From a small northwestern observatory…

Finance and economics generally focused on real estate

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U.S. housing market — good news and bad

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The good news, such that it is — home sales are inching up — a 0.7% rise in January from the previous January.

Now, for the bad news — the median home price in America, measured on a January-to-January basis, just hit its lowest point in 10 years, according to a recent announcement from the National Association of Realtors.  Indeed, 35% of home sales were “distress sales”, driving the median home price down to $154,000.

graphic courtesy CNN-Money

This represents a 6.9% price decline from 2011, and a drop of 29.4% since the peak in 2007.

Why would anyone buy a house during this free-fall?  Actually, even in a falling market, buying a home makes some sense.  For one, interest rates are at amazingly low levels, and if you have great credit, loans are available.  On the other hand, rental rates are on a sharp increase, due in no small part to the lack of apartment construction in recent years.  Putting the two together (and if you buy into rational expectations), then buyers who look at an alternative of renting would find that buying a house, even in a declining market, may make some economic sense.
Second, a LOT of the distress-sale buyers are investors who plan to convert former “owner-occupied” stock into rental homes.  Indeed, we will probably see a significant increase in the stock of rental homes in America in the coming years.  Again, the rapidly rising rental rates induces investors to want to get on that bandwagon quicker rather than later.  Since investor-buyers are usually in for the long-run, eventual re-sale prices are inconsequential to the decision.
The real challenge is for appraisers.  They are typically backward-looking in forming sales adjustment grids, and assume both linearity and continuity in market conditions adjustments.  Neither of these assumptions are valid today.  PLUS, when appraisers “get it wrong” in a declining market, they are often held to blame.  In short, appraising a $100,000 house today which turns out to only be worth $92,000 a year from now can get you in hot water, even though, following good appraisal practice, the house legitimately pencils out for $100,000 today.
Oh, and let’s not forget the challenge faced by tax assessors.  In some jurisdictions (like the one I live in), tax rates can rise when assessment rates fall, so that county and city budgets remain constant.  In other jurisdictions, however, either legal constraints or public opinion keeps tax rates flat, and thus a 30% decline in property values translates into a 30% decline in local budgets.  Since property taxes fund police, fire protection, and schools in most jurisdictions, this translates into some real pain for local officials.

Written by johnkilpatrick

February 22, 2012 at 10:26 am

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