US House prices may face a long decline
US houses, as everyone knows, are deflating. There are signs that the fall in housing prices is slowing down, but the trend is still down and there are reasons to believe the US decline may continue for quite some time. As Robert Shiller in the New York Times explains:
“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?”
Shiller explains that housing markets simply don’t adjust quickly and in economic terms, they are not efficient. People make their housing decisions years in advance based on (expected) changes in their lives and these decision are often partly emotional. They may have found a job somewhere…or gotten a divorce…or their children may have left home…or they might just want to live in a different area. These plans take years to come together and years to execute. They can be reversed by changes in market conditions, but not quickly.
And then, when people are planning to sell a house, they may not be in a hurry. If prices slip, they may decide to wait, sometimes for years. Furthermore, decisions about buying or selling a house are often decisions taken by two people together. The husband may be desperate to get out of a sinking housing market, for example, but the wife may not want to leave her home. Even when they must sell for financial reasons, that decision can take months, even years to reach. Often, they hesitate. The wife expects to get a better job or the husband expects a raise or they anticipate some other economic change in their lives that would avoid the need to sell their house.
Then, after the decision is eventually made, there’s the actual process of selling a house: setting a price and finding a willing buyer. In a downward market, buyers’ expectations tend to adjust most quickly. Reading in the paper about a correction in the housing market, the prospective buyer expects a great deal. The prospective seller, on the other hand, tends to deny the severity of the downturn. He reluctantly and belatedly acknowledges that he’ll need to lower his price. But as he gives in the market gives way further. The prospective buyer hears about more great deals that other buyers are getting and he lowers his price targets even faster than the sellers lower their asking price.
Shiller gives another example: “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….
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.”
Now, the Australian property market is very different from that in the US and is unlikely to experience a downturn of the same magnitude or duration, however the same buyer – seller psychology applies in the Australian market and next time your buying or selling it worth keeping this in mind.