Is The Housing Market Getting Worse?.

Megan McArdle wonders if the housing market getting even worse?

The existing home sales figures released today offer little cause for optimism. Sales fell 2%, and the inventory of unsold homes ticked upwards--there is now enough supply in the housing market to satisfy almost ten month's worth of demand.

A deflationary mindset has entered the market. Buyers are holding out because they think house prices will go even lower, and this is becoming a self-fulfilling prophecy. I've been thinking about buying a house recently, and a number of people have told me that I should wait until it bottoms. Some of them are the same people who back in 2004 were telling me to buy before America ran out of houses.

Trying to time the bottom is a fool's game, and anyway I want to live in the house, not flip it. But as long as most people feel as they do, the housing market will continue to crater.

Indeed, the economists surveyed by the Wall Street Journal suggest that the problem may be even worse than we think, because so many homeowners are holding back from selling until they can get what they think of as a "fair" price--i.e. at least 10% above what they paid for it in 2005. The people who are selling now are the ones who really have to sell, either because they can't meet the mortgage payments or because they have to move to another city. I looked at eight houses last Wednesday, of which two were foreclosures. All of them had been on the market for two months or more. The agent told me about one client who was moving to another city but couldn't sell his condo because he'd have to show up at the closing with a check for $40,000.

Eventually some of those people who are holding onto their houses by their fingernails will have to sell too, into a market where most buyers are demanding super bargains. If you don't have much equity in your house, now would be a good time to tighten the belt and start paying extra on the mortgage.

Elsewhere, The LA Times claims over $6 trillion dollars has disappeared from housing wealth:

A Washington think tank is warning that housing prices are falling at an accelerating level, destroying wealth at a pace that will cost the average homeowner $85,000 in lost wealth this year alone.

The projections by the Center for Economic and Policy Research are based on the numbers in Tuesday's Case-Shiller home price index, which showed accelerating price declines in most big cities.

The annual rate of price decline over the last quarter was 24.9% in the 20-city index and 25.8% in the 10-city index," the center said in its Housing Market Monitor today. "At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner."

I haven't seen the actual data but wonder if this article is overstating the true situation? If the "excesses of the housing bubble" are what's being lost, how much of a loss is it really? Financially speaking, the true loss of personal wealth is measured by what people bought their homes for compared to how much they are worth when they sell it. Psychologically speaking, a significant dip from peak value on paper still feels like a loss -- even for those who aren't currently trying to sell. Unfortunately, a lot of people over-invested in real estate because of rapidly rising prices and borrowed against their increased home equity only to see it vanish, leaving many in genuinely poor financial shape.

I am very glad I ignored the advice of many of my friends and did not buy a home a few years ago prior to coming back to school. Some even encouraged me to do so for an investment as I was heading back to school. Had I listened to their advice, I probably would have had to drop out of school by now in order to try salvaging my financial situation and avoid bankruptcy. I feel badly for my friends who bought (or refinanced a significant portion of their home's value) near the peak.

Like I've said before, renting has its perks.