It can take twice as many years to go down, as it took to go up.
Edward Leamer, economist at the UCLA Anderson School of Management, was presenting a paper at Jackson Hole, in which he gives the Federal Reserve an 'F' for failing to target the housing market.
In a Bloomberg interview, he explained why it takes so long for real estate markets to adjust. Whereas he thinks the builders will stabilize by the end of the year, owner occupied homes takes forever to adjust because sellers have the option to not sell.
Note - Bloomberg does not archive interviews, so this will only be available for a day or two, on Bloomberg's homepage.
Leamer explains why prices on owner occupied homes fall so slowly. Sellers dig in their heels, year after year after year.
"If I don't get my price, I'm not gonna sell"...next year they say, "If I don't get my price I'm not gonna sell."
So it takes forever to normalize, because the prices don't fall as fast as they need to.
Prices in some Calfiornia markets need to fall 30-40%. The downturn is inevitable.
...but the sellers of owner occupied homes just don't let that happen, because they say "I'm not selling unless I get my price", so what happens is that transaction prices move down ever so slowly and you don't get a normalized market price... [cut off, end of interview...he probably meant to finish by saying "for a long time]
Hat tip to Tanta at Calculated Risk for finding this total gem of a quote in economist Edward Leamer's paper , which he presented at the Jackson Hole, Wyoming conference. Dr. Leamer totally nailed the emotional component of sellers. This is one of the best quotes I have ever seen! In bold, I put the parts relating to prices, sales, or volume.
We love our homes. We don’t love our investments in General Motors or IBM, and when the stock market sends us the daily message that share prices have plummeted, we reluctantly accept that unwelcome reality. Homes are different. We have a close personal relationship with our homes. When the market is hot, buyers stream by our front doors proclaiming that they love our homes even more than we do by offering prices beyond our wildest dreams. Charmed by that flattery, many of us sell our loved ones, confidant that we have turned our homes over to people who will treat them well. Thus rising prices and high sales volumes. When the market cools, however, only a few prospective buyers come to our front doors, and those prospective buyers bring a most unsettling message: “We know you love your home, but it isn’t worth nearly as much as you think.” That can be a deal-breaker for female owners, but the clincher for males is the fact that their idiot neighbor sold his home for $1 million just last year, and the male owner is not going to take a penny less than that. It doesn’t matter what the market thinks. This house is worth $1million. Period.
Housing hormones, both estrogen and testosterone, make owners very unwilling to sell into a weak market and that unwillingness tends to keep the prices of homes actually sold high while greatly reducing the volumes of homes sold. What we observe are not market prices but sellers’ prices.
If you don’t like this love story, another good one is that sellers look backward, remembering what they or their neighbors paid, but buyers look forward, wondering what the house might be worth in a couple of years. Positioned in time looking in different directions, when the market is rising, owners estimate the value less than prospective buyers, and a sale occurs, but when the market is falling, the owners remember the good old days of high prices, and the buyers are thinking about a better deal in a couple of months. Then there is no transaction, unless it is at the high sellers prices. A third story comes from the behavioral economics: It’s loss aversion.7 As long as I don’t sell my home, I can comfortably maintain that it is worth what I paid for it.