increasingly difficult for governments to keep telling their citizens that they can’t have an affordable home because of land restrictions

TO BE NOTED: From the Gulf Times Via Free Exchange Via Economist's view:

Unlearned lessons from the housing bubble

Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land

By Robert J Shiller/New Haven, US A construction worker building a new home in Hayward, California. The kinds of expectations for real estate prices that have informed public thinking during the recent bubbles were often totally unrealistic There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates. That misunderstanding encouraged people to buy homes for their investment value – and thus was a major cause of the real estate bubbles around the world whose collapse fuelled the current economic crisis. This misunderstanding may also contribute to an increase in home prices again, after the crisis ends. Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets. But we do not really have a land shortage. Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land. Less than 1% of the earth’s land area is densely urbanised, and even in the most populated major countries, the share is less than 10%. There are often regulatory barriers to converting farmland into urban land, but these barriers tend to be thwarted in the long run if economic incentives to work around them become sufficiently powerful. It becomes increasingly difficult for governments to keep telling their citizens that they can’t have an affordable home because of land restrictions. The price of farmland hasn’t grown so fast as to make investors rich. In the United States, the price of agricultural land grew only 0.9% a year in real (inflation-adjusted) terms over the entire twentieth century. Most of the benefit from land for investors has to be from the profit that agribusiness can make from their operations, not just from the appreciation of the price of land. Despite a huge 21st century boom in cropland prices in the US that parallels the housing boom of the 2000’s, the average price of a hectare of cropland was still only $6,800 in 2008, according to the US Department of Agriculture, and one could build 10-20 single-family houses surrounded by comfortable-sized lots on this land, or one could build an apartment building housing 300 people. Land costs could easily be as low as $20 per person, or less than $0.50 per year over a lifetime. Of course, such land may not be in desirable locations today, but desirable locations can be created by urban planning. Many people seem to think that the US experience is not generalisable, because the US has so much land relative to its population. Population per square kilometre in 2005 was 31 in the US, compared with 53 in Mexico, 138 in China, 246 in the United Kingdom, 337 in Japan, and 344 in India. But, to the extent that the products of land (food, timber, ethanol) are traded on world markets, the price of any particular kind of land should be roughly the same everywhere. Farmers will not be able to make a profit operating in some country where land is very expensive, and farmers would give up in those countries unless the price of land fell roughly to world levels, though corrections would have to be made for differing labor costs and other factors. Shortages of construction materials do not seem to be a reason to expect high home prices, either. For example, in the US, the Engineering News Record Building Cost Index (which is based on prices of labour, concrete, steel, and lumber) has actually fallen relative to consumer prices over the past 30 years. To the extent that there is a world market for these factors of production, the situation should not be entirely different in other countries. An even more troublesome fallacy is that people tend to confuse price levels with rates of price change. They think that arguments implying that home prices are higher in one country than another are also arguments that the rate of increase in those prices should be higher there. But, the truth may be just the opposite. Higher home prices in a given country may tend to create conditions for falling home prices there in the future. The kinds of expectations for real estate prices that have informed public thinking during the recent bubbles were often totally unrealistic. A few years ago Karl Case and I asked random home buyers in US cities undergoing bubbles how much they think the price of their home will rise each year on average over the next ten years. The median answer was sometimes 10% a year. If one compounds that rate over 10 years, they were expecting an increase of a factor of 2.5, and, if one extrapolates, a 2000-fold increase over the course of a lifetime. Home prices cannot have shown such increases over long time periods, for then no one could afford a home. The sobering truth is that the current world economic crisis was substantially caused by the collapse of speculative bubbles in real estate (and stock) markets – bubbles that were made possible by widespread misunderstandings of the factors influencing prices. These misunderstandings have not been corrected, which means that the same kinds of speculative dislocations could recur. - Project Syndicate lRobert Shiller, Professor of Economics at Yale University and Chief Economist at MacroMarkets LLC, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics

TO BE NOTED: From the NY Times:

"Economic View

Why Home Prices May Keep Falling

By ROBERT J. SHILLER

HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.

Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.

But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.

There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.

Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.

On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.

All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.

For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic “regime change” — a shift big enough to make people change their thinking.

But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market.

Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC."

Foreclosure sales, which historically bring 20% less than non-foreclosures, pull down house prices in hard-hit areas

TO BE NOTED: From HousingWire:

"Seasonal Strength in Home Prices

Posted By DIANA GOLOBAY
May 21, 2009 8:22 am

Following a free fall in much of 2008, the value of many households’ largest asset — their home — seems to show signs of stabilization so far in 2009.

A composite index of 25 major metropolitan areas across the US showed a 0.3% slide from February to March, adding to the composite measurement’s Q109 stability, according to [1] a monthly housing report released today by Radar Logic.

“While not a bottom, the stability in home prices we are seeing is certainly good news,” says Radar Logic CEO Michael Feder in a media statement today.

