Double Bubbles and the R-word
DebSF -- February 11th, 2008
An article in the 2/11/08 DNR Business section caught my eye today, reporting the results from a recent AP-Ipsos poll indicating that 61% of the public believes that the economy is in its 1st recession since 2001. Popping housing and credit bubbles, along with high energy and food prices are all contributing to the sense that people can’t afford things they usually buy, and so are decreasing their spending.
A recent CNN article spins sort of a different story, about homeowners in denial, reporting on a Harris interactive survey of 1,619 homeowners and found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. If most folks really don’t feel much poorer, how much will they really change their spending?
How does this relate to what’s going on around here?
Scott Rodgers great blog has a couple of stellar posts over the past 2 weeks, one charting a broad decline in 4-quarter percent change in the VA housing price index, with the other showing the significant slowdown in sales in H’burg and R’ham county over the last month.
What does it all mean? Well, housing usually leads the economy into recession, and housing prices are falling both nation- and state-wide. Since 1945, new home sales fell before every recession except the business-investment led recession of 2001. What gets us out of a recession? Ummm… housing. It usually plays a starring role in a recovery as the economy emerges from recession. Housing usually bottoms a few months before the rest of the economy – and then acts as an engine of growth coming out of the recession. But the current housing market has lots of oversupply and falling demand. So it is unlikely that housing will act as an engine of growth any time soon. We’ll need to see a significant reduction in the supply of unsold homes before there will be much of an increase in new homebuilding.
If you’re one of those folks hoping for a 08 second half recovery in the economy, we’ll need to look somewhere else for that jump start, and the economy will likely recover before housing does this time around.
Anecdotal evidence around BRCC (from those hooked into the local economy) is that private sector job applications are up, leading to an inference that job security is down, another indicator of recession. And according to the CEPR, if the next recession follows the pattern set by the three most recent downturns, a recession in 2008 would raise the national unemployment rate by between 2.1 (a mild-to-moderate recession) and 3.8 percentage points (a severe recession similar to the early 1980s), increasing the number of unemployed Americans by between 3.2 million and 5.8 million.
That’s the housing market, but I wonder how all that will affect the rental market. Many of my peers are waiting it out, and continuing to rent instead of buy.
Also, I was a little suspicious of that DNR article the other day that stated that a recession was unlikely here. What did you make of that?
There’s no sign that we’ve seen the bottom of the housing slump, so housing prices should soften even more over the coming months. The Fed is very likely going to push interest rates down even more, so anyone going into the housing market will likely get an even better deal if they wait awhile longer. But loan terms are going to tighten up. No more liar loans, no more zero-down loans. Back to more conservative lending practices, not that the valley experimented too much with these kinds of mortgage instruments anyway. This is one of those times it’s really good to be conservative.
I’ve heard often that H’burg is recession-proof, mostly because of the hospital and JMU. Downturns in the area can be cushioned because of the fact that medical and educational spending aren’t as cyclical as other types of purchases, and lots of $ gets pumped into the local economy from these 2 sources.
In the article you linked above, Brian is pretty careful to say that we are likely to see a slowdown, but not a recession. How slow does the slowdown have to get before you call it a recession? I can tell you the formal definitions for the national level. But for the city? Hmmmm.
The local rental pool had gotten worse over the last few years. Most people who had he ability to buy did so, leaving a larger percentage of low quality tenants. Now that credit has tightened, and it seems everyone is petrified of buying a house only to see it decrease in value, the pool of renters out there has gotten better – at least in my experience.
2 rules that happen in general with real estate — people get out too late, and they get in too late. It’s really hard (if not impossible) to time the market.
In terms of no recession in Harrisonburg? Opinions about that are like bellybuttons – everybody has one. Brian has been hired to convince people that Harrisonburg is a great place to do business. He certainly isn’t going to go on record as saying that he thinks the local economy is about to tank, regardless of his real opinion.
I agree with John– a few years ago, anyone with good credit was buying, not renting. Now there is an increasing number of renters with good credit in the rental pool who missed that opportunity. Rental rates in the area did not rise significantly when sales prices were rising, but are rising slowly now. Renting is still a good deal here for the renters, even though rates have gone up.
The coming deluge of student housing will likely keep rates on even non-student housing from rising significantly. If I was renting, I’d be waiting it out right now too.
It is interesting to see how more folks are shifting back towards renting, instead of buying. I did a simple comparison of the two with a townhouse on Vine Street a few weeks ago. (http://tinyurl.com/37ob3r) The results:
Short term cash flow says rent.
Mid/Long term wealth building says buy.
But the overriding factor for some people right now seems to be a hesitation to buy because they might lose value in their home. Some people have certainly experienced that in the past year, though the (simultaneously significant and insignificant) overall average sales price still is (generally) trending upwards. (http://tinyurl.com/2m776f)
Let’s try getting those links to work:
Comparison of buying and renting
Overall Sales Price Trends
You forgot the most important profit killer — the 5-6% commission that realtors would take in order to sell the property! In the example listed, the seller would give back about 8 grand to the realtors. Factor in the 3% average discount to asking price, and the buyer isn’t quite as well off as he appears in the listed example.
That being said, I still think it’s a great time to buy.
John — great point — the cost of selling the property does change the equation in some cases.