Consumer Reports On Housing "Values"
In the debate surrounding the housing market it can be difficult to find objective data. So this Consumer Reports table comes at a good time. It is based on OFHEO numbers and was put together by an independent research firm.
With a surprisingly large number of communities included, most will find their home covered. How does it look? Let's just say if "overpriced" is bad, Califonia is in trouble, with most cities at 50% or higher.
19 Comments:
How can the market be overpriced when a mere $1 million can get you this beauty:
http://realtor.com/FindHome/HomeListing.asp?snum=154&locallnk=yes&frm=byzip&mnbed=0&mnbath=0&mnprice=0&mxprice=99999999&js=off&pgnum=16&fid=so&mnsqft=&mls=xmls&areaid=90069&typ=1%2C+2%2C+3%2C+4%2C+5%2C+6%2C+7&poe=realtor&zp=90069&sbint=&vtsort=&sid=04851B87F2EAC&snumxlid=1044097866&lnksrc=00001
This is just an outstanding blog.
Maybe the best thing about the Internet is that people of like thoughts and opinions can get together and share them.
I've thought housing was irrational for a long time and suffered by myself in silence. Now, I have company.
Thanks, Ben.
This is a great site, is this the first time that Consumer Reports has commissioned/published such a study?
Nice comments! I appreciate it.
(is this the first time that Consumer Reports has commissioned/published such a study?)
To my knowledge, but I don't know for sure.
I'd be curious to know how they define "affordable price". What assumptions are they making about the type of loan, down payment, etc...
Also, I wonder how up to date their average home price is. I was looking at the prices for my area and you can't really get much (in a decent neighborhood) for the price they listed.
Guess I'm skeptical due to the lack of disclosure regarding their methodology.
I also find the average prices a bit confusing, the average in L.A. of D.C. would only get you a one or two bedroom condo in a reasonable neighborhood. If one were to look at stand-alone single family homes the averages, I think, would be almost double, and therefore even more unaffordable. Overall I think the report provides some pretty good data that illustrates on average what is going on in the regional housing markets. This is the first time, to my knowledge, that CR has done such a study.
Another interesting aspect is where the bubbles are occuring, heavily concentrated in California, Vegas, Southern Fl and the East Coast. I wonder, were those areas also more prone to speculation in the stock market bubble? Shiller's comments on the both bubbles indicate that its the psychology of the herd that drives these periods of speculation. Would be interesting to dig deeper into the data to see what correlations you could find between the dot com speculators and real estate speculators, er investors. Are they the same people?
I'm reading a great, great book. It is called The New Reality of Wall Street by Donald Coxe.
David Coxe has been trading stocks since the 60s.
I'm only 1/3 the way through the book, but what it basically does is teach people about market crashes in general and specifically the tulip crash, 1929, 1987, Japan and 2000. It is very good.
I've got 2 quotes from it to share:
"When everyone who matters on the Street is getting rich from being on the same side of a story, the natural balance that makes capitalism a good financial ecosystem is imperiled. Get out while your (financial) health is sound."
Page 94. The italics are his.
"As J.K. Gailbrath said in a speech in 1998:"If you forget everything else tonight, remember this, that when you hear someone say 'we have entered a new era of permanent prosperity,' then you should immediately take cover, because that shows that financial idiocy has really taken hold and that history, all history, is being rejected.""
Page 37.
When this happens, the market has entered the phase of "Shared Mistake" whereby the entire herd plunges off a cliff that anyone with vision can see.
It is a great, great book. I highly recommend it.
Real estate is in the "Shared Mistake" phase now. It will not end nicely. Lots of people will lose their shirts.
BTW: He goes into some depth as to how the Japan crash started and it appears similar to what is happening in the US. The US dollar will probably come under pressure in the near future if the two are parallel events.
"History doesn't repeat itself, it just rhymes a lot."
"Another interesting aspect is where the bubbles are occuring, heavily concentrated in California, Vegas, Southern Fl and the East Coast."
People are buying there because those areas are giving the greatest returns right now. Remember during the dot com bubble, when people didn't care what the company did, only how its stock performed ? Same thing. People are buying their second house in an area where the return is the best. What is the return in Idaho ? Not good. Why buy there ? The other factor is that a lot of these homes are being bought, unfortunately, by retirees and they like CA, FL, and LV. They think they will ultimately move there.
Sad...
The latest from Shiller:
http://www.onpointradio.org/shows/2005/04/20050407_a_main.asp
I'm surprized that they listed 15% overpriced as "fair value". 15% of a $300,000 home is $45,000, not chump change in my book. Furthermore, a lot of people only put 10% down on a house, so should it become properly valued, they will be under water on the mortgage.
