Hat tip to Aztec for sending this along, from Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601039&sid=aVVtkVUvfRXE
We are largely hostage to the way our mind works. According to prospect theory, pioneered by psychologists Amos Tversky and Daniel Kahneman, the idea of losing money is a much more powerful motivator than a gain.
Our brains are telling us it’s painful to price our homes to reflect 20 percent to 50 percent losses in market values. So sellers overprice houses and wait for something to happen.
A myopic, loss-averse view of the market, for example, means listing for $500,000 or more when comparable upscale homes are selling for $400,000 or less. I have seen it in my suburban Chicago neighborhood, where homes have been on the market and unsold for years.
Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices. It’s like holding on to a favorite stock long after it has tanked.
There are also influential cerebral centers for optimism and self-confidence. We hang on to properties, falsely believing that prices will rebound to the bubble years of 2005-2006.
Time will even out all the ripples.
Permabear babble. Not even I am looking for a return to 2005-2006 prices anytime soon.
The bubble peak was the same as the stock market being overvalued and oil being $145 a year ago.
We debate which year we’re looking at as normal here. For me it’s 2002-2003.
Captain Obvious has arrived!
This is why I read books written in the 30s and 40s.
I absolutely KNOW that prices will return to 2005-2006 levels.
I’m just not so sure that I’ll live long enough to see it!
Actually now that I think about it – don’t know that my 2 year old will live long enough either?
“Actually now that I think about it – don’t know that my 2 year old will live long enough either?”
Funny, but I hope Jim’s blog is around in 20 years so we can see how laughable that will be. Inflation is going to be a killer and 2005 non-adjusted pricing will seem like a bargain.
A couple things here: Homes have value outside of market value. If you’re only willing to sell it for X and the markey won’t pay that, then you hold on to it and use it. No harm, no foul. Holding stock in a company by contrast, not so much. Its worth what the market says it is, and there isn’t a lot of other uses for it.
As for the return of 2005-6 prices, I think Mozart and Michael are falling prey to another common mind trick, which is to assume things will stay the same until there is overwhelming evidence that things aren’t the same. If your property is down 30%, expect it to return to 2005-6 prices in 7-10 years. Not real great, but in the grand scheme of things, not horrible either.
Perfect Michael!
It depends on pricing, but I’m seeing prices dropping all over the place with major sales on everyday products.
I wonder what the current CPI looks like. I see more deflation than inflation at this point.
This recovery is going to be a long, very long haul. 2010 should be an interesting year. I always laugh when I hear government representatives say, this economy is worse than we thought… Like honestly, they didn’t really know that it was this bad in the first place! There just trying to hide the obvious and keep people from panicking.
Okay Blue Streak and fellow Permabears and Permacubs, here are some numbers:
California Median Home Prices:
1969 = $23,210
1979 = $84,150
1989 = $196,120
1999 = $217,510
(2006 = $556,240)
2008 = $346,750
Oh, and don’t forget, California might fall into the sea.
A bit of a warning on inflation – not all prices will go up if wages don’t go up. We probably all agree here that the huge government debt will force inflation up – but what that means is the dollar will tank against world currencies, so imported goods (oil, ChinaJunk, etc.) will cost more (inflation). . .BUT. . .that is external inflation, as wages will likely be stagnent because of continued high unemployment, so housing prices (which reflect wages) will not go up very much. . .actually external inflation could cause housing prices to go down, as more of our paychecks go for gasoline, food, and utility bills. . . won’t be much money left to buy a big house.
Anyone here know what “pushing on a string means”?
We have, until now, never experienced this in America. Does anyone know how long it will last?
Japan has been dutifully pushing that string for 20+ years now, and we previously did it for 7 years in the 1930s.
Anyone else know what the demographics look like to reverse the string pushing? Even the FED believes we’ll be at abnormally high unemployment for the foreseeable future.
I’m just proposing that things are indeed different this time, and I think we ought to temper our enthusiasm (Mozart) for a quick recovery, and bank on a recovery on the order of decades, not years. We are in a very precarious position. Very, very precarious.
