Sunday, August 26, 2007

Property values NEVER go down...

Apparently some people, even many people, really believe this. Indeed, a friend of mine said as much to me a couple years ago. "House prices always goes up." He meant even more than that, believing that house prices always rise faster than inflation. Which may be true if you take only the past ten years as evidence. Go a little further back, of course, and you see that house prices flop up and down just like anything else, sometimes very rapidly, often driven by collective waves of behavior that look decidedly like the consequence of imitation. Stalwart economists may still harbor doubts, but property markets herd just like equity markets; only the time scales are different.

House prices are now set to fall, as the New York Times reports. That's not really so interesting; more interesting is the human dynamics behind the story. "Many government officials and housing-industry executives,"the article reports, "had said that a nationwide decline would never happen." On what possible grounds? If you suspect some conflicts of interest, I think you wouldn't be too far wrong.

As just one example, the article quotes Ben Bernancke:

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

That, pure and simple, was a form of cheerleading.

We're not so good at predicting the future when the past is given to us as statistics about "fundamentals," or sold to us in glowing terms by those with vested interests in keeping the bubble going. But one thing people are really good at is detecting patterns. We can recognize a person we know, even someone we haven't seen in a couple years, after a glimpse of the back of their head at 50 yards.

For a bit of fun, check out this video that puts you on a rollercoaster ride through housing prices, adjusted for inflation, over the past 120 years. After a century of riding, I think you'll have a good feel for the typical ups and downs of the market; and, I suspect, an accurate expectation of what might come next.


Anonymous said...

What bernanke said was a complete lie, and you know that. This man is the fed chairman, and you think he doesn't know that housing prices can fall? Give me a break! The political correctness you give these politicians who change their answer day to day, hour to hour, is a joke. THESE PEOPLE ARE LIARS MESSING WITH OUR LIVES!

Len said...

In point of fact, the selling prices of houses has been going down for a few months. Builders have been getting rid of their inventory by cutting prices. For example, there's a development I go by here in Atlanta that had been asking for $1.2 million for McMansions, but they had to cut the asking prices down to $800k just to move them. That's a 33% drop.

As a result of this price cutting by builders, people who are selling existing homes have had to cut their prices just to compete. Since many of these people refinanced their homes at inflated values, they're quite often getting pinched pretty badly.

Although The New York Times is just getting to this story, Paul Krugman has been all over it on their editorial page for months.

Soren said...

If housing prices always rise faster than inflation then eventually we will be spending 100% of our income on housing, right?

Who am I? said...

You're all correct. Lies, falling prices that get papered over and ignored, and mathematical impossibilities (although I suppose some crazy economist somewhere can "prove" that incomes should rise faster than inflation). I guess this is what it takes to support a collective delusion for a decade or more.

Len, you've probably also seen earlier articles (in the NYT, I think) describing builders who were managing to sell houses for the asking price, but doing so by giving hefty cash REBATES, which then did not figure in the recorded sale price!

Len said...


I hadn't seen that, but it's just more proof that there are lies, damned lies, and statistics.

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