Saturday, July 25, 2009

Housing's Endless Downward Spiral

When you strip out the unit percentage gains achieved by revising down the previous month's reported number, and take away the foreclosure/short sale volumn out of the housing numbers, you conclude that not only is the market NOT "stabilizing," but that the housing marke is still in state of freefall, albeit a freefall that is slowing down a bit (not necessarily any sign of stability, as you would expect that the rate of decline would slow down over time anyway).

What will add fuel to the decline in the value of housing is the surging number of rental units. And this is occurring despite a big shift in the market from buying to renting. As Calculated Risk reported yesterday, the rental vacancy rate is at an all-time high:

As rental vacancies surge, rents will decline and this will put further downward pressure on the price people are willing to pay to buy a home. This is a vicious downward spiral which will not stop until the supply and demand equation balances out. Right now there were just way too many housing units - both homes and apartments - that were built in the last few years and prices are way too high right now to foster any semblence of supply/demand balance.

Anectdotally speaking, at least in Denver, I'm seeing more and more "for sale" and "for rent" signs being posted all over the city, especially in areas didn't seem to have much on the market. I know the guy who owns the 3-unit townhome complex I live in and has the middle unit on the market for about 15% less than was originally being asked for a year ago as a brand new unit told me that he's had only 8 showings in 4 weeks and the only comments were that 2 of the showings inquired about renting. I live in an area that was one of the hottest markets during the bubble.

My best guess is that, overall across the country, we will see housing prices decline at least another 20-30% before we reach anything that can be considered a bottom. And that bottom could drift sideways for a very long time.


  1. Here in San Francisco, a 2 bedroom home is still $600,000 in a decent neighborhood such as the Sunset, and studio apartments rent for around $1100. It'll be very interesting to see if this city breaks down like much of the U.S. (and the extended Bay Area, some parts of which have seen 50% RE declines).

  2. You will know in about 6-12 months, as the big surge in unemployment starts affecting the ability of people to make payments who are sitting on prime-rated, non-conforming mortgages (i.e. non-agency financed mortgages).

    Unless S.F. has escaped the surge in unemployment, I would bet you will see a big wave of foreclosures in the near future. Watch the rental inventory too.

    Denver is at a record in apartment rental inventory and some projects are still being finished. The housing market is just now being flooded with "for sale" and "for rent" signs. I see new ones every day in my area of Denver.