Housing Bust

There are a lot of houses for sale in my neighborhood, and they don’t seem to be moving at all. One of our neighbors has reduced his asking price by $100K and still hasn’t sold his place! Back when we bought our house at the end of 2003, almost every property would get snapped up within a couple of weeks, often for more than the asking price. It figures. If I buy a house, that is the signal for the real estate boom to end. I am the only economic indicator you need. I don’t believe any of these houses is in foreclosure, but it must suck to have to sell your house in this market.

I have heard that the mortgage default rate (MDR) is about 2.2% overall and just over 10% in the sub-prime sector. Presumably, the greater risk associated with sub-prime loans was figured into pricing, but this default rate is about twice what is usual. Apparently 90% of the sub-prime mortgages are not in default, so lots of folks who would have been renters seem to have made out thanks to innovative mortgage products. This sub-prime MDR is about what it was in the recession of Ought One. It may not presage the apocalypse after all, unless you are heavily invested in securities backed by sub-prime mortgages, in which case you are screwed.

The prices of houses seem to me to be a function of the amount of monthly payments the buyer can expect to have to pay. If you look at houses in terms of the monthly nut to cover, you can see that prices rise with lowering interest rates and vice versa.

High taxes mean less value to the seller since the buyer has to figure the tax burden into his housing budget. On the other hand, the high taxes are supposed to translate to a greater demand for housing in the district and increased values. That doesn’t help me as a buyer or owner who is not looking to sell, especially in an area where so much new housing is being built.

The mortgage interest deduction, far from subsidizing home ownership, simply increases the cost of the house since the buyer’s budget already accounts for tax savings. The deduction subsidizes sellers and real estate agents. Buyers and owners who aren’t selling lose the benefit of the deduction because it is already accounted for in the price of the house and their monthly budget.

It is no mystery that the housing boom came to an end when interest rates started rising. My house is still worth the same monthly payment, but that translates to a smaller asking price than what I might have expected two years ago.