The idiocy of the housing market

I don’t watch a lot of television, but when I do sit down in front of the 42″ plasma high-def TV, it’s frequently tuned to TLC, The Learning Channel, and one of the shows I’ll watch is called Flip That House. Flip That House is a reality show about people who buy run-down properties, restore and remodel them, and then sell the houses for a profit.

I watched a couple yesterday evening, and, as always, I was amazed. No, not amazed by the jobs that they did, though some were reasonably impressive, but by the prices: they show people buying these absolute dumps, 3 bedroom, 1½ bath houses in modest, middle-class looking neighborhoods — and starting out at over $300,000 for the house. They take six or eight weeks, budgeting $40,000 to $80,000, and sha-zamm! they turn around and sell it for $579,000 or something like that.

Due to the markets in which I’ve worked since 2000, I’ve seen the housing bubble expanding like mad; I’ve produced a lot of concrete for Toll Brothers and similar high-end home builders. [When I started out in concrete, I did a lot of work for Ryan Homes, which (at least in the 1980s) specialized in larger but still reasonably priced houses.] Toll Brothers, on the other hand, builds McMansions, and I could never see how there could be so many people around Allentown, Pennsylvania and Hockessin, Delaware, who could afford houses in the $350,000 to $750,000 range.

I lived in a remodelled farmhouse when I was in Hockessin, actually a locally famous place, the old llama farm. I didn’t own the house, but rented it for two years. I was renting only the house; the separate office building with upstairs efficiency apartment and the barn and the 3¼ acres of land were not part of my lease. As the end of the second year of my lease was approaching, the owners decided that they wanted to sell the property, and since we were already there, they offered me what they considered to be a bargain; they were going to list the entire property for $385,000, but offered it to us for $335,000.

Well, I did a little checking on just what that would cost us, and, in very rough figures, we’d have been paying about $2,500 a month for the mortgage.

Uhhh, sorry, but no thanks; that would be $30,000 a year just in our mortgage payment! It was a nice house, and nice property (though it couldn’t have been subdivided, due to a pond and a stream running diagonally across the wedge shaped piece of land), but, realistically speaking, you’re looking at the entire take-home pay of someone with a $40,000 a year job, just to pay the mortgage.

Now, we weren’t doing badly in income when we lived in Hockessin, and we actually could have afforded it — if we were willing to eat potatoes and beans for one meal and beans and potatoes for the next. Maybe we could have splurged occasionally, and had rice, though soy sauce for it might be a real luxury. And the least little hitch, like one of us breaking a leg or getting sick for a couple of months, and it would have been all over; we’d never have recovered financially from getting just two months behind on the mortgage.

Thing is, the llama farm would have been a real bargain in that neck of the woods, for there were three Toll Brothers subdivisions surrounding it, and I well remember the sales sign at the entrance to Hockessin Valley Falls: New Homes from $350,000 to $750,000. If a $300,000 mortgage would have run me $2,500 a month, what kind of payments would people have to be making on a McMansion that cost three-quarters of a million dollars?

It’s no surprise that it couldn’t last; I’m still stunned that housing prices have gone up so much for so long since the market bottom in 1991. But the Standard & Poor’s/Case-Shiller home price index showed a record 6.7% decline in prices for existing homes, the largest decline since the 1991 construction recession.

In the year-over-year comparison, Miami posted the largest decline among the 20 markets with prices down 12.4 percent in October compared with the same month last year. Tampa, Fla., was the second-worst performing city with declines of 11.8 percent. Besides those two cities, Phoenix, Detroit, Las Vegas and San Diego also posted double-digit year-over-year declines.

Well, at least one guy thinks that it’s a good time to buy!

Home prices fall: Can it really be all bad?
by Tracy Coenen

Economists and financial analysts watch the housing market carefully for clues about how the American economy as a whole is faring. The latest headlines are about falling home prices, and the hysteria is building. Yes, it’s the 23rd month in a row that home prices either fell or didn’t increase enough to please analysts. That’s bad, right?

Well the housing market does give us some signals about our economy, and these numbers may be sign of weakness for Americans. (I don’t think it’s as serious as the media would have you think, but that’s another article on another day.)

I prefer to look for the silver lining in this cloud. What a great time for bargain hunters to get a great deal on a house! Sure, falling home prices are bad for sellers who might end up upside down on mortgages or who might not profit the way they had hoped. But it’s a great time for those who have been saving and planning for a home purchase to cash in. There are great deals to be had, and buyers have many choices in the marketplace. Happy house hunting!

Uhhh, maybe. If it were me, I think that I’d wait a while longer. There’s a serious backlog in existing homes for sale, the largest inventory since 1991, and home building has slowed way, way down. I know of a couple of subdivisions where homes are literally more than $100,000 less expensive than they were two years ago; it must suck to be one of the families who bought big in 2005! Yeah, there are some houses out there that look like real bargains compared to 2005 and even 2006, but there’s no particular indication that we’ve reached a bottom yet.

There’s only one number you need to check: the National Organozation of Realtors puts out a housing supply inventory figure every month. When that number declines for two months in a row (and it increased again in November), we’ll probably have reached the bottom and started to creep up again.

In the meantime, watch Flip That House, and see if you can tell me why a 3 bedroom, 1½ bath fixer-upper would go for over $300,000 in California.


