Tuesday, January 01, 2008

Brain-Dead Predictions about Housing

January 2, 2008

What would the New Year be without some predictions? Rather than strive for wild guesses from the edge, I'm going with predictions so obvious they qualify as brain-dead. Nonetheless--or perhaps because of their tremendous obviousness-- they carry profound implications for the U.S. economy and culture.

1. Housing prices will fall farther and longer than every guess being bandied about in the mainstream and financial media. You know the stories--expert #1 foresees a 15% drop, expert #2 says a 30% decline is possible in the frothiest markets, etc.

Why fuss around with namby-pamby numbers like 15-30%? I'd say it's absurdly obvious that 80% to 100% declines are already baked into some areas--yes, houses won't find buyers for a $1, i.e. the value will suffer a 100% decline to zero.

2. The housing market won't turn around in 2008--or 2009, 2010, 2011, either. The really smart folks will be saving their money for 2012 or maybe 2013, when years of grinding losses will have stripped the assets of everyone who bought real estate with the idea of retiring on the proceeds. At that bottom, everyone will be disgusted with real estate, both residential and commercial, and no one will be dumb enough to sink dead money into an asset class which continues to decline in value year after year.

At that point, say Q1 2013, then housing will again become a buy.

How can a house become worthless? Just ask residents in depopulated areas of Detroit. If people pull up stakes because jobs disappeared, then houses drop to zero value. This is not some bleak future--this has been the case in areas of Detroit for many years. (Note that the larger Detroit-Ann Arbor-Flint metropolitan area actually gained population in 1990-2000.)

Will this happen everywhere? Of course not. But four other easily predictable forces will trigger huge declines in areas which have been seen as "safe from price decline."

3. Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions nobody wants at any price. Add a dash of decay which acts as a catalyst, and you speed up the abandonment of the exurb.

4. People will "double up" as the economy sours. As I have commented here many times, the population of San Francisco rose by 52,000 (7.6%) in the dot-com boom in 1995-2000, even though the number of new housing units increased by only 5.4% between 1990 and 2000. Take a look at these numbers, all courtesy of the U.S. Census Bureau:

housing units in S.F. 2003: 346,527
residents in S.F. 2003: 751,733

residents per unit: 2.17

housing units in S.F. 1990: 328,471
residents in S.F. 1990: 724,000

residents per unit: 2.20

Looks pretty stable, right? But the population was 776,733 in 2000--meaning 50,000 people moved into the city in the late 90s and 25,000 had left by 2003.

The city added 18,000 units in the full decade 1990-2000, which historically correlates to about 37,000 residents. Indeed, the number of residents per housing unit has actually declined since 1990.

So what's the point? Just this: 5% of a population can move in or out of a city regardless of how many housing units are present. Simply put: people double up in boom times when housing is in short supply and in recessions when money is short.

Many single people bought houses they couldn't afford in the bubble. So did families. So where are they moving? In with someone else is the answer for many. Some people who are trying to hang onto their homes are taking renters, who then leave vacant apartments or condos behind, while others who have bailed out are moving in with other family members or friends.

Take 75 million housing units nationally and 5% of the population doubling up, and you get 4 million empty residences. You think the inventory of empty homes is high now, look what happens when people start losing their jobs. They will get very creative about living quarters, and very creative about cutting expenses they can no longer afford like mortgages and rent.

Houses can't be moved (at least not cheaply), but people move all the time. And when they move away from places, the price of housing in that area declines. It's supply and demand, and as money gets tight the demand for housing drops. People take roommates, move back home, double up.

5. Houses built where they should not have been built will be abandoned. Large swaths of known floodplains are now covered with subdivisions in the Sacramento Delta region. No doubt the same can be said of certain stretches of the Mississippi River region and other coastal and riverine flood zones.

Back in the good old days of say, 2007, governments might have reckoned they had the funds to rebuild dikes and other engineering wonders to protect a few thousand new homes. But as the economy sours, governments are suddenly short of funds. And as people leave those distant suburbs, then the stark reality will become apparent: it isn't worth tens of millions of dollars to protect a few thousand homes (many standing empty) which should not have been permitted in the first place.

Of course the homeowners will feel entitled to government protection; it is a natural assumption that if the county allowed the builder to build the homes, then it was "safe" to do so. New Orleans is not the only inhabited area with grave risks of flooding; the willy-nilly building boom saw thousands of houses tossed up on land which was rather clearly unsuitable due to heightened risks of flooding, etc.

Will government buy out beleaguered homeowners? No doubt there will be cries to do so, and other voices noting that governments are now broke or in deficit mode. Lawsuits will be filed and much money will be spent resolving a crisis which resulted from lax approval of questionable building sites.

6. Poorly built McMansions will be abandoned as the costs of repair exceed the value. Those of you not in the building trades may scoff at this, but go find a "new home" which has had the plumbing fixtures and copper piping ripped out (to be sold for the scrap value), a swimming pool filled with guck and leaky flashing around the chimney, not to mention broken windows, buckled hardwood veneer flooring and damp, rotten carpets. The cost of fixing all this is huge, especially if water has leaked into the framing or subfloor.

Although I can't locate the source, I remember reading that in the depths of the 1930s Depression a premiere commercial building in New York sold for less than the installation cost of its elevators in 1928, just before the Crash.

If you doubt that property can drop 80% or more in value, recall that real estate remains a business proposition: if you can't make money owning this asset as a business, not as a speculation, why buy it? If you can't rent the property for a profit, and keep it rented through thick and thin, then why risk buying it? Owning a property which sits empty for months or years is a very sure way to go broke. If you can't sell it, then you walk away and start over. That's Capitalism with a capital C, folks.

In honor of football season, let's trundle out a football metaphor: you can toss the ball in the end zone, but if there's nobody there to catch it, you still lose.

From: http://www.oftwominds.com/blog.html


Blogger bdrasin said...

If its true that exurbs will be abandoned and people will move in closer to cities, "double up", then there could be some upside for city property owners, right? Basically, you should be able to charge more rent if you have more tenants. Here in the Bay area SF may be super expensive, but there are a lot of old duplexes in West/North Oakland in the 500-800k range and maybe these would keep their value better.

2:24 PM  

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