Market bottom or no market bottom, prices to keep on falling

First point:

"Home and apartment construction rose 17.2 percent in May, up to a seasonally adjusted rate of 532,000, the Commerce Department reported."

Can somebody please explain how adding more supply will somehow “fix” falling prices caused by a lack of demand? How is this good news for anyone except potential buyers? I'm listening...

Second point:

Regular readers of this post have heard my repeated calls for a major correction in the high-end market caused by the collapse in jumbo financing. My call is for at least a 50% drop in prices peak to trough, inflation adjusted. According to Bloomberg, the analysts at JP Morgan Chase agree with me, except their number is 60%:

"... prices for more expensive homes may not bottom out until 2012, and ultimately result in peak-to- trough declines in excess of 60 percent (compared to 40 percent nationally)."

Check out Bloomberg (search for “millionaire homes”) for the entire piece. We are a long way from the bottom.

The Bloomberg article says "U.S. home prices MAY fall another 14 percent"

But your post says "Home prices across the country WILL fall another 14 percent"

Sometimes one word can make all the difference.

I'm not rooting for a huge correction, merely forecasting that this situation will get much worse (especially in New England). I already own as much real estate as I intend to own. The media, the feds, and the bankers have been way off base on this whole downward move in the market, there is no reason to give their forecasts any credence now. This will get much, much, worse,
AT LEAST another 30% here in the Boston area. In my old town of Winchester (now live in Portland, ME), there are over 50 houses listed at greater than $1mm.
Good luck moving those properties with a lousy job market, relatively high jumbo rates, a lousy economy, depleted net worths for many etc.

I agree with Hung. There is a big difference between “rooting for” a particular outcome and making a prediction based on fact. Imagine the following scenario:

A patient walks into the doctor's office complaining of severe abdominal pain. A detailed diagnosis reveals pancreatic cancer which has metastasized to multiple organs. Barring a miracle, the patient has no chance of long term survival. The doctor reluctantly delivers his prognosis: “You have 6 months left to live if you're lucky. We can provide palliative care but there's nothing else we can do. I suggest you get your affairs in order. I'm sorry.”

Is the doctor in the above example “rooting for” the patient to die? Of course not. What the doctor is doing is providing an objective appraisal of the situation (based on historic precedent and fact) so that the patient can plan accordingly.

Myself and several others on this site are like the doctor. People understandably don't want to hear what we have to say. Denial, anger and despair are typical responses. But that doesn't mean we're wrong. The simple fact is unless we witness an economic miracle, the collapse in housing has MUCH further to go. There is no way around this. People should prepare themselves for massive price declines and act accordingly.

That said, don't lose sight of bigger picture. Like most of us, maybe you lose some money. But there are more important things in life. One way or another, we'll all get through this. In the end, the experience make will us stronger. Remember, things could be much worse... You could be the guy in the doctors office.

Seriously, I can't stress this point enough. It's only money!!!

It's only money? The REAL simple fact is; ALL housing prices are speculative and based on what the seller wants to earn as quickly as possible. Housing prices for the longest time have been way overpriced in the New York and Orange County markets. The same is true in Massachusetts. Most people would prefer to buy a house than a condo. Most renters would prefer a newer building than an older building. Most renters would prefer to buy something rather than rent indefinitely. So what's stopping them? Prices are still too high. Money is need for everything and not just housing. The more supply the better for the buyers. If you are selling and you can't get the price you want, stay put until the market recovers, just like the '80s.
Archimedes

It doesn't matter if you are rooting for home prices to fall or not, prices WILL revert back to levels based upon economic fundamentals, wages, affordability, etc.

Good post as always Lance (#4). I'm always amazed that people would rather bury their head in the sand then educate themselves to the realities around them. There's a saying that goes: When faced with a crisis, only about 5% of people will recognize the crisis and take actions to protect themselves. The other 95% either will not see the crisis or will choose not to protect themselves. The percentages are debatable, but I would agree that the majority of people, especially when it comes to finances, are quite clueless.

I've given up on our "leaders" instituting the change we need to get this country back on course. I see what is on the horizon and it is quite bleak. All I can do is protect myself and attempt to get friends and family to do the same.

I hope you all do the same.

42%, that's it? Realistically, here in Boston, prices need to tumble about 75% from peak. The peak here was just that overbloated and unrealistic in itself. As it stands right now, anything decent priced under $250k is getting 7 offers on it on the first day and selling in 2 days...which is flat out rediculous. The first time home buyers who have been locked out of the market since the turn of the century are just that desperate.

I don't want to see a financial apocalypse in the RE market- who would ever root for that? Do I want to see prices reach a realistic level? Yes...

The current climate makes it particularly difficult for people to buy homes or especially condos. What used to be considered a very strong credit score can't even get one a mortgage now, let alone decent rates. And while prices have dropped some, let's face it- anywhere remotely desirable to live in the Boston area (and it doesn't need to be Back Bay or Winchester here; I'm talking JP, South Boston, Medford, Quincy, etc.) is still way out of reach for many prospective buyers. Thank goodness for FHA loans, or the market would probably worse off than it already is. My humble prediction is that while things may be improving in the economy overall- the lasting effect of this credit mess is either going to keep alot of properties on the chopping block for a VERY long time, or prices in places like Boston, San Fran, LA, Seattle, NYC and other expensive places are going to have to drop.

Just like the days of easy credit, I think the days of the $400,000 condo in JP or South Boston are seeing their twilight.

But hey, I could be dead wrong.

