24-Jun-10 News -- May new home sales plunge

[John]

Dear Barry,

It's interesting that you saw a lot of this coming in the 1980s.

> I filed away a lot of data out of those charts and other material
> I dug up out of government websites. I know that the 1977 high of
> 819K units sold for new homes stood as a record until 1997 and the
> only year close was the 817K in 1978. Those were wild speculative
> years, as I was in the residential business during those
> summers. You could list a house and sell it in 10 days or less. In
> fact, if you had a customer, you had to drive the neighborhoods to
> watch for signs or the homes would be gone. Prices were marked up
> ever few weeks.

I've estimated that house prices are currently at early 2000 levels,
and that they're going to fall further to 1990 levels. Does that
estimate seem reasonable to you?

John

[vincecate]

But it also means that low interest rates were almost certainly irrelevant in 2003, and other factors caused the real estate bubble at that time.
John

If someone can afford $3,000 per month for buying a house, then interest rates of 4% instead of 8% let him buy about twice as expensive a house. So interest rates are almost certainly one of the factors. Again, if nobody can remember a time when house prices went down it is far easier to get a bubble in house prices than if everyone just saw a bubble pop in house prices. So the popular perception of the safety of investing in real estate has substantially changed.

[Raynote]

John, do you know if there has been a similar real estate bubble in Europe over the same period? And if that is so, can we expect a similar fall in housing prices in the years to come?

Raymonde

[John]

Dear Raymonde,

>

John, do you know if there has been a similar
> real estate bubble in Europe over the same period? And if that is
> so, can we expect a similar fall in housing prices in the years to
> come?

I don't know the details on a country by country basis, but I do know
that Spain has been the worst, with a real estate bubble even larger
(on a percentage basis) than the U.S. bubble. The reason that Spain
is one of the "PIIGS" countries is that Spain's economy is in serious
trouble because the bubble is currently bursting.

John

[vincecate]

(In fact, in this case B occurred before A, so A could not
possibly have caused B.)

Just reading how Krugman was cheering lower rates in 2001 (to ease pain of dot-com bust) and hoping the lower rates would cause a housing bubble. Do you think the housing bubble started before these rate cuts?

http://blog.mises.org/10153/krugman-did ... ng-bubble/

On a A before B meta level, the following amuses me. "The South seceded before Lincoln was sworn in as president, so clearly President Lincoln did not trigger the civil war."

Or more to the current situation, the hyperinflation has not started yet, how could it be the cause for gold prices going up?

[Raynote]

Thank you for your answer.

Actually I've heard the same mentionned about Ireland as what you wrote about Spain. A couple who stayed at my place recently (I run a very small bed & breakfast or "chambres d'hôtes" as we say in French) whose daughter is living in Ireland told me that the value of properties there has plummeted by 40 to 60%.

And I remember 6 years ago when my son was working in Cork for the company Apple, he couldn't afford to rent a flat of his own although he was fairly well paid. The rent was so high that he had to share with 2 other workers. And Cork isn't a capital city, I can't imagine what the prices were in Dublin! There certainly was a housing bubble in that country for a few years, maybe a decade.

[John]

Dear Raymonde,

> Thank you for your answer.

> Actually I've heard the same mentionned about Ireland as what you
> wrote about Spain. A couple who stayed at my place recently (I run
> a very small bed & breakfast or "chambres d'hôtes" as we say in
> French) whose daughter is living in Ireland told me that the value
> of properties there has plummeted by 40 to 60%.

> And I remember 6 years ago when my son was working in Cork for the
> company Apple, he couldn't afford to rent a flat of his own
> although he was fairly well paid. The rent was so high that he had
> to share with 2 other workers. And Cork isn't a capital city, I
> can't imagine what the prices were in Dublin! There certainly was
> a housing bubble in that country for a few years, maybe a decade.

Ireland has been trying to follow all the rules and implement
austerity programs to bring down the deficit, but their situation
continues to deteriorate, along with the rest of Europe.

John