Realty Bites

Q. Have home prices hit rock bottom?

A. Yes. And no.

As most of you know, I’ve been bearish on home prices since 2002, when I first began warning my clients to stay out of real estate investments if at all possible. Sell your home now and rent, I told them. The economic news has continued to be dire since then, and there are few signs of a lasting recovery in sight. And yet, somehow, the stock market has been rising steadily, which bodes well for the real estate market as well. What’s going on?

Certainly there is plenty of reason to fear another downward spiral in prices. The lending environment is, shall we say, challenging. A large proportion of recent sales have been foreclosures and their close cousin, short sales. (A short sale is simply a sale in which the purchase price is not sufficient to pay off the mortgage.) And we can expect wave after wave of foreclosures in the future as people struggle to pay their mortgages while out of work and unable to find jobs. Things look pretty grim. And yet.

And yet, stocks have bounced back strongly from their lows last year. What gives? The Yale economist Robert J. Shiller may have an answer. He suggested recently that home prices aren’t tied so much to economic data as they are to homebuyer sentiment. Indeed, if you ask around, many people are enthusiastic about the prospects for improvement in real estate prices. There seems to be a general sentiment of optimism among people who have been sidelined by falling prices. If enough momentum develops, recovery could become a self-fulfilling prophecy.

In my opinion, it all hinges on whether there are enough buyers who can still afford to get into the market for real estate.

Hey, good news. The world didn’t end last week! Anyone care to guess what the stock market will do next week?

Q: Does your home price hype cycle theory apply to the stock market?

A: We’ll find out next week.

There was, in fact, a headline on the front page of The New York Times on Sunday, October 12: Those with a Sense of History May Find It’s Time to Invest. To my way of thinking, this is the rough equivalent of The Worst is Over. As you know from my previous post, when The New York Times reports the worst is over, the worst is just beginning. It is entirely possible that the stock market continues to drop sharply next week.

Consider another unattributed article from the Times on the same day. This one was quite clever, comparing today’s news to actual quotes from 1929, just moments before the stock market crash. Here are some excerpts from the piece:

From a “Wall Street Analysis” by Thomas C. Shotwell in “The World Almanac for 1929″:

The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher. MORE →