Oversupply and Compression: How the Median House Price Will Fall from $215K to $70K

[Crewleader]

July 30, 2008

Charles Hugh Smith


I am constantly amazed (yes, I know I shouldn't be) by how many otherwise intelligent people expect housing to "recover" next year. I shouldn't be surprised, of course, because fantasy and hope are the key traits of all post-bubble busts.

Thus we had analyst after analyst in 2001 and 2002 calling "the bottom" in the Nasdaq, even as it fell from 5,000 to 3,000 to 2,000 and then finally to 1,000.

In a similar fashion, we now have a nearly universal belief that oil and commodities have "topped out" and the recent decline is a new trend. Happy days are here again, oil is heading back to $75/barrel, hoo-ha!

(NOTE: Before you jump on the "oil will just get cheaper and cheaper now" bandwagon, I heartily recommend the new Readers Journal essay by Portugal-based correspondent José de Freitas: Why the Trend in Oil Is Up.)

In a similar fashion, we should not be fooled that a brief market reaction is the start of a new trend, i.e. "housing will soon bottom." On the contrary, I predict the median price of a house in the U.S. will fall from $215,000 all the way down to $70,000.

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

[Warpy]

1. I think the assessment of median home price is accurate

but needs to be adjusted for the various markets.

I do think the precipitous fall in prices in Florida and California has just about happened, but that oversupply in housing, especially the wrong type of housing, will send median prices sliding for some time to come.

I also see ordinary tract housing in exurbs as being especially vulnerable to the continued slide in prices. Anyone with the money to commute from an exurb to a city is going to require something besides a McHouse.

I also see it becoming more and more difficult for people who have employment to escape an upside down mortgage, even if they're willing to ruin their credit for the next dozen years. The rules are being changed almost daily. The only thing left is the rebuilding of debtor's prisons.

As for the price of oil, there will be a continued fall in the spot market futures price but not in the price of contracted oil, which is mostly what we're seeing reflected in pump prices. Don't look for a whole lot of relief at the pump until and unless this country's financial house is put back into order.

[DCKit]

2. Aren't you just a little ray of sunshine!!!

Any thoughts about inner-city housing? DC, NY, Atlanta, Seattle, etc... should all hold value since they don't require the long commute. Additionally, retrofitting high-density housing (apartments/condos) with solar electric/heat and co-generation is far less expensive/unit than for single-family homes.

[AndyTiedye]

3. The Landlord Has to Do it for an Apartment Building, and Usually Has No Incentive to Do So

Renters usually have to pay for the heating fuel, but any energy-saving improvements are up to the landlord, who has no incentive to spend money on them.

[DCKit]

4. Ah, but a foreward thinking landlord might realize....

his apartments would stay full and affordable if people knew their bills were going to be regular and predictable by not being under the control of the energy mega-corporations. But I wasn't referring specifically to apartments, just high density housing.

I live in a large condominium complex and, more often than not, they'll simply lie about something rather than investigate the possibilities. My favorite was a heat-exchanger interface/upgrade to our AC system to preheat our summertime hot water. Trane (the boiler manufacturer) says it's available, but management says it's not. Oh, my! Who am I to believe?

Of all the horrible things I've heard about Condominiums over the years, nothing prepared me for an association and management company that don't give a shit about spending a dime to save a dollar.

I am (financially) terrified.

[Warpy]

7. Like I said, I think the big drop is done.

Inner city housing that's been improved is generally holding value, with the glaring exception of Miami. Even my own area of inner city, post WWII starter homes has held its value, improved or not, while the trophy houses with long commutes are going unsold for months.

Modest housing with a reasonable commute is still a great hedge against rising rents, even if there is an upside down mortgage temporarily. The key, as always, is to know your market well and know the definitions of "modest" and "reasonable."

Higher population density buildings have always been more efficient. Unfortunately, they can also maximize misery as incompatible people with incompatible habits are squashed together. The single family house is not going away, although some of them will become impractical to the point of abandonment over the next few decades.

People who have been living large on debt are going to be on a whole other learning curve. Housing will be one of the areas to reflect it.

[Trillo]

5. One thing that may be missing in the analysis

is the cost of building materials. Since 2000-2001 they have appreciated significantly, like a number of other things. Unless there's deflation in these materials, or a massive rethinking of typical construction techniques that lower the costs of construction, then it seems there may be some kind of floor near the cost of building a roughly equivalent new structure.

I suppose construction materials themselves could deflate.

[spooky3]

9. This really puzzles me.

Since demand has gone way down both for new construction and renovations (relative to 2005, for example) I really don't understand why building materials costs keep escalating (I've read the same thing you have--I'm not doubting what you're saying, just trying to figure out why it defies economic forces).

Further, labor costs associated with producing these materials have probably declined in real terms in recent years.

We all know that transportation of everything including building materials is most costly and that has to be reflected in the costs of materials, but other than that, I don't see any factors that should be driving up the price of those materials.

[Celebration]

10. they say it is global growth

China, Brazil, etc. Whether that can continue without our economy going along is a big question mark.

[northernlights]

12. supply has gone up faster than demand has gone down

Until the housing bust, demand for lumber and building materials was skyrocketing, with supply being devasted.

The megafires in California have for some years now been burning up lumber and, in some cases several years back at least, several major lumber mills.

The hurricane season that gave Florida 4 major hurricanes in 1 year, and Katrina and I forget the other one that year that wrecked the west Louisiana coast, ate up a lot of lumber and construction material.

From the time we invaded Iraq, lumber started skyrocketing. The US Government shipped a lot of it there for building/rebuilding, where it has been repeatedly blown up and replaced.

It is only 2 years since the housing bust got going, putting a dent in demand. But the fires, hurricanes, and Iraq debacle rage on.

[spooky3]

13. I think you mean supply has gone DOWN faster...? But

much of the lumber and other building materials used in the US comes from Canada, not from the US.

[sendero]

6. I agree with him.....

... but only if we have some serious general deflation.

Housing still has a long way down to go, but maybe not quite that far IMHO.

[harry123]

8. $70K seems a tad far-fetched

I like Charles' stuff and read him regularly. But, the $70K number seems like a worst-case scenario figure. I really don't see it happening as bad as things are likely to get.

As you say, only massive deflation will get us there.

[MichiganVote]

11. $70,000? I think that figure is ridiculous. The highest reductions will be in the multi-million end.