Chuck Ponzi
I agree with “Former RB Resident” ,
7-10 years we will probably be back or close to 2005 – 2006 prices
I also agree with “Mozart ”
2002 – 2003 should be about the normal price at the moment.
(the price would find a willing seller).
I think there’s much more price declines to occur in SD specifically in the nicer areas and I’m preparing for it.
We can all dream about unicorns and the tooth fairy but the hard truth is…
1. Our state government is giving out IOU’s instead of cash
2. Unemployment is going up
3. Businesses are leaving CA because of high tax rates
4. We are in a RECESSION
5. CA is slowly getting invaded by Mexico
The likelihood of house prices increasing in the short term is slim to none. At the end of the Great Depression everyone was afraid to invest in the Stock Market and Housing because so many people got burned. I don’t feel enough people have experienced enough discomfort yet. Until they do nothing will change.
I love and learn from almost all the posts here, but as much as I sometimes disagree with shadash’s apparent harsh stance at times I find myself enjoying some of his/her? points the most. Well stated. Never been a fan of unicorns, but I loves me some tooth fairy.
shadash, some people prefer to live in a dreamworld and ignore all the points you have made. life can seem easier if you ignore all the bad news and just pretend that everything is going to go back to “normal”. i lived through the 70’s recession and the 90’s recession and neither was fun. this one looks pretty bad. i think coming out of this one we are going to end up with a paradigm shift in american consumerism. right now it is too early and there has not been enough pain. give it more time.
i am not a permanent doom and gloomer as i think we will emerge from this funk eventually, but into a vastly different country. just like with 9/11, when the unthinkable happened. some of the general public may have looked in retrospect and said they were not overly surprised at 9/11 inasmuch as something like that was inevitable, but they were shocked nontheless to confront the reality of what occurred. there is no reason why this country can not be substantially frayed by this economic meltdown and changed significantly in the future. there is no reason why this cannot go on for years to come. i am hearing nothing but weak references to ‘green shoots’ when the hard evidence indicates nothing but more tough times ahead.
It’s different this time.
maybe I will get lucky, having bought at or near the low-end bottom, and then in a couple of years when the mid-range crumbles I could be a ‘move-up’ buyer…maybe even get into Carlsbad where I work. Nevertheless I’m expecting a long/slow/flat shaped recovery.
I think shadash’s list of “hard truths” 1-5 are very good points–especially #1 and 2.
With CA now handing out IOU’s and $26 billion in the hole, tax and fee increases are inevitable. I have no hope that the recent “temporary” tax and fee hikes will, in fact, be temporary.
As a renter, I’m waiting to see how it plays out in the coming months…
shadash, your racism is showing. Having more people in the state (that is, illegals from Mexico) increases demand for housing, which increases prices, not the opposite.
My 2 cents
What was true in SD
1) Little / no downpayment needed
2) No verification of income
3) Home as ATM
4) Wage growth not really there
5) Cash largely generated from stocks, real estate (assets not income)
What is true now
1) Rents will stay steady or fall
2) Inflation will occur..maybe 6 months maybe 2 years
3) Wages will not increase
4) Saving will be harder
5) Loan standards and interest rates should/will increase
6) Stock market is dicey at best
so…if you didn’t previously speculate and win, have a family member loan/give you a down payment…how are people going to pump up real estate again?
2002-2003 home pricing might have been “normal” for the time, but in the absence of the artificial “growth” of the housing bubble, it would have been a point on a downward slide that began in 2000-2001 and would have continued until something new came along to reenergize job growth. Up north in Silicon Valley we often speculated whether there might have been more investment in telecom or biotech and a corresponding boom in one of those areas if the capital had not been drawn off into cheap/subprime/liar mortgage derivitives, war spending or skyrocketing oil; anybody have any idea where (if anywhere) it might have gone here in SD County?
