Why do house prices fall so slowly? Post author By Kevin O’Rourke Post date June 7, 2009 Robeert Shiller has a nice little piece on the subject here. (HT: Mark Thoma) Categories In Uncategorized 6 Comments on Why do house prices fall so slowly? ← Perspective on the Labour Market → Solvent Green Developers 6 replies on “Why do house prices fall so slowly?” Well, well! House (residential) prices decrease slowly. Sure do – just think about the level of investment – hundreds of thousands. No one wants to experience any loss of value, and your home is, well, your home. House prices are fast to rise, but slow to decrease. People are very irrational when it comes to considerations of the value of their home. Question: Where will prices decline to? How about x3 median income of the area in which the property is situated. Mortgage availability is another factor. If you can only borrow 75% of retail value (maximum) this would be useful guide. An additional guide would be to compute 28% of your real salary – this amount, plus house insurance and local charges should be the maximum you should pay out for your home. Now you observe the median price of a property in your area (not the average) – if the data are available, and compare with your real (P60) salary. Compute the difference in values using the above guides. You can ‘guesstimate’ value decreases in range -3% to -12% per annum. This should give the approximate duration of decline. Note, if the economic deflation continues, then this will also lengthen the duration of house price decline; 10 – 15 years?? My guess (for what it is worth) is that prices will settle at 1995ish levels or perhaps close to the rebuild cost. Brian P Brian P The term is “downward stickiness”. And for piquancy, more condiment in the wound: in deflation, rebuild cost can drop 30% from the peak. Sell now and move to Bali…. It’s similar to banks marking securities to market. The holders of these assets are happy to mark-to-market until they get answers they don’t like. I guess a lot of would-be house sellers will have to hold to maturity. Defaults tend to set the market clearing price. How are abandoned houses being treated. Banks may be selling their best houses first, from their vast inventory. What about people who are busted flat living rent free in the bank’s house? Just saying the data may be ‘corrupted’. I read that New York City housing ‘homeless’ people in new apartments. There is some evidence of ‘warehousing’ of properties and other tricks: http://exiledonline.com/depression-porn-gaming-the-real-estate-market/ http://articles.latimes.com/2009/may/05/business/fi-demolish5 Surely this is due to the fact that houses are not viewed by most people as investment assets (like stocks and shares which Shiller references), but as a form of consumption asset similar to a car Comments are closed.