  1. I did a lot of work for Ryan Homes, which (at least in the 1980s) specialized in larger but still reasonably priced houses. Dana

    Ryan/Ryland had a very bad reputation for quality andthey once tried a unique defense in a civil case. The claim was that there was no explicit warranty that the homes in question were fit for human habitation.

    From some of their homes of more recent construction, they do concentrate more on the visible than what the purchase cannot see.

    My experiences over 20 years ago with a suposedly reputable builder in Fairfax County, VA. Were not that pleasant. There was the BS that attempted to keep me off the work site. They screwed upquite a bit an everything got fixed wthin a year of moving in.

    “Flipping” in Baltimore turned out to be a crooked scheme and a lot of black homebuyers (and banks) were royally screwed. Thre were some crooked appraisers involved and sleightof hand in transferring property.

    A distressed property with an ‘interesting’ address would be bought on the cheap, for as little as $7000. Then it would be ‘sold’ by A to B for $50,000. B then does some cosmetic repairs (on the order of $10,000) and sells it to a real buyer for $65,000. The buyer is unsophisticated but knows that home ownership is part of the path to a better life.

    The probem is with the appraisal. All of the houses on one side of the street are dumps and they have even-house numbers. The houses on the other side are of very recent construction and were part of a subsidized program where the proce of $85,000 provided a lot of home for he money.

    With those comps, the creditworthiness of the buyer is not that big a deal for a bank. They have a cushion in the equity. Or so they think.

    The buyer tries to keep up the payments but when the payment starts to reflect market-driven rates (plus a pontor two) the day of reckoning comes. A and B take their money and run, creating more cover company names.

    I have seen this game from up close and it is a very dirty business.

  2. Several decades ago I happened to tune into a “Christian” radio staton near Baltimore while hunting for a classical music station.

    The message was rather clear: treat your home primarily as a shelter for your family. Do not think of it as an investment vehicle to be highly leveraged.

    I have known of people who moved in with little down other than closing costs who pulled out what seemed to be equity a year later. Prices are not going to keep going up. There are dips and valleys amidst the peaks.

    If you have some real equity and the price drops 5 or 10%, what of it if you are not ready to sell?

    People playing around with negative amortization are the ones in trouble. Another day older and deeper in debt, as went the song.

  3. Dana: this is why I don’t own a home.

    A *condo* in this market goes for $400,000 with a lengthy commute or $600,000 with a reasonable commute.

    Don’t even ask about single family homes.

    Owning is better than renting for long-term financial health. But … it’s not a reasonable option at these prices.

  4. I traded a half hour commute for a 53 minute one and escaped Maryland for Delaware. I got twice the house for the money and got my property tax cut in half.

  5. Anywhere that would involve a longer commute would (a) involve a longer commute, which is the last thing I want, (b) be in the same state, (c) be in areas which are less urban and therefore less interesting to me.

    Not a trade-off which would work for me.

  6. The statement ‘De gustubus non est disputandem’ has not become less validsincethe days when it wasspokein a very popular langage.

    Tastes do vary, and what delights A may disgust B. This is as true for food and art as it is in housing or automobiles. Yet for most of us,compromise is necessary. Those with a thirst for ‘bubbly’ may make do with Asti rather than domPerignon. Few can dine on Kobe beef on a regular basis and vegetarians are another matter.

    Some prefer an urban life setting, but most city dwellers are there because of necessity. Yet upon leaving Baltimore City for suburbia with my parents,I soon realized that some things were lost. I could no longer walk to the end of the block and enter a woods that strethced for over a mile in two directions, where I could play after dark without my parents being concerned. Now that woods is a de facto graveyard for losers in drug trade disputes.

    I guess you can’t go back. Suburbia is not that bad and a 54-mile commute with no stop lights other than a single flashing red) in car with over 400 hp on tap is not all that unpleasnt.

  7. I’m not sure I agree *today* that most city dwellers are there because of necessity; there’s been a big movement in recent years towards city dwelling, and the parts of the urban California suburbs which are in hottest demand are the parts which are densest and most city-like.

    I like being able to walk to the grocery store, to the bookstore, to the movie theatre, to the library, to the cafe, and — just barely — to work; none of these would be doable in a less urban environment.

  8. Also, going back to Dana’s original post: there are regions in the outer suburbs of the bay area where condos are going for *half* of what they were going for two years ago.

    The poor people who are under water on their investment properties are just hosed.

  9. There has always been madness in crowds and it did not stop with the South Sea Island Bubble.

    Supply and demand sets the real prices although some pay any price needed for the sake of a perceived exclusivity.

    Johnny Carson once mused that the greatest treasure any marketeer cold have was a list of all of the people who bought two items from the Frankin Mint. But where is the secondary market for kitsch? Who will buy crap that was originally sold as ‘collectible’?

    Aomeimes there is no greater fool and some sucker ends up holdin the bag,

    California seems more of a syndrome than a state. Land in many places is dear so prices escalate. For a typical single family home, there is a narrow range of ratio between the alleged values of lot and land. But which is the driver?

    No amount of money could entice me there. People must love the costs and the diminishing freedoms.

  10. A: here in small-town Jim Thorpe, I can walk to church (a block away), to several restaurants (from right down the block to about a mile away), the public library (a mile, but it’s pretty small), the grocery store (½ mile), a little convenience store (½ block), a bank (1 block, but I use a different bank, ’cause this one sucks), the school, the courthouse, two parks, every place but the movie theater, because we don’t have one!

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