Housing prices fall below replacement costs, with further to go

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.

7 thoughts on “Housing prices fall below replacement costs, with further to go”

  1. Hey Steve,

    I have to disagree with you. First, why risk catch a falling knife? Nobody is good enough to catch the bottom. Why not wait until after the bottom and buy on the way up?

    Second, although Austin’s unemployment is very strong compared with the rest of the country and with the rest of Texas, it has been deteriorating. Just check the stats from the Texas workforce commission’s website. Unemployment is running about 1% higher than last year and it’s getting worse, not better.

    Third, rents are falling as well. I’ve visited some of the new apartments for rent and they are really struggling to get these new buildings rented out. It’s very ugly out there.

    On the positive side, the government is trying to reflate the economy, but this takes time to work it’s way through the economy. They are printing new money to replace the credit that has been destroyed, but this just started. Trillions of dollars in assets are in the process of being destroyed at the moment across all asset classes. They are not going to be able to print the money fast enough and get it into the economy before more damage will be done.

    There is too much momentum to the downside at the moment at it is probably smart for buyers to stay on the sidelines. The market is filled with dead heros…

  2. Well, the fact is the replacement cost will eventually fall as well because less demand and over supply for labor and material will push the cost down as fast as our gas prices. So I’d say eventually the house replacement cost will drop to the same level of the worth of the house it’s replacing.

    I don’t think Leon Fu’s argument for not buying is valid. He’s right that the market may sink further and if you are an investor, you might become a “dead hero”. However, essentially what this downturn is doing is to take the entire real estate business off the quick cash cow investment model. It was never meant to be that way.

  3. I agree. There’s no sense of what property is worth right now. We know a good portion of the inventory has been withdrawn from the market, the folks who *have* to sell are discounting, and the alternative to buying, i.e., rents, continue to go down. The feds are going to mess with things further by subsidizing low mortgage rates for some, but without a sense of what the properties are worth, who would buy – even at 4.5%?

  4. Somewhat amusing to hear the siege mentality drumbeat of some less than honest local flippers and real estate agents who are attempting to use bubble area stats to scare locals into expecting less in order to secure a quick profit. The reality is Austin is a very desirable place to live and prices, as they have done for many years neither boom or crash but just chug along appreciating steadily year after year.

  5. Houses are worth a maximum 2.8 times the yearly income of the average person/people living in them. If you live in a $300,000 house and the average income of your neighbors is around 110,000 then the houses in your area are properly priced. Home values can increase only at the rate of the income of an area. If home prices in your neighborhood are going up because doctors and lawyers are moving in its real appreciation, other wise its inflation or speculation.

  6. Barry, your point about income to home value ratio is an important one. Austin remains very well positioned as far as the ratio of median income earners ($70K) who can afford a median income home ($190K).

    California, Nevada, Arizona, Florida etc. departed from the ratios by using a combination loans to unqualified borrowers and old fashioned buyer ferver.

    I wonder how the lessons of today will be remembered? Already, part of the solution being offered is to re-create the problem by helping buyers who, at present, cannot afford a home, to buy one.


  7. LA was nearly 12 times yearly income before the bubble busts. In the range of 300-150K there lies the healthy real estate price point around here. However, the big difference I see between Austin and the rest of Texas is that the high end seems to be very speculative in nature here. In neighborhoods that are close to median prices, incomes are probably reasonable for house values, but the high end in Austin has people living in homes that shouldn’t be. Sure there are a lot of people in this town that have made a lot of money in the tech industry and others that have moved in already stacked with cash, but amongst those properties live people who are paying the mortgage from a salary. They are neither professionals, (doctors dentists, lawyers), executives, nor independently wealthy. They leveraged themselves into those homes with toxic loans that are no longer available and they will not be in them in 12 months.


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