Lance - good analogy. The only difference I see between your example and this board is that if I happen to disagree with my doctor or solicit a second opinion, he doesn't insult me or call me names.

I see at least another 10 - 15% drop in Boston area before end of 2010. More in other less fortunate parts of the state/country. As Obama's socialistic "recovery" vanishes there will be additional pressure on markets witch will result in further unemployment number rise and prolonged recession going into stagflation. Hold on to your valets.

Why is this such a big deal?

We root for lower purchase prices for almost everything else to help out consumers, but when it comes to housing, it's such a bad thing to make it affordable to the middle to upper-middle class?

Currently, I wouldn't be able to afford a very MODEST home in the town I rent and work in. If I was to purchase a MODEST home, I'd have to move too far out to even make it worth my while to commute. When it comes time to buy, if I can't buy around where I work so I can have a convenient lifestyle, I'll just move somewhere else.

Come on, is a very poorly built cramped Cape house in a regular suburb like Winchester or Arlington really worth $450,000+? It's just a little shack in a cramped neighborhood in a not-so desirable state to live in.

Right now, owners are still in denial about the values of their homes.. The homes I see on the market for $500k realistically are worth under $300k.. Owners are dreaming, and they are encouraged by greedy real estate agents.. However, these homes are not selling and will not sell. Maybe next summer these owners will drop the price down to $400k or so, but they won't sell at those prices either.. So maybe in two years they'll drop down to $300k and start to get some offers.. The point is, owners are still unrealistic and asking for too much for their homes.. The longer this continues, the more homes will be on the market, and the more homes on the market, the lower prices will go.. The economy is still in the garbage, people are still unemployed, and banks are still not giving out mortgages. We will never see another period where it is so easy for unqualified buyers to obtain mortgages. None of the forces that have been driving up home prices in the past decade exist anymore.. So now the only possibility is for prices to drop ddown to levels of several years ago.

So many confident predictions with so little foundation. Nobody knows just what Boston (or any other) real estate prices will do. (Anybody who can predict that kind of thing is a millionaire today.) What we can easily predict is that there won't be an apocalypse with 50% price drops, because the real estate market here is not driven by debt and speculation, as it is in Florida or Arizona. It is driven by the influx of highly paid professionals to this area because of its excellent jobs and good schools. It's easy to imagine that the local market could stay soft for a few years and drop another 10%, but the basic forces that make Boston real estate expensive are not going away, until they shut down all the colleges, hospitals and financial firms.

I agree with what John says.Nobody can predict what will happen to RE -let alone the stock market.I can tell you my experience is that i am a 1st time homebuyer who patiently waited on the sidelines for a correction and got it.Did i get the bottom ? Who knows? Maybe , maybe not. I do know that i got a good deal.To me THE SINGLE most important factor in buying real estate is the interest rate.I locked in a fixed 5% 30 year loan with 0 points.I think rates are going substantially higher because the economy will be booming soon.When you combine the following factors IMO this is a once in a lifetime chance to be a real estate buyer : 1.historically low interest rates 2. 8K in cash from Uncle Sam just for buying(1st time buyers) 3. Much lower prices than 2005.

If you're looking to buy, save your money and be patient, this correction has a long, long, way to go...

Regarding Rob's comment, I have also thought that houses are still priced too high -- but then I see them selling, at least in the areas near me (JP/Roslindale). A condo I looked at with a friend near Rozzie Square sold in the high 300s recently -- much higher than my friend would even have considered paying, but someone is paying that (hasn't closed yet...). My friend is waiting for the predicted drop, but we're not seeing it happen.

John,
With all due respect a lot of these high paying jobs you talk about that are supposedly keeping the local RE market afloat are disappearing from the landscape either through layoffs or companies leaving. Many of these layoffs we read, hear, and see on the news are not just occurring in the blue collar sector but the white collar sector as well. Believe me. I know because I work in this sector and have many friends and associates who continue to say that their firms are still laying off and things are very bad. But the point must also be made that those in the upper middle class who earn 6 figure salaries make up only a small percentage of the overall population in and around Boston as well.

Also as far as the colleges are concerned they are nothing new to this region. I do not know why folks use them as some sort of safety net with the RE market as well. They already employed the folks who were around far before the RE run-up and they will only contribute only a relatively small amount more.

The basic forces for the local RE market you claim have changed dramatically in the last 8-10 years to the point where they don not support the basic fundamentals of home ownership for the blue and white collar sector.

i think the slew current factors (ie 1st time home buyer tax credits, foreclosure prevention type programs, low interest rates, etc) are partially propping up demand for moderately priced homes (250-350k) As a first time home buyer myself, I'm not looking to make a killing in real estate, I just want a home to call my own, and getting $8000 and an historically low interest rate are good incentives. Unfortunately, they are good incentives for all the others out there, so demand is high (and keeping prices up). See homeowners just stopped selling when prices were dropping (why would they want to lose money). now that demand is up, they have the upper hand again. better jump in now, at least take the 8k give away.

Its refreshing to hear others with similar opinions of the over inflated home values. It is so true that when you live in cramped dismal towns in an undesireable state its hard to justify 500k for a value. Mass is a concrete black top jungle, yeah theres some towns with trees but you need a million to get in. As a construction expert I know what it really costs to build these homes and most of the time its about a 1/3 of what they are priced at. The correction is over due prices have not even begun to drop to a respectable place. I do feel bad for those who will lose in the short term. Maybe they will need to reavaluate and think about staying long term. To bad they are in MA

Lance, I agree with most of your comments but comparing a doctor's "detailed diagnosis" to real estate speculation, is more than a stretch.