The housing market basket case: It’s us

The resale price of homes is dropping faster in Minneapolis than in almost any other U.S. city.

The Case-Schiller housing price index has just been released for December and it shows a massive drop in the resale price of homes here — 4.6 percent — in one month. It is the largest single-month decline since Minneapolis was added to the index in 1989, and puts the region right up there with Phoenix on the list of basket-case cities.

The price of a home is now at spring 2002 levels.

It’s hard to say what this means because at the same time, the sales of homes is increasing — albeit slightly — according to MPR’s Jess Mador.

“I think we need at this point is a certain amount of patience,” David Blitzer, the chairman of Standard & Poor’s Index Committee told CNBC this morning. “Right away there’s a lag in any numbers that come out a month, a month and a half… there’s a lag in people getting going. Mortgage rates have come down. It’s very difficult for people to qualify for loans. The banking system, now that the horse is out of the barn, has locked the barn up very tight. This is also the slow period. You gotta hang on ’til late in the second quarter in the summer before all the stars are aligned.”

Only Phoenix (-5.1%) and Las Vegas (-4.8%) dropped more than Minneapolis in the month.

For the year, Minneapolis housing prices dropped 21.1% 18.4%, about the same as the entire country. The pace of the price drop is not changing much increasing slightly, however. In the last six months of the year, Minneapolis prices dropped a little more than 10%.

At 11, NPR’s John Ydstie, will join Gary Eichten on Midday to answer questions about the economy. I’ll live-blog it here.

Update 9:31 a.m. – In response to a question from a reader asking for a comparison between the current rapid drop in home prices compared to the rapid increase in home prices during the “boom years,” I played with the spreadsheet and found these factoids:

  • The largest month-to-month increase in home prices was July 1997, when prices jumped 2.1% from June 1997.
  • Most month-to-month increases during the boom years were far less than 1 percent.
  • House prices have dropped my more than 1 percent in 12 of the last 15 months.
  • The highest one-year jump in housing prices here since the Case-Schiller index started was 12.2% (2001). There were only three years in which housing prices jumped by double digits (1999, 2000, and 2001).
  • The rate of increases in home prices started dropping in 2002.
  • Home prices have dropped for three straight years. Home prices increased for 17 straight years.
    • Joanna

      It would be interesting to compare these numbers to the steep rise in home values that took off about ten years ago. I bought a condo fifteen years ago. It doubled in value, then tripled. Now with the price drops, it is “only” double what I paid for it (although you’d never know it to see my property tax bill!) But of course if I sold it, I wouldn’t be able to buy something comparable in my neighborhood. I know a few people who want to sell, but just can’t bring themselves to lower the price from what they would have gotten a year ago.

    • Bob Collins

      Compared to 15 years ago, the index is 77% higher. After inflation, however, it’s only up 17 percent.

      But people who look at these numbers tend to say, “it’s still worth more than I paid for it,” but they’re failing to realize what the price drop means for pulling out of this mess.

      A house is now no better an investment than a new car, which depreciates the minute you drive it off the lot. During this decline, no matter where you jumped, you lost money and you lost equity.

      Think about that! ALL of the things we learned about the value of buying a home, doesn’t apply. Throwing money at a new mortgage now, is the same as “throwing money down a rathole,” a phrase we always said when we paid rent.

      The minute you buy a home now, you lose money and you don’t build equity.

      In that environment, it’s amazing that as many homes are selling now as are selling. People are saying, “these are bargains” and maybe they are in the long run. But if you got into the housing market anytime in the last two years, you’re underwater.

      That’s what the the “we shouldn’t bail out anybody who was too stupid to buy a house they couldn’t afford” people don’t quite understand. Nobody outside a select few in this country can “afford” to lose money. But that’s what’s happening.

    • bsimon

      “The resale price of homes is dropping faster in Minneapolis than in almost any other U.S. city… at the same time, the sales of homes is increasing — albeit slightly.”

      Overall, I’d say that’s a good thing. It is better to lower prices, find the bottom & reestablish rational pricing for real estate than to maintain a ‘value’ of homes that people generally aren’t willing to pay.

      In my neighborhood there are houses selling for unheard of prices. Granted I haven’t seen their conditions, but there are several for under $100K, and one at the shockingly low price of $49K.

    • bsimon

      “ALL of the things we learned about the value of buying a home, doesn’t apply.”

      That is only true if people learned the wrong lessons.

    • Bob Collins

      I don’t think that’s true at all, Brian. Buying a home historically had made financial sense. At the moment, it really doesn’t make financial sense and the only way it would is if the market turns around.

      It might turn around, but there’s certainly not guarantee of that.

      The point is that the shallow debate about it has created the impression that on one side are the smart people who “didn’t buy more house than they could afford” and on he other side are the stupid people who did.

      That’s nonsense, first of all, because it presumes advance knowledge of what the economy is going to do and what one’s employment and health problems are going to be.

      Historically, housing has provided a financial cushion if something went wrong, you could always sell it and get some walk-away money to use for whatever you needs you had. That’s not possible, now.

      Your reference to a 49k pricetag suggests it’s a bargain. It’s not a bargain. A $100,000 house that loses 5 percent of its value in a month and a $49,000 home that loses 5 percent of its value in a month is not a better or worse value. They both lose money.

      Look at it this way. GE is at abut $10 share. A year ago it was at $35 a share. It’s NOT a better value today than it was a year ago because the market establishes the value.

      The ONLY way it becomes a better value is if you assume the economy will return to its previous lofty heights. That’s not a given anymore.

      If you buy a house on an assumption like that, are you not making the same mistake that the smart people have accused the stupid people of making in the past?

