Case-Shiller Home Index Kills Green Shoots
Posted by Michael A. Kamperman on May 26, 2009
The S&P/Case-Shiller home index showed national home prices in March 2009 declined 18.7% from a year earlier. What is significant is national home prices had already started falling well before March of 2008. Anecdotal evidence indicates the decline is still going on. On my block in Central Texas there are two very nice homes that have sat on the market for over a year. In March the asking price was $419,000. Now both homes are listed for $399,000. Still there are no takers. I was fortunate to be able to play golf on Monday and I met a young man around 30 named Joe. He is a much better golfer than I am. Joe just moved from our area due to a promotion with his company to Katy, Texas. This community is about 30 miles east of Houston on I-10. Joe told me he and his wife were looking at homes built in the 2000’s with 3,500 to 4,000 square feet with granite counter tops. This is comparable to my neighborhood. Joe told me they looked at 6 to 7 homes and they were priced in the $150,000 range and were going in the $40’s per square foot. I looked at the real estate offerings in Katy and discovered there are over 700 foreclosures on the market. Homes that cost over $100 to build a few years ago are now selling for less than half of construction costs near Houston.
This means almost everyone who built a home in the last few years in this area is now severely underwater. Texas real estate had been holding up and the Texas economy had been holding up. But the jobs report for April indicated Texas was now shedding jobs. The economic crisis is spreading with no end in sight. Joe was fortunate that our area remained reasonably strong and he was able to sell his home for a fair price a few weeks ago. Hence, he will be a buyer very soon in Katy. But with homes selling at these prices most Americans who purchased a home in the last few years are underwater and their ability to transfer to follow job opportunities is very limited if they own a home. Furthermore, those that do move will be hesitant to lock themselves into home ownership which could limit future job change options.
Washington needs to wake-up. Their efforts so far may have prevented imminent collapse of a major bank, but little else. If this trend is not reversed it is only a matter of time before the big banks face a new crisis. These homes are selling at these prices because not enough Americans can access mortgages. The only solution available to the country is massive quantitative easing. Without it assets prices will continue to deteriorate and job losses will continue to mount. Those afraid of runaway inflation need to contemplate whether or not that is preferable to runaway deflation.
Badtux said,
I lived in Houston in the aftermath of the last housing bubble burst in Texas (which thankfully was only Texas, not nationwide). I was a college student and roomed with a guy who bought a modern three bedroom house in decent condition, around 1500 square feet, for $20,000!
Thing about Katy is that it’s in the middle of nowhere way northeast of Houston proper, on a narrow two-lane portion of I-10 that cannot be expanded because it’s right up against the railroad tracks so it’s a constant traffic jam all morning and all evening. It’s over an hour to get to anywhere in Houston that’s worth getting to, most of the jobs are in downtown Houston or the southeast or southwest. But they were building *thousands* of McMansions out there, way beyond where there was any need for housing, just because they could. When gas prices go up, driving hours a day to get to work and back no longer looks so attractive and those McMansions turn into McSlums. That does not mean that good homes further in have turned to McSlums though, the housing bust in Houston, as it is in many places, is rather selective — the “right” neighborhoods that are close to work, close to good schools, close to shopping, etc., are retaining significantly more value than places like Katy which were destined to be McSlums from the beginning because there just is no reason to live way out there except for the fact that you can buy a McMansion for cheap, and any cheap McMansion housing eventually turns into a McSlum as people realize that having a 3500 square foot house but spending hours away from your family is hardly preferable to living in a more modest home closer to work so you can actually see your wife and kids from time to time…
So anyhow: Houston. Yeah, been there, done that. It’s definitely a unique place, and it’s hard to generalize from anything Houston to the U.S. as a whole — except to say that McMansion developments hours from the urban core are turning into pumpkins nationwide nowdays (same is happening here in the SF Bay area, some of the McMansion developments just over the hump in the Central Valley similarly turned into pumpkins).