House prices improved in 11 of the 25 major metropolitan areas studied for the report. Six of the remaining areas showed declines less severe than those seen in the previous month.

The Boston market showed the strongest month-over-month gain (6%) in house price per square foot — the measurement used by Radar Logic to remove the factor of house size and to show house prices in real terms. Denver followed closely with a 5.7% increase since February, while Milwaukee house prices rose 5.6% and Charlotte posted a 5.1% increase.

The Washington, DC market fell the farthest in terms of price per square foot, dipping 7.5% below February’s levels. The only other area to come close, Las Vegas, fell 4.3% from the previous month, while the other 12 areas that showed declines only fell less than 2% from last month.

Sales counts rose in 23 of the markets since February, in line with historic seasonal patterns for the month, Radar Logic found. The findings also correspond to increases in so-called “motivated” sales — a kinder term than “foreclosure” sales — across 23 local markets on a year-over-year basis during the month, and in 21 areas on a month-over-month basis.

The increases correlate with expiring foreclosure freezes and moratoriums that dragged down foreclosure sales in previous months, Radar Logic’s analysts say in the report.

Foreclosure sales, which historically bring 20% less than non-foreclosures, pull down house prices in hard-hit areas. An influx in foreclosure sales following the expiration of many moratoriums might have a negative impact on house prices in future reports, making the stability seen in the first quarter a seasonal anomaly.

And with online foreclosure marketplace RealtyTrac reporting foreclosure filings [2] up 32% in April from the same time last year, it’s unclear how much longer housing markets across the US have to unwind.

Write to [3] Diana Golobay."

today’s figures showed the first improvement in the rate of change since December 2005

TO BE NOTED: From Bloomberg:

"Home Prices in 20 U.S. Cities Declined at Slower Pace (Update1)

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By Courtney Schlisserman

April 28 (Bloomberg) -- The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007, amplifying signals that the market may be stabilizing.

The S&P/Case-Shiller index’s 18.6 percent decrease compares with a record 19 percent decline the month before. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Declining prices, Federal Reserve efforts to bring mortgage rates down, and government tax credits for first-time buyers may continue to support sales after an almost four-year slide. Still, mounting unemployment means purchases are unlikely to rebound quickly.

“We’re probably getting close to an inflection point,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who correctly forecast the drop in the index. Still, he said, “if we are indeed going to see a recovery in the second half,” the double-digit price drops will need to abate in the next few months.

Economists forecast the index would drop 18.7 percent from a year earlier, according to the median of 27 projections in a Bloomberg News survey. Estimates ranged from declines of 17 percent to 19.2 percent.

Compared with a month earlier, home prices fell 2.2 percent in February, after a 2.8 percent decline in January, today’s report showed.

On an annual basis, today’s figures showed the first improvement in the rate of change since December 2005. The index started falling in January 2007.

Universal Drop

The price figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month-to-month.

All 20 cities in the index showed a year-over-year price decrease in February, led by a 35 percent drop in Phoenix, a 32 percent decline in Las Vegas and a 31 percent slide in San Francisco. Compared with the prior month, prices also fell in all 20 cities.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” David Blitzer, chairman of the index committee at S&P, said in a statement.

A total of 803,489 properties received a default of auction notice or were seized in the first quarter of 2009, the highest since records began four years ago, according to RealtyTrac Inc., an Irvine, California-based seller of mortgage data.

Jobs, Confidence

Job losses threaten to keep prices down and force more homes into foreclosure, economists such as IDEAglobal’s Maxwell Clarke said. The U.S. unemployment rate jumped in March to the highest level since 1983 and the number of jobs lost exceeded 650,000 for the fourth straight month, according to Labor Department data.

At 10 a.m., figures may show the New York-based Conference Board’s index of consumer confidence rose to 29.9 in April from 26 in March, according to the median forecast. Estimates ranged from a high of 35 to a low of 26. The measure hit a record low of 25.3 in February.

Foreclosure-driven declines in prices have spurred home resales. Purchases in March stayed near a four-month average and prices rose from February, according to data from the National Association of Realtors. About half of the March existing-home sales were of distressed properties and first-time buyers accounted for about 51 percent, the group said last week.

New Homes

Sales of new homes in March were higher than economists forecast, according to Commerce Department data released last week. They fell 0.6 percent to an annual pace of 356,000 after a revised 358,000 in February that was stronger than previously estimated. Inventories of new homes fell to a seven-year low.

KB Home, the Los Angeles-based homebuilder that targets first-time buyers, is among those in the industry seeing an improvement. The company last month reported a narrower first- quarter loss as orders rose for the first time in three years.

Other reports indicate a let-up in the economy’s decline. The Fed said earlier this month that the U.S. contraction slowed across several of its biggest regions in March, with some industries “stabilizing at a low level.” Retail sales showed a “slight improvement” in some areas, and there was a “scattered pickup” in home buying, according to the central bank’s so-called beige book.

