The US housing market remains a sick puppy, lying in its basket and flippering feebly at human approach. Out here in Greater Suburbia, there are any number of clearly irresistible houses that have been for sale since about the thirteenth century. Anyone who can get a mortgage has their pick of a des. res. with all the amenities and a desperate seller.
So old Joe down the block, a 50-plus-year resident, went to the stars last Christmas. Joe's house was admittedly no great prize as he left it. He had last redecorated in about 1975, and the place sported a legendary guy basement full of a long lifetime's plunder from his place of employment, the Pennsylvania Railroad (When I first met him, ten years ago, he proudly boasted that he was still using up his vast stock of PR toilet paper. He retired in 1985). Rusting metal, bizarre home-made wiring and lots of water leaks dripping in the gloom meant you had keep your hands to yourself. Still, once his nephew had cleaned it all out, it wasn't a bad little house. It sold this spring to a very nice Mexican family, for roughly what it would have cost in 1980.
Looking around the ol' neighborhood (try Zillow.com), most other joints that have changed hands in the last year have sold for about 40% less than they would had the market remained even flat after 2007.
The big question then, pop pickers: is this a temporary lull, with the Good Times just waiting at the gate to scamper back in when the sun comes out, or a permanent re-setting of the market? The latter, in my opinion. Here's a bit of Captain Economics 101:
Any kid of ten (I have one around here somewhere) can tell you that growth-based economics is a crock. Even two percent growth, compounded, requires that your economy double in size within a lifetime - something that cannot happen unless you start out a lot poorer than we are. Once all the conquerable lands with natural resources and inadequately armed people are invaded and civilized, the only way this model continues to work is if we get to hit the re-set button every few decades. Traditionally, this was done by holding a World War; the victors got to drive the losers' economies for a while, and could thus rig things like exchange rates and trade agreements in their own favor. Presto: boom times for the winners, gradual recovery for the losers, nothing to worry about for, oh, a good 50 years.
The last time we got to do this was in 1945, and now time's up. The golden glow of WWII has long since faded, but no-one's had the nerve to start WWIII and the economy has thus been bleating for a major re-set lo these 20 years past. Seeing as we can't get it together to hold another round of global mayhem, however, various parts of it are going ahead and re-setting themselves.
Of the $220,000 average price of a house in my neighborhood four years ago, I'd say that about $40,000 was nominal value (also known in the trade as "trying it on"). That's the difference between replacement cost (which your insurance company uses to calculate your policy) and the selling cost. To buy a house like mine in outer Detroit would cost about $25,000; in Palo Alto, about $450,000. For the same house. The replacement value in both places would be similar. As you can see, Detroit features negative nominal value - houses sell for less than they cost to build, which is why no-one is building any - while in La-la Land there's almost no connection between what something is worth and what you have to pay.
A healthy housing market is one in which nominal value is no more than a certain fraction of replacement value, and I'm proud to say that my neighborhood qualifies. Which is why houses do actually sell here, and yet don't even a mile or two away, where nominal value makes up over 30% of the asking price.
Look for the housing market to start moving again when houses sell for a figure that is closer than telescope distance to their actual value. Californians - don't hold your breath...
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