12/30/09 London, England – The Los Angeles Times tells us that mortgage defaults in the prime category rose in the 3rd quarter. If you are wondering what might happen to housing prices in the US…should the depression continue…you might want to keep an eye on the default rate.
Housing prices are down about 30% nationwide. In some areas, they are down much more. But they had been going up for so long…this downswing still seems like an aberration. Hope has momentum…especially in the housing market. Housing prices rose along with inflation for 100 years. Then, they rose much faster than inflation over the last 10 years, ending in 2007. This leaves people with the impression – false – that housing always goes up over the long run. As we have pointed out many times in these Daily Reckonings, housing prices in the nicest neighborhood of Baltimore, where we have our offices, hit their highs, in real terms, in the 1920s. They’ve been going down ever since. Even after the big run up to 2007, they were still below their ’20s peaks. That’s a bear market in real estate prices that has lasted, so far, 80 years.
We don’ t have reliable numbers – in fact, we don’t even have unreliable numbers – but our guess is that property prices in central Rome topped out during the reign of Trajan…or maybe even Augustus. They must have gone down for the next 1700 years, because as late as the 1800s, the most precious real estate of the Roman Empire…around the forum…was being used as a goat pasture. That’s still better than say Troy or Ctesiphon – cities that were abandoned and forgotten completely.
Real estate doesn’t go up over the long run. Sometimes it goes down…often for a very, very long time.
In the early stages of a depression, people may believe that “prices will come back.” They wait. They hope. Sometimes, prices do come back. Sometimes they don’t. But if the depression continues, people will give up hope and lose confidence. They will begin to put unwanted properties up for sale – even at much lower prices. And they will begin to default even when they can still make mortgage payments.
There were only 2 million houses in the subprime mortgage sector. There soon may be as many as 30 million houses that are ‘underwater.’ When those homes stop expecting prices to recover, they will want to get rid of these waterlogged properties. And they can do so easily. They just send the keys to the mortgage company and walk away.
Regards,
Bill Bonner,
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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“housing prices in the nicest neighborhood of Baltimore, where we have our offices, hit their highs, in real terms, in the 1920s. They’ve been going down ever since. Even after the big run up to 2007, they were still below their ’20s peaks. That’s a bear market in real estate prices that has lasted, so far, 80 years.”
That says more about Baltimore than it does about real estate.
Contrast that with the soaring real estate values in the surrounding counties.
(BTW, I remember when Agora was in the low-rent section 25 yrs ago. Congratulations, Bill, on moving on up.)
“When those homes stop expecting prices to recover, they will want to get rid of these waterlogged properties. And they can do so easily. They just send the keys to the mortgage company and walk away.”
Or will they . . .
http://online.wsj.com/public/resources/documents/WalkingAway1029.pdf
Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis
Brent T. White
The University of Arizona
James E. Rogers College of Law
Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.
Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which
strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing
collapse.
Shame,guilt,and the exaggerated anxiety over 4 closure. R u kidding me! thats some nice text book hose’in. Millions of people could care less,from watt i’m c’in. Were’re not in this housing situation,cuz people r paying there mortgages! R we? There just pissed off,and fead-up! And could care less bout there credit-rateing. All i can say is. Power 2 the people!!! PS prices need 2 keep come’in down until they match the real everyday salary of the American worker! Its really not that hard 2 figure out,its basic math! I think,i thought,i think? *S*
Homes are shelter, when that idea sinks in prices will adjust to reality. Homes are not ATM’s, investments and maintenance free.
If you can afford it, homes can be palatial. If you cannot, homes are a place to live your life.
I just read on Mish that Bonner has joined the deflationist camp, because it’s “too hard” for western countries to get hyperinflation going successfully. I’m not getting this from reading DR directly, am I missing something?
As far as subslime housing, here in S. California it has already fallen 50%. There are still homedebtors living in their houses who haven’t made a mortgage payment in months. So, there probably is some more downside in real estate prices, but at this point I would rather own some fairly cheap rental properties than to have money in either cash or the stock market. I think the downside is more limited.
Deflation seems to be the current experience. Hyperinflation is still a theory.
Housing prices rose along with inflation for 100 years? That’s a bear market in real estate prices that has lasted, so far, 80 years? Hmmm.
When individual homeowner’s have the same legal opportunities as corporations in a “loosing” financial situation they will just “close the doors” and walk away….until then, some “guilt” will prevail, but it is “Hope Springs Eternal” that keeps them in their underwater homes.
Deflation will be the way of life for us all for at least 10 years if not more……for those who have some cash stashed in fixed incomes they will maybe survive….it is not a market for the small investor….but traders will as usual, with other peoples money, make out like bandits…
Welcome to the “paper enterpreneurialism” economy! (We don’t produce anything that “costs” money; we just slice and dice financial securities like a salami….until one of these days the salami disappears….
Then…BLOTTO!