Fed officials will tomorrow announce their decision on the direction of the benchmark overnight lending rate between banks.

Steps to lower borrowing costs and unclog lending have helped push mortgage rates down in recent months. The average rate on a 30-year fixed mortgage reached a record low of 4.78 percent in the week ended April 2, according to Freddie Mac.

The National Association of Realtors’s affordability index, which tracks mortgage rates, home prices and incomes, surged in February to the highest level in 20 years of data.

Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net"

sign that low interest rates may be moderating declines in real estate values

TO BE NOTED: From Bloomberg:

"Home Prices Gain 0.7% in February From January (Update1)

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By Kathleen M. Howley

April 22 (Bloomberg) -- U.S. home prices rose 0.7 percent in February from January, the first consecutive monthly gain in two years, a sign that low interest rates may be moderating declines in real estate values.

Prices fell 6.5 percent in February from a year earlier, the second-smallest drop in six months, led by a 19 percent decrease in the region that includes California, the most populous U.S. state, the Federal Housing Finance Agency in Washington said today. The gain in February from a month earlier beat the average estimate of 10 analysts in a Bloomberg survey for a decline of 0.7 percent.

Mortgage rates have tumbled 1.6 percentage points in six months, making houses and condominiums more affordable. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 5.3 percent last week as Americans took advantage of interest rates near record lows. Home sales rose 5.1 percent in February from a month earlier, the National Association of Realtors said March 23.

“As demand firms, and once inventories of houses and a broad range of goods are brought into line with sales, economic activity should begin to stabilize,” Federal Reserve Vice Chairman Donald Kohn said in an April 20 speech in Delaware.

The inventory of properties on the market fell to a 9.7 month supply in February at the current sales pace, down from April’s high of 11.3 months, and sales rose 5.1 percent from a month earlier, the Realtors group said.

The number of Americans signing contracts to buy previously owned homes rose 2.1 percent in February, led by a 14.5 percent jump in the Midwest and a 10.6 percent increase in the Northeast, the National Association of Realtors said in an April 1 report.

Arizona, Nevada

The FHFA’s February house price index is down 9.5 percent from its peak in April 2007. The Mountain region of the U.S., including Arizona and Nevada, had the second-biggest decline in home prices from a year ago, dropping 9.2 percent, the FHFA said in today’s report. The South Atlantic area, including Florida, fell 8 percent.

New York, New Jersey and Pennsylvania declined 4.1 percent from a year earlier and New England dropped 3 percent, according to the report.

Mortgage Rates

The average U.S. rate for a 30-year fixed home loan dropped to 4.82 percent last week from 4.87 percent a week earlier, according to Freddie Mac, the McLean, Virginia-based mortgage buyer. The rate has averaged 5.02 percent this year, compared with 6.21 percent during the five-year housing boom that ended in 2005.

The difference between 30-year mortgage rates and 10-year Treasury yields has narrowed to about 2.2 percent from 3.1 percent in December, which was the widest since 1986. The spread remains almost 0.7 percentage point above the average of the past decade, data compiled by Bloomberg show. Rates for 15-year mortgages are about 1.8 percent above 10-year Treasury yields, compared with an average 1.4 percent since 1999.

U.S. banks owned $11.5 billion of foreclosed homes in the fourth quarter, up from $6.7 billion a year earlier, according to the Federal Deposit Insurance Corp. in Washington. California and Florida metropolitan areas led the U.S. in foreclosures in the first quarter as unemployment and falling property values deepened the housing recession, according to RealtyTrac Inc., based in Irvine, California.

‘Glut of Homes’

“Whatever damage has been done in California is only going to get worse because there is a glut of homes owned by lenders that aren’t yet on the market,” said Bruce Norris, a principal with the Norris Group, a Riverside, California-based real estate investment firm. “These homes are like a shadow inventory that is likely to drag down prices further when they come onto the market.”

Freddie Mac, along with larger rival, Washington-based Fannie Mae and banks including New York-based Citigroup Inc., have slowed or delayed foreclosures using various moratorium plans in the hopes that homeowners in default will be able to modify their loans.

U.S. home prices probably will fall 5.1 percent this year to $188,500, less than the 9.3 percent plunge in 2008, according to the real estate group. Home resales probably will rise 1 percent to 4.96 million after a 13 percent drop last year, NAR said in a forecast posted on its Web site.

The housing market may be buoyed by improvements in the banking sector. Treasury Secretary Timothy Geithner said yesterday in testimony to a congressional oversight panel that most banks now have “more capital than they need.” Geithner also said there were signs of “thawing” in credit markets.

The U.S. has pumped more than $590 billion of public money into troubled financial institutions over the last six months through the $700 billion Troubled Asset Relief Program. Geithner said in a letter to the oversight committee yesterday that $109.6 billion remains of the funds authorized by the Emergency Economic Stabilization Act last year.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net."