Words to strike terror in the heart of any homeowner: "And Now House Prices Will Now Drop Another 20%". That's what Garry Shilling argues in a rather exhaustive piece for Business Insider, in which he lays out a whole bunch of reasons to think that home values still have a little farther to fall. Most of those reasons come back to three factors that have considerable interplay: unemployment; tighter underwriting standards; and a huge unsold inventory. In essence, demand remains depressed because too many people can't get mortgages; while inventory is building up, not only the conventional inventory but the "shadow inventory" of houses that need to be sold in the near future, but which aren't on the market yet: defaults that haven't yet been foreclosed, foreclosures that haven't been put on the market, and homes owned by people who ought to sell, for one reason or another, but can't quite bring themselves to take the loss yet.
Housing busts have historically been about three years from peak to trough, I'm told by the people who analyze these things. But housing busts have never before seen the sort of government interventions we've had to prop up the housing market. So it's entirely plausible that the market will fall still further--indeed, likely, looking at the Case-Shiller index, which remains above its historical level.
Given that we just bought a house a few months ago, I'm sure this post will inspire a couple of readers to ask whether we regret that decision. The answer is that no, we don't, for several reasons:
1. We always viewed buying a house as a consumption decision, not an investment decision: we wanted to own a house a little bit for the forced savings, but mostly so that we could get the house exactly the way we liked it. We knew that process would be expensive, and would come with a bunch of hassles, an expectation that has already been borne out by our experience trying to get the chimney guy to call us back so that we can give him thousands of dollars to rebuild our chimney and flue. But that decision has been more than vindicated by our ability to fix up the kitchen the way we want it.
2. Washington DC is a slightly weird market, because government employment is stable, and government activity has been increasing. The ratio of rental prices to home prices isn't particularly high
, and has actually fallen somewhat over the last year. Meanwhile, the population of the city has now increased for the first time in 50 years. Our neighborhood, which has had few services, is now gaining crucial commerce like restaurants and grocery stores nearby, which should help support prices.
3. We're in it for the long term. We expect to own this house for longer than the seven-year average; for us, even in a worst-case scenario, eventually inflation will erase at least some of our equity losses. If we stay in the house as long as we hope, ultimately we'll have locked in a housing cost that will end up being well below the current market. We won't have bought at the bottom, of course--but the universe is too complicated for me to think that I can reliably buy anything at the bottom.
4. We're not house poor. Not just less than they were willing to lend us; even by conservative standards, our purchase was well below the recommended caps both as a percentage of take-home, and as a multiple of our annual income. That means that a decline would be an unhappy event, but not a catastrophic one.
Of course, buyers like us aren't going to help the market reinflate. In the long run, that's probably a good thing--it means a more stable, more sensible market. But in the short run, that may be a recipe for further pain.