Where’s The Bottom of the Housing Market?
October 12, 2008
By most estimates, Wall Street’s easy credit allowed home builders to produce about 2 million new homes for which there was never a creditworthy buyer. The resulting slow-motion economic train wreck has now produced over 5 million vacant homes currently listed for sale, with several million more for listed for sale but still occupied by owners or their tenants. Housing prices continue to fall, and everyone wants to know: Where’s the bottom?
It’s an interesting question when you realize there is certainly no lack of demand. Over 74 million Americans don’t own a home and in most cases would probably like to. So there are plenty of potential buyers – they just can’t afford to buy a home yet. So the question is, at what price will most of these 5 million vacant homes be purchased and occupied? The answer will represent the bottom of the housing market.
I believe the unpleasant conclusion in most cases is that home prices will bounce down a long staircase (each stair tread in turn feeling for a moment like the bottom) until pricing reaches investment value. Investment value being the price at which an investor can purchase a home and rent it for a profit.
To be sure, many homes will be purchased as prices fall. However, I believe that it is only at investment value that sufficent equity is likely to come into the housing market to establish a pricing floor where housing prices and financial markets will finally and fully stabilize. That means that housing prices still probably need to fall another 20% to 30% before we reach a real bottom – and that’s still a long way to go.
