Housing prices fall below replacement costs, with further to go

by Steve Crossland, REALTOR in Austin TX on December 4, 2008 · 7 comments

This article below came in my Daily Real Estate email news today. Says that housing prices in many places are now below replacement costs, meaning you can buy an existing home for less than it would cost you to build one.

Then, in the same newsletter, another article (also below) saying that prices have further to fall. Wow. Of course Austin, except for specific exceptions, is not an area where housing prices have plunged because we had no huge price runup that need undoing.

Daily Real Estate News  |  December 4, 2008 
Housing Prices Fall Below Replacement Costs
Housing consultancy Global Insight reports that nationwide, housing prices are now 3.8 percent undervalued, based on total market value. It says values fell at a faster pace in the third quarter after stabilizing earlier in the year.

According to Global Insight’s calculations, prices are now 6.5 percent below their 2007 peak. They fell at a 6.9 percent annual pace affecting 241 of the 330 metropolitan areas analyzed by Global Insight. That’s up from 150 metro areas affected in the second quarter.

Contraction is most severe in the Southeast and Southwest with only the Pacific Northwest remaining overvalued, Global Insight says.

Home prices fell more than 10 percent in the third quarter in nine central California communities. The Central Valley communities of Merced, Stockton, and Modesto have seen property values fall to less than half their 2005 value. Twenty-nine metro areas in California, Florida, and Nevada ­– at one time among the most overvalued – have seen price declines in excess of 30 percent. Similar steep price drops are occurring in Michigan, northeast Ohio, the southern metro areas from Charlotte to Atlanta, as well as in New England.

“Weak economic conditions and wary consumers continue to hold the housing market back. Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices. As the inventory of these homes is removed from the market, prices will remain on a downward path,” predicts Jeannine Cataldi, senior economist and manager of Global Insight’s Regional Real Estate Service.

Then, in the same newsletter, we have the following:

Do Housing Prices Need to Sink Even More?
Home prices could be stabilized by lowering them further, a report from the think-tank Center for Economic and Policy Research suggests.

The proposal calls for 20 percent to 30 percent price cuts in the priciest markets, driven by restrictions on lending by Fannie Mae and Freddie Mac.

The center proposes that Fannie and Freddie use rent-based appraisals, saying that drastic declines would protect future homebuyers from paying “bubble-inflated prices on which they will subsequently lose money.”

What about current homeowners facing big drops in home value and wealth? “If homeowners will lose most of their home equity over the next year, it is better that they recognize this fact as soon as possible so that they can adjust their behavior accordingly,” the report says.

These are interesting times. Austin continues to have solid employment, reasonable inventory (though high in many specific subdivisions and areas of Austin) and the interest rates are very low. It’s really the wariness and fear of buyers that are slowing things down, and perhaps that wariness is justified. But for a lot of buyers, this is as good as it gets, and sitting on the sidelines for non-personal finance isn’t really the best move.

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