It’s sure starting to look that way.
The Chicago Mercantile Exchange now has housing futures contracts, one each for ten cities plus a national average. The May 2007 composite (the furthest-out contract) is 5% below the August 2006 composite. That’s right: projected appreciation in those ten cities over the next 9 months is -5%. Admittedly, the CME list is of especially “bubbly” cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington.
If housing prices in those ten markets are really going to drop at an annual rate of almost 7%, then the effective price of homeownership — a 7% capital loss, plus the interest cost of the mortgage, the opportunity cost of the equity, and running expenses — is more than virtually any homeowner can really afford to pay; living in a million-dollar house will wind up costing more than $150,000 per year. (When I sold my house last year, it was because I’d done that calculation based on flat prices and decided that I couldn’t afford to keep owning.)
So a drop at the projected rate is unsustainable if people come to expect it, because almost no one is going to pay today’s hot-market housing prices, or anything near them, if prices are seen to be sliding. That’s how a bubble bursts.
More opinion on the subject:
Bill Gross, managing director of PIMCO bond fund, writes in his August Outlook: “It’s not looking good, folks — housing that is. PIMCO’s on-the-ground analysts, who for nearly a year have roamed the country with random real estate agents in search of local housing trend information, report that prices in many areas are actually declining, which has significant implications for the economy, inflation and interest rate trends.”
“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”
As if investors in home-building stocks need more to worry about. They’ve already watched their shares get hit by the slump in home sales and the weakening economy.
Now add this concern to the list: Companies writing down their land values because they aren’t worth what they paid for them.
The housing slump reached a new milestone this spring as home prices that were soaring at double-digit rates only a year ago reached the break-even point and started to decline in many once-booming areas, recent reports show.
Footnote The guy who bought my place last June fixed it up and put it back on the market for a quick flip. No luck so far; it’s still sitting there, and the asking price has been reduced by half a million dollars. At the current asking price, he’d about break even after renovation expenses, commissions, and carrying costs. But that’s the asking price. It looks more and more as if I dodged a bullet.