Friday, March 07, 2008

Stop waiting for the Housing Recovery

I wrote a post not long ago that housing prices have to overshoot to the downside before the fall in prices can stop. Today, Reuters caught on.

Quoting Mark Zandi of, Reuters said:
Home buyers are not going to catch that falling knife and that's going to weigh very heavily on the housing market through this year and next.
Homebuyers have no incentive to purchase a home right now, as by waiting another month or six or 12, they can often find a comparable home (indeed, perhaps the same home) at a lower price, so why rush? But it is not only that: buyers have a huge disincentive to purchase - a leveraged asset whose price is falling will quickly wipe out any equity invested, unless one can purchase for cash.

The only way buyers can be enticed back into the market when buying represents a real advantage to renting. Thus, prices must overshoot below intrinsic value to the point where it becomes a "no brainer" to purchase, irrespective of the potential loss of equity.

This occurs when:

1. The (after tax) carrying costs of the real estate are lower than rents, or
2. Rental availability in specific segments (e.g. 4 bedroom residences) is too thin
3. The emotional value of owning a home becomes overwhelming

This process will take a long time because the costs of owning became extremely high. I admit that if my personal circumstances were different, though, I would be out shopping for foreclosures, REOs and desparate sellers, though looking for rental property and not a home.


  1. Not unlike dividend-centric stock investing!

  2. It's exactly like dividend-centric investing! In fact, I am a firm believer that the true value of an asset, particularly one that is not wasting (like many agricultural products) is derived chiefly from the discounted value of the future dividends.

    Real estate *should* only be valued according to the discounted cash flows (Net Operating Income, including tax benefits) of the property. Very few homeowners judge the rental benefits - it is often an emotional purchase.

    There are some behavioral benefits to owning your own home that have positive economic consequences that *can* be factored in - owners tend to invest time in improving the property and may spend less money on eating out or other entertainments - but the economic benefits are harder to assess if one considers the opportunity costs.

    After all, the homeowner could have chosen to invest that time and money in other income producing assets or in working more.

    On the basis of "dividends" from real estate, fundamentals have not supported prices since about 2002. After that, it was all speculative psychology - buying begat higher prices which engendered not selling, which fundamentals would have suggested, but more buying.

    Now, we will see the opposite, lower prices will give rise to more buying but rather less buying and yet lower prices.

    So much for market efficiency.