We will not see the 2005-2006 prices again for at least 15-18 years in my opinion. The climb back up this mountain will be long and slow with many false starts along the way. The main thing many people are forgetting is the fact in the 1990’s we enjoyed the longest peace time expansion in our nations history. The 25 million new jobs was all-time record that will stand as one of the greatest decades in terms of job creation for a long time to come.
Real estate prices were relatively flat in the 1990’s when you look at the numbers. We will need to create a substantial number of new jobs in the coming decade. Wage increases will need to outpace inflation, so without these two things happening we will face tough times in the economy.
Goetpf,
I didn’t know Mexican was a race. I have heard of a Latin race which holds the largest percentage of the population in many centeral and south American countries.
You are presumptuous labeling me a racist.
Easy fellas….
There is a way home prices could keep rising. And perhaps it would be a form of justice- Stop building homes for a few decades.
Once the dust settles the government will be in the position to control this completely. And given how badly this turns mess out, it may well be warranted.
There are countries today where most people don’t own a home until after 40 if ever at all.
Is it far out? Sure. But so was thinking the USA might lose it’s credit rating.
We are all in the handbasket together, like it or not. Deadbeat and 20% downers.
People reading this blog are, I think, appreciative of the distinction between nominal (the actual dollar amount) and real (equivalent buying power taking inflation into account) prices. I took the liberty of dividing Mozart’s CA median home prices by the CA median income of that year (data from US census bureau, google “California median income”). Here’s what you get:
Year . . . house_price/income
1969 = 2.50
1979 = 4.61
1989 = 5.48
1999 = 4.58
2006 = 10.28
2008 = 5.98
Does anyone seriously think housing will again reach 10x income anytime in the foreseeable future? Sure, prices will go back up, but that is meaningless if all it does is track income.
If your property is down 30%, it will return to 2005-6 prices in 7-10 years…at which time the dollar will be worth 30% less.
Chuck,
One difference between the US and most other countries, especially Japan, is that we have a constantly growing immigrant population to help offset the aging population that is here now. That certainly won’t solve all the problems, but it puts us in a better position than Japan, with its language and cultural barriers, or Western Europe with its many languages and general xenophobia.
We still have the problem of a population that feels entitled to a very high standard of living and an economy that’s way too reliant on consumption, which was recently over-exacerbated by easy credit. Will/Can we find a balance between saving and spending? I’m personally very curious to see where we find jobs for all of our citizens that aren’t bubble based.
As usual, Mozart is at least half right. It is babble and standard fare for Bloomberg whose reporting is as prescient as the analysts they’re obsessed with.
Bloomberg has it backwards, it’s the not the fear of losing money, it’s the thought of not making all that jack that has home buyers doing dumb things. If losses motivated people the most common aphorism on the real estate wouldn’t be, “cut your losses”. People see the “potential” money and won’t let go of it even if their behavior drags them into the abyss. It’s same reason why people in the lower income brackets vote for policies that benefit the upper income brackets. They ignore what it does to them but they dream of “raking it in” once they’ve made their own bundle. More power to them I suppose.
And with all due respect for JTR, this,
“5. CA is slowly getting invaded by Mexico”
is just plain inflammatory (there, I didn’t use the other word). “Invaded”? Really? It’s historically ignorant and ludicrous to use a word like that in that context. I could go on but you either get this or you don’t. That’s just my opinion.
Call me whatever you like, I’m riding along with Chuck, anyone who uses the past to tell you what the immediate future holds is blowing smoke somewhere delicate. This economy is unique in our history and it won’t play out as other changes have. But as I’ve said many times before, if the bulls amongst us are so confident, then now is the time to make your point with your hard earned cash. Get out and there and buy! By your own logic, you’re a fool if you don’t.
Me, I’ll watch awhile longer before even thinking about making a move. I think it’s going to be very interesting to see how things play out in California.
Dwip,
Another point to factor in is the emergence of a two-income household as more and more women joined the workforce and gradually increased their pay beginning in the late 70’s early 80’s.
