predict future prices? Why are prices not dropping faster? Do rising NODs and REOs mean we can expect lower prices? Is the subprime lending crunch going to cause lower prices? How do supply and demand affect pricing, and is there anything that is causing supply to rise or demand to fall? How long will we have to wait to get a house we can afford? How will I know that the bottom in the market has arrived? These are questions that people ask me all the time, and I have answered them for you in this report.
Reader Comments (4)
"I hope this puts to rest the idea that rising NODs, short sales, or REOs are causing price drops or that they could be bought at a discount."
Sorry, REOs if sufficient in number relative to the total market do cause price drops.
"Let's also put to rest the idea that median, average price, or $/sq ft is of any use."
I agree that the median is worthless because it only tells what was spent, not what you got for the money. However, the $/sf is a decent indicator. It is flawed in that it reveals nothing about quality, but it is an improvement over the median. The best indicator would be an analysis of individual transactions showing holding time and % change. This would show the price drops in real time. Unfortunately, to my knowledge no such indicator exists.
"How will I know that the bottom in the market has arrived?"
The article that Rich wrote that you don't agree with provides a great leading indicator of when we will be at or near the bottom.
REOs can only cause price drops if any of the following happens:
1) lenders get anxious to get the REOs off their books so they lower the price
2) inventory gets so high, that any seller, including the lender, must drop prices to get a sale
However, as of today, an REO in and of itself is not priced less than a regular home.
I think there is too much theorizing and playing with numbers and making charts for the heck of it.
$/sq ft is another example of playing with numbers. It's not providing an accurate picture of what is going on. As people buy better homes for the same money, the $/sq ft can actually go up. Average price in San Diego went up in March 07 compared to March 06.
Rich's articles are really missing the mark, and I would not use his methods to find the bottom. From his columns, I wonder if he ever talks to any realtors. If he had, he would know that NODs are not causing price drops.
The only way to know the bottom, in my opinion, is to talk with realtors, because they are the first to know when demand picks up again. The numbers lag by many quarters. Also, the months supply is the best numerical indicator of price pressure, and that is my most important number if I had to pick one.
My job as a housing market forecaster is to be out there looking at homes, talking with realtors, attending auctions, interviewing loan officers, reading the news, subscribing to foreclosure data, looking at the MLS, analyzing data, asking tons of questions, reading housing blogs...it's basically a time consuming task. That is my approach.
Thanks for your comments, I really appreciate it.
das right, das right
$/sq ft is a distribution number.
A 1000 sq ft home is $400 per sq ft.
A 3000 sq ft home is $300 per sq ft.
So when we sell fewer entry level homes, the $/sq ft goes DOWN.
Some folks made the mistake of seeing a falling $/sq ft, and thought they finally found the metric for falling prices. But they did not do their homework.
So when we sell more high end homes, the median goes up and the $/sq ft goes down.
There is not any metric available today to measure price changes. I don't like the OFHEO or Case-Shiller indices much better.
My suggestion is an appraisal model, where a select group of homes is marked to market every quarter, although even that is a problem because how does an appraiser value a home which does not sell.
In today's market, how much is that house on the freeway worth? It won't sell, nobody wants it in a down market, so how can it be marked to market?