    • bsimon

      Bob, I am challenging the contention that a home should be purchased primarily as an investment. That is absolutely not the case. Change in a home’s value from month to month should be irrelevant – it is not financially sane to buy a home that you don’t expect to be in for 3 years, at an absolute minimum. If I buy a house today and its value drops next month, why should I care? I shouldn’t – if I’m likely to move next month, I should be in a rental with a month to month lease, not a home that I own. Based solely on closing costs, I cannot rationally expect a home purchase to be a smart short-term decision. It is a capital expenditure that will only pay off long term, if at all.

      That is the lesson that our society has apparently not learned.

    • Bob Collins

      It’s not irrelevant. It CAN’T be irrelevant in a market-based economy. The housing situation IS relevant to people who don’t INTEND to move anytime soon because the ability to tap equity is part of the equation, not as an investment, but as a means to make ends meet.

      That’s my point regarding the shallow “why should I?” folks. People should care because any the biggest asset is a bigger liability. People’s living situations change — they lose jobs, they get sick etc. — and the inability to turn that liability into an asset is virtually non-existent.

      If the value of your home drops below the value of the mortgage, you have to make the lending institution right.

      The people who got into trouble projected that long-term their circumstances would not detrimentally change. The people who are buying homes now are making the same projection.

      You have no choice BUT to make that projection, and yet it’s an utterly illogical one when you think about it.

      It’s that hope and optimism thing that’s gotten us into trouble. How whacked is that?

    • Chris

      bsimon’s point also applies to the rent vs buy issue you brought up earlier, Bob. A long-term homeowner is still in a better position than a long-term renter, even if the value of the property drops. After 30 years, the homeowner owns something, even if it is “worth” less than when it was purchased. The renter owns nothing.

      The financial cushion of owning a house isn’t that you can sell it to make cash. I think the financial cushion is that you can live in it.

      (FYI, my folks bought their home around when I was born, in 1974. They are retired now and are still living in the same home. I am renting, since I don’t want to settle down in the Twin Cities long term.)

    • Bob

      Looked at rationally, buying a home has never been an investment, and has never made more sense than renting — unless you’ve paid cash for your house.

      On a fixed, 20-year mortgage with a rate of say, 6% and a home price of $120,000, you end up paying roughly twice that cost over the life of the mortgage. So your house would need to be worth at least $250,000 at the end of the mortgage to be considered an investment. But wait — let’s add in the cost of maintenance, repair, replacement and renovation over that time period. When we do, it becomes pretty obvious that the idea that a home is an investment is one of the Big Lies that’s been perpetrated on our culture.

    • David W.

      Bob, the cost of maintenance is passed along by the landlord to renters, as is the cost of interest plus the landlord’s profit. Owning makes sense if you’re planning on staying a while, but if you’re not settled it’s wiser to rent and avoid the costs of buying and selling real estate.

      The problem with home ownership is that you can be affected by swings in the housing market. There was an explosion in housing development for ten years and now there are so many empty units available that prices are plummeting. Ditto for commercial real estate. If you sold at the top though, you’re sitting pretty.

    • http://www.linkedin.com/in/thomassweeney Tom Sweeney

      I saw Jeff and John live last night. Two questions:

      1. People are drowning in econ crisis coverage but little (none?) of the information is actionable. What would John have me do in reaction to the reports? I was laid off last March 4 and am still looking.

      2. Is the crisis likely to boost US productivity and global competitiveness by enabling companies to pay people way less and by causing employees to work way harder for the good fortune of having a paycheck? I’m a certifiable workaholic with sweet references and 25 years in publishing but have yet to land after declining a transfer to NYC.

    • Bob Collins

      //After 30 years, the homeowner owns something, even if it is “worth” less than when it was purchased. The renter owns nothing.

      Not if the price drops below the mortgage. This is a point that Bruce Williams used to make back on his old radio show.

      The rent got something for his money. He got a place to live. So did the homeowner.

      The renter got something else. He got the ability to move tomorrow. The homeowner doesn’t have that ability, and in this economy, he may also have the problem of a liability, not an asset.

      Now, clearly, if things get back to normal, that might change. But, as I said before, it’s not much different than buying a car right now. You lose money. the only question is when you record that loss. there’s no guarantee thta loss will disappear.

      To coin an incorrect phrase from the Internet bubble — the old rules don’t apply anymore. (g)

    • bsimon

      “clearly, if things get back to normal, that might change”

      The point of my first post was to predict that falling prices in conjunction with increased numbers of sales points to things beginning to return to normal. We aren’t out of the woods yet, but clearly more buyers are recognizing that now can be a good time to buy a home.

    • Bob Collins

      Well, I think that’s right. It’s like we said about gas prices “the cure for high gas prices is high gas prices.” So perhaps the cure for low home values is low home values.

      I still, however, don’t know how someone buys a house in this environment. You have to be REALLY confident that you’re not going to lose your job in the next year or so and God bless the people who have that luxury.

    • andy

      Jeez Bob, you’re not making me feel all warm and fuzzy about the house I’m putting on the market tomorrow. For obvious selfish reasons, I hope all people don’t feel the same way as you right now as far as buying a house.

      By the way, I’m selling now because my wife has relocated for her career and I plan to join her soon. I’m leaving a very secure job so I’ll be job hunting soon – talk about a leap of faith!

    • Bob Collins

      Wait! What? You’re leaving us? Where are you going? More important, do they have the Internet there?

    • andy

      Don’t worry Bob, I’m only moving to Chicago. I assume they have internet there, at least some currupt form of the internet. I just became a sustaining member of MPR so that I can always keep my connection with MN.