Just a quick note on the US housing market, mostly as a cautionary tale about the grinding and plodding nature of house price declines. Two things happened in the US market last week worth noting. First, existing home sales fell by 2.6%. Second, median home prices fell for the ninth straight month.
Housing bear markets are different than bear markets in stocks. They last longer. A man can swallow his pride and sell a stock for a loss. But accepting the idea that property markets are cyclical too, and that you have bought at the top, this is something a man is reluctant to acknowledge until financial necessity forces his hand.
The existing home data was slightly at odds with the new home sales data released earlier in the week. New home sales actually increased by 14.6%, accompanied by an 11% decline in the median new home price. No mystery here. US homebuilders are slashing prices to clear inventory. Everything must go!
You now have a clash between existing home owners and homebuilders over prices. Investors and individual homeowners will be reluctant to lower selling prices because it means lower profits, or even a loss. But builders are anxious to find the market clearing price for inventory and to clean up the balance sheet. The homebuilders are looking for the bottom. Existing homeowners are stargazing at profits that will never materialise.
That means median home prices in the US will grind lower for the next year, and maybe much longer. It is a psychological war of attrition for sellers. And the current paper losses don't account for inflation either, which is working against them.
Sooner or later, home owners in over-extended property markets will have to cave. This will mean more price declines. With credit tightening, homes are still not affordable to new and first-time buyers.
The housing market always comes down to the affordability of the monthly mortgage payment. And based on that, the end of the housing bear is not near. Property bear markets last a very long time because of this psychological resistance to selling. America's has really just begun.
Does the US property market tell us anything about the Australian market? Maybe. Aussies are in love with property, so much so that we find people barely have time for stock market chatter at cocktail parties. The "animal spirits" associated with property are still alive and well, as is the belief that property the quickest, most fool-proof way to wealth.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
