The "First" and "Last" Time Buyers, A Long Story...

A good analysis was given my My "friend" Professor Robert Shiller on the New York times.

He really gives some good ideas why the housing market can continue correcting for quite a long period. He gives the example of the first time buyer - the young couple - and the "last time" buyer - the old couple about to retire- .

Let's decorticate certain point made - you can as well read the full article - for archiving purpose, in general, I prefer to copy fragment of the article, the one I think are important to highlight, instead of providing a link as links don't survive time.

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

"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."

I suppose the same phenomenon has started in Suomi-Finland about one year ago and according to my deep studies and my materials (crystal balls, www), the correction will last for at least another 3-4 years to end sometime in 2012-2014, to stagnate for a very long time- well until the next wave of babies - boomers arrive in force in the market - in the past 10 years an army of baby have popped up around many cities , and may flood the "housing" market in about 2025-2030 and at most create another financial crisis ;-> - be careful when you make babies, think about the economical impact on bankers income and stock options...

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

In Finland we are just starting to witness the process of higher unemployment from a low of 7% it will most probably reach double digits of about 11-12% (or more if the economical deterioration is higher than expected) - of those figures could be much higher if the retirement process had not started (since the work force will be shrinking)

"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."

Regarding the young couple, it is clear that they have been completely priced out of the market and on top they are slowly denied participation in the job market.

Although the strong dynamic of the past 15 years has pushed some to take massive debt (where debt servicing burden is undocumented by the statistics officials) or need to leave in "rabbit" size dwelling (though rabbits are smarter, they don't pay a penny for the place they live in).

"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."

So no hurry, usually a bust in the housing market stays fresh in minds for many years that follows- of course media, banks economist and some politicians (by providing trap subsidies, wrong tax scheme, permit control) will try to scare people off by suggesting that housing price will resume again their growth - fallacy and lies made to trap honest and young or old workers for the greed of few.

You have to remember, as well, that a boom is mainly a concentration of demand in a specific point in time that outpace the offer and is usually created by low interest rates, lax regulations and deterioration of credit qualities - this of course is amplified by the media (TV program, self interest) and social behaviours (the sheep behaviour - a friend or relative is buying and the wave start).

This will not happen for at least a decade or two or maybe never (though I doubt this latest point, history has shown the contrary) - household are not speculators after all they want to live in a place they like without having high debt pressure - this is not the case today but probably will be down the line at least in term of quality and affordability.

Source : Shiller - NYT