Dispelling Myths About the Future of Home Prices

As home sales and prices fell once more in July, industry insiders that predicted a soft landing are beginning to be proven wrong. Current owners have seen their wealth shrink a lot, as equity plummets and the future remains questionable.

With that in mind, let’s take a look at some of the cliches/forecasts given by a number of Florida home mortgage experts. Are they correct? Or did the following housing myths never make much sense in the first place?

Myth #1: As long as job growth is strong, prices can’t go down

This misguided statement is almost understandable. In past housing recessions, prices fell sharply in markets with severe job losses. But the argument that prices can’t fall in a good job market doesn’t make economic sense:

Granted, a strong employment picture helps Florida mortgage loan demand. People have more money, they can spend it. But look at it this way: if far more properties are pouring onto the market than can be absorbed by people lured by the new jobs, and if the sellers are pressured to sell, prices will fall.

In booming markets, prices soared to such extraordinary levels that builders kept churning out new homes, and owners of existing houses threw a record number of units on the market to cash out. Therefore, supply grew so quickly that demand, even in strong job markets, simply couldn’t keep up.

Myth #2: The builders learned their lesson in the last downturn. They won’t swamp the market with new houses when the market turns

This is idea is based on the notion that builders wouldn’t take a chance by creating lots of unsold, “spec” units that could clog the Florida home mortgage loan market in a downturn. They had supposedly absorbed hard-won discipline from their excessive building in past downturns.

It hasn’t turned out that way. Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. Moreover, buyers are walking away from deposits on houses that were supposedly pre-sold, forcing developers to place them back on the market at a discount to other hopeful Florida home loan owners.

The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate.

Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices

Here’s a chance to determine the validity of this statement: Florida mortgage rates have fallen again. What really matters for all assets, of course, is real interest rates - in other words, nominal rates after subtracting inflation. And these real rates fell sharply starting in 2001. That caused a legitimate, one-time increase in housing prices.

The rub is that prices rose far more than could ever be justified by declining mortgage rates. That’s where the bubble kicked in. Today’s relatively low rates are not, and never were, a reason why prices would keep rising. Once real rates drop and stabilize, the impetus goes away - again, the gain is a one-time, not a recurring, phenomenon.

Today, real 10-year rates are still extremely low. They have nowhere to go but up. When the one-time gain of 2001-2004 reverses, housing prices could take a further hit.

Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices

This argument ignores that the tough zoning laws and anti-development fervor have been a feature of America’s tony towns since the early 1970s. The “not in my town” phenomenon is nothing new.

America’s housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where affordable housing is plentiful. Then the jobs move to the areas with the cheap houses. People in their 50s and 60s cash out early in San Diego and buy a bigger house for half the money in Texas or Florida.

And the cities are just as enthusiastic about developing blighted areas with new, tax-paying high-rises as the suburbs are slamming the door. In the New York area, Brooklyn, Jersey City and Hoboken - and even Manhattan - are sprouting more new housing than in decades, despite a job market that’s hardly robust.

Conclusion

All of these myths, of course, are bad news for sellers hoping to turn a major profit. Buyers, however, are in the middle of an ideal time to take out a Florida mortgage loan. Prices should remain low for awhile, as these theories proven.