There was also the emergence of the FIRE (Finance, Insurance, Real Estate) economy that started ramping up during the same period. We’ve been on a steady diet of boom and bust since, but like Chuck said, we’ve never experienced anything quite like this, certainly not in the past 50 years!
Bloomberg is not making this ‘loss-aversion fear’ up. It has been studied by scientists. We are psychologically programmed to react in a very different way if we lose $20 vs. finding $100. Found money takes no effort, but earning that $20 wasn’t easy. Obviously there are the exceptions, which can be seen in people who inherit money rather than earning it.
shadash, your racism is showing. Having more people in the state (that is, illegals from Mexico) increases demand for housing, which increases prices, not the opposite.
Geotpf | July 8th, 2009 at 4:18 pm
—————–
Diving into the fire and brimstone here… (Please feel free to delete, Jim, if this is getting too uncomfortable)
Since the majority of illegal immigrants in California tend to be poor, the only way they can drive up prices is if they buy/rent homes with multiple families per SFH. At that point, will traditional buyers (single familes who reside legally in the U.S.) be willing to overpay to live in those neighborhoods?
—————-
Before people start thowing the inflammatory and obligatory “racist/xenophobe” labels around, why not first explore why people feel the way they do? You’ll never get converts by screaming “racist!” at everyone who disagrees with you.
Everyone comes here with different levels of knowledge and experience. Maybe if people tried to understand why “racism” exists, they might be able to do something positive about it. Screaming and name-calling will only make the issue more divisive, and make the underlying emotions even stronger.
No, what tends to happen is the codes have be changed because you have sometimes as many a 10 people living a two bedroom house/apt.
It’s a big problem, but SD doesn’t seem to have it near as bad as some other cities.
The cause chain may be better described as demand for housing and then illegals. Not illegals and then demand for housing.
Again compared elsewhere SD has very little new housing. But it is also a relatively small city.
CA renter-But they also rent apartments. So rent increases, which makes houses closer to rental parity, which means more apartment renters with savings and/or good credit scores buy houses. Plus, the closer houses go to rental parity, the more people will buy houses as investments, driving up prices.
That is, demand for low priced housing (apartments, houses in bad neighborhoods) eventually effects prices for high priced housing. It’s one big interconnected market, and if you increase demand to any one portion of the market, price overall (eventually) will increase.
If, say, you go from 80 families needing housing to 100 families due to 20 immigrant families moving in, and the number of housing units is stable at 90, prices will go up, period.
I stand by my earlier statement that saying that saying that “CA is slowly getting invaded by Mexico” will lower prices is 100% opposite of accurate, as such will actually raise prices, and that the only reason for somebody to say that is because they are racist.
If you don’t consider “brown” to be a race, fine. Maybe instead of “racist”, “illogically xenophobic” is better. Whatever.
I could be wrong here, but I think Shadash’s reference to being invaded by Mexico is more directed toward the CA economy. Illegal aliens create a burden on the state without contributing any taxes themselves. Their employers also avoid payroll and unemployment taxes by paying under the table.
It doesn’t have anything to do with racism, just economics. If you think illegal immigrants are helping our economy, you’re quite mistaken.
Geotpf,
I think the term your looking for is “Nationalist” since Mexico is a nation.
A racist is someone that dislikes a specific race. Examples of race include…
white
black
chinese
indian
korean
japanese
etc…
I’m against Mexican nationals living in CA illegally because…
1. They’re a burden on CA government/local resources
2. They’re side-stepping the legal immigration process
3. By moving into CA they’re not working to make Mexico a better place to live
4. When you’re illegal you have to work in the shadows. Placing yourself at a serious disadvantage in the workplace. You also become a target for those looking for someone to exploit and pray upon.
Chinese, Korean, Indian and Japanese are nationalities, not races.
According to the The 22nd US federal census sent out in 2000 they’re also races.
http://en.wikipedia.org/wiki/Race_and_ethnicity_in_the_United_States_Census
The census applies its own unique definitions, which it clearly notes have no validity outside of its own statistical application. Just another one of the many ways that the government operates in its own separate reality.