The housing situation in the US is a mess. No one can argument with that. Yale Professor Robert Shiller claims that this housing market could be worse than the Great Depression in his new book The Subprime Solution. You may have heard of Mr Shiller before from:
1 ) His previous book, Irrational Exuberance, which successfully forecasted the top of the stock market in 2000/2001
2 ) The nations authoritative residential housing market index Standard and Poors Case-Shiller Index, which he developed with Wellesley College economist Karl Case
Evidence that supports his claim regarding the housing market being so badly off:
–Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it’s not a stretch to think we might exceed that drop this time around.
–There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).
–The current hopeful consensus, that house prices will bottom soon and then begin to recover, is most likely a dream. Housing markets don’t usually have “V-shaped” recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.
Time will tell exactly how bad the housing situation in our nation is. In any case, it should teach us some lessons about excess, greed and debt.
Corrections happen after periods of excess unsustainable growth. The excess growth in the housing market was caused by greed from banks and individuals. Neither were following rules/laws or using common sense.
Historically, home values increase 5.75% per yr. But for a period a few years back home values were increasing 10% per month in some densely populated areas. That boom is over and people are now back in the real world. If you are looking to buy a home to live in and remain in for decades to come, now is an excellent time to buy. Supply is great and prices are low/negotiable. Get a regular loan and make a 20% downpayment. If you are looking to buy a house to flip it and make a lot of money, don’t even think about it. Not now or anytime soon.
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I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
Although what you said was purely theoretical, it would be a relief to think so. I’ve been trying to take advantage of the situation with the economy actually, and saving toward buying a condo in NYC within the next two years. Just my lucky break
I personally think government’s takeover of Fannie and Freddie ensures a prolonged extension of the housing bust. By legislative mandate, each institution must reduce the size of its portfolio by 10% annually, which implies future capital constriction over the next few years. Unless another big supplier of mortgage capital comes to the market’s rescue (an unlikely scenario), it’s probably safe to assume we won’t see a resurgence in housing for some time to come.