Despite positive fundamentals such as low unemployment, rising wages, and low borrowing rates, consumers are panicked about the housing market and sitting out a golden opportunity to buy at low interest rates with plenty of inventory to choose from. One reason is the constant drumbeat by the press that housing prices are softening, but consumers aren't getting much insight or perspective along with their daily thumping of bad news.
The media is mixed about why consumer confidence fell in August, according to the Conference Board. According to the monthly government index, consumer confidence fell to 105.0 in August, from the July reading or 111.9. There are a lot of reasons for consumers to be nervous -- a five percent loss in the stock market, the possibility of a sludge-like economy, and a constant barrage of bad mortgage money news, to name only a few.
But let's get a little perspective. The Board says the July reading was a cyclical high, which suggests that the June high was the anomaly, not the ebb of July. Confidence also dipped in September 2005, just after Hurricane Katrina, which is hardly surprising considering the devastation and extensive cleanup anticipated by the nation.
So it's hardly surprising that housing transactions are down with analysts saying things like home prices will decline further and sellers are in denial.
The proof of this is that before the subprime meltdown, the media was worried that housing would fall because of rampant speculation. One out of three homes sold in 2004 and 2005 were purchased by non-occupying buyers. And those sellers put their homes on the market to cash out, right? Allegedly, they bought their homes with no money down and now their adjustable rate liar loans are resetting at higher rates.
How come nobody's talking about that now? Supposedly, these speculators were caught in a vise, unable to flip their homes to buyers who were fleeing "bubble" markets like Florida, Las Vegas, Arizona and California. If those speculators are in so much trouble, how can they hang on, or what the media calls being in denial?
If the media and economic experts are saying that home prices are going to fall further and then recover, is it so strange that buyers are waiting? My question is why is it "denial" for sellers to wait out the falling prices part to cash in on the recovery part?
That's what makes this whole thing so funny. Somehow it's okay for buyers to panic, but not for sellers to remain cool.
And staying cool can't be easy considering that home prices fell in the second quarter 3.2 percent compared with the same period a year-ago, according to the Standard & Poor/Case-Shiller Index which measures same-home sales, so somebody is dealing in reality. A year ago, home prices were rising 7.5 percent nationally, but let's put that in perspective, too.
The historical average price gains for homes is about one or two percentage points above inflation, making homes appreciate no more than about three to five percent annually. So last year, when homes were rising 7.5 percent was an anomaly. Why is it something to panic over that home prices would ebb closer to normal rates of appreciation? Does anyone expect a Las Vegas winning streak to last forever?
But a decline in home sales is seen as something catastrophic. While this is the first year that home prices are predicted to decline since the Great Depression, it's also only the second year to follow a record five years of double digit gains. And 2006 just missed being a double-digit gainer.
Doesn't it stand to reason that some of those gains would be given back? A three percent price adjustment is hardly something to panic over, any more than a five percent stock market loss is panic-worthy after three years of record gains. In fact, there are more gains to give back. The Case-Shiller index ended in June, well before the "mortgage meltdown" of late July and August.
While the Case-Shiller index notes this is the largest year-over-year decline in home prices since 1991, the last housing recession, the message being sent is that housing isn't going to be a good buy anytime in the future. The last time home prices receded this much, it took eight years to return to their peaks, notes the report.
It's a self-fulfilling prophecy. But that's not the real reason why we have 10 months of housing inventory on hand and prices aren't going through the roof in areas that sat out the bubble.
The real reason is affordability.
While home prices shot up, salaries were actually going down. While the Census Bureau is able to report more jobs and a slight gain in household income (0.7 percent,) individuals are making less money. That means it takes more people working for less to create that higher household number. For full-time male workers, earnings slipped 1.1 percent to a $42,300 median, and women's earnings did even worse, sinking 1.2 percent to a $32,500 median.
So given the implacable headwind of affordability, it's not surprising that prices have fallen, and are likely to fall further still, but it's unlikely that homes will give back years of record gains, either. Just like everyone else in America, sellers who are holding out are trying to cash out big. If they aren't dropping their prices more, it's because they believe they are able to hold on, meet their mortgage requirements, and will do so well into the future.
If they're able to do that, where's the panic for them?
It's all a matter of perspective.