Price stickiness in house markets
 

http://www.nytimes.com/2008/03/26/bu...=1&oref=slogin

At this rate it will take a few more years for prices in bubble markets to realign with historical averages. Obviously, all housing markets are local. For example here in King County with Microsoft and Boeing hiring, prices have not moved down much more than 1% in the last year.

But the national numbers raise an interesting question: Does the average homeowner, in a bubble market, view their house primarily as an investment or shelter?

If you view a house as shelter, and plan to stay there for a long period of time, you can wait out a market correction. You know that in 7-10 years you will at least break even and your home will have provided shelter over that time.

On the other hand, if you see your house primarily as an investment, a rational investor would walk away from the loss now. If they bought at the top of the market there is little chance of breaking even in 3-5 years. Of course walking away is not "free" - there is a cost in terms of credit scores and self esteem. You do have to live somewhere, but some homeowners can rent at a fraction of what their upside-down mortgage is costing them. It will be interesting to see where foreclosure numbers go from here.

Maybe, in the end, the biggest market correction will be one of expectations.

I'm not terribly concerned with the price of my home any time in the next 15 years. Although I don't want to be upside-down in the home, it doesn't bother me too much if I am (as far as I can tell, I'm not). We plan to be there for at least 15 more year.

I guess that puts me in the "shelter" camp.

I think the average person sees a home as a shelter. So if they have negative equity trouble only comes when they have to move, for job transfer or somesuch. If they happen to have an equity windfall they can use it save themselves from consumer debt problems, use it to trade-up to a bigger home, better neighborhood, etc. So that is out the window, of course, for many recent homebuyers, and that activity was providing some lift for consumption in the past 3-5 years. The loss of that "paper wealth" may cause recession as much as foreclosures.

Seems that the market is dropping much faster than the article contends. Prices in Vegas are down around 20% in the last year, and the house I sold in California 2 years ago has a valuation on zillow.com (which I know is a very rough measurement tool) of $150,000 less than the price I sold it for. So if a painful "ripping off the band aid" fix is best for everyone, I think the pain is coming faster than some think.

Be careful not to extrapolate two of the worst bubble housing markets to the rest of the country.

my house is worth 10% less than what I bought it for in 2004.

:(

I think one of the problems is that people don't really have a choice, i.e. they owe more on their house than they can get in cash to pay off the loan, and they'd rather pay the house payment.

If I didn't care about my credit, I would save a great deal by allowing my home to be foreclosed upon.

My house is up, but not much, because I live in the ghetto.

In 6 years, it is up something like 15%. Nothing to do with the housing crash.

Price stickiness is evidence to me that they view the house as an investment. You don't dump a stock that has great long term potential just because it's dipped down for a couple years.