Isn't it interesting how people's perceptions of "value" change during a bull market.
I'll bet that nobody would buy a house at a 15% premium during a bear market.
Audio presentatio of Shiller and others on the real estate market:
http://www.onpointradio.org/shows/2005/04/20050407_a_main.asp
National housing values by local markets. Im not sure what all I think about it so far, but I did just finnish reading a series of articles about how all the real estate appraisers are corrupt, I wonder who created the list. Hmmmm could it be real estate appraisers who wish to reassure current and soon-to-be homeowners that they arent the last suckers buying into a crashing asset.
Consumer Reports also released a flawed/biased report about SUVs awhile back, they rigged the tests so they would roll-over easier. Didnt they also do some fake gas-tank exploding reports on Fords too? Im pretty sure they did.
Just listened to the on-point radio show with shiller. The Berkley guest named Quigley is odviously working for the government. I think that it is extremely important to know where somebody gets his livlihood from. I've never heard a RE agent tell me that it wasn't a good time to buy... Kathleen Madigon is just stupid. She said the most home prices have ever fallen is 8%. That's an outright lie. I just wonder whose her sugar daddy.
I think her 8% referred to the national average. That may be right, even the CR report indicates that some areas are fairly valued and some are undervalued. A popped bubble probably wouldn't affect places like Indianapolis but its gonna hurt like heck in the very overvalued places. When places like Stockton/Lodi and Fresno are overvalued like they are you know its a bubble - there is plenty of land to build on in those areas. Lereah will go down as the Mary Meeker of the real estate bubble.
A quick answer to the questions about the CR methodology: the report is actually by Ingo Winzer, whose website is localmarketmonitor.com. The guy has been around for many years--he sells his current reports for a few grand, and gives away older ones as samples. CR is just republishing his data. I highly recommend taking a look at an actual older report from localmarketmonitor.com, with historical data from your market, not just at CR's numbers.
Winzer explains his methodology better on his website, but basically he looks at historical prices in each market, and computes an "equilibrium price" based on local incomes and local custom on what homes sell for (e.g. 6x income in San Francisco, 2x income in Houston). This doesn't account for interest rates and lending standards--it's the equilibrium house price, not the equilibrium monthly mortgage payment. The site is great for seeing how slowly housing bubbles deflate--look at San Francisco/San Jose between 1990 and 1995, or LA between 1990 and 1997. Even though we are in a bubble, it's likely it will slowly deflate over many years (unless some crash happens, like Fannie going under). If this is true, it doesn't mean someone shouldn't buy now, but anyone who buys now should do so with open eyes.
I agree with Dan. That report underestimates the over valuedness of homes in the bubble area. Furthermore, it is just doing a gross average house sale price to average income ratio. I think if more analysis was done, you'd find stronger patterns and that the over valuing is even more pronounced.
I wonder what Price/Earnings ratio they used and how it compares to historical value ? Given the liquidity that is around and all the RE speculation, I find it hard to believe that ANY area would currently be UNDERvalued.
Here is a quote from Coxe:
"Since the advent of the Industrial Revolution and particularly since the spread of public health practices- including water purification and immunization in the 19th century- industrial societies have known only rapid population growth (except for the 2 world wars and the influenze epidemic). The collective failure to prepare advanced industrial societies for negative population growth means that people and families will gradually reach their own conclusions about such matters aas the wisdom of investing in real estate. Judging by the boom in housing prices across the G7 since 1999, that realization has not yet sunk in. The big question: To whom will today's buyers of high priced European homes sell after, say 2020 ?"
I find this irronic given that people are starting to use 30 and 35 year mortgages to afford their purchases. By the time they get the mortgage paid off, the house will be worth half (in real terms) of what they paid for it.
Here is another quote from Coxe.
Pg 221:
"If you're investing in residential properties as part of your retirement planning, you'd be wise to do your shopping when mortgage rates are very high, forcing house prices down so the home remain affordable to most buyers.
Buying a home or second home at a time of record low mortgage rates is likely to be a losing investment for most of the rest of an economic cycle. As the economy strengthens and mortgage rates rise, fewer home buyers will be able to pay up to buy homes."
It is certainly worth repeating that ARMs make a lot of sense if you anticipate interest rates declining.
I can remember talking to a fellow at a party in about 98 who had been doing one-year terms on his house for about 10 years. Although he didn't know it, he was riding the great bond bubble of the last 15 years - all he knew was that he had saved a bundle. But who thinks rates are headed down?
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