Why are slumping house prices bad?

Discussion in 'Economics' started by noob_trad3r, May 23, 2011.

  1. Everyday another article about how foreclosures and slumping house prices are bad for the economy.

    Why? Cheaper house prices means people who buy a home will be less house poor and have more discretionary spending money. This is good for the economy it seems.

    People walking away from 3000 a month mcmansions and giving the bank the keys means that person now is no longer house poor and has more money to spend on goods and services. Thats good for the economy.

    All this money going to service a mortgage is just a money sink it seems. So why the doom and gloom?
  2. Bob111


    also with cheaper house prices more and more people find themselves upside down on their mortgage,paying more than their house is worth. fun isn't? stimulating :p
  3. On a macroeconomic level you will probably get someone saying it is because it affects confidence and thus expectations. I don't however agree with this. I think the whole confidence concept is just and excuse to give the boomer generation a huge advantage over the next generation.

    On the plus side people will have more money for themselves.
  4. zdreg


    housing prices are bad for the same reasons that the clueless inflationastas on ET will tell you that deflation would be the end of the US. put deflation into search in the upper right hand corner. you will come up with half dozen reasons why lower prices are bad for the country.

    lower prices ie housing prices would be the best event for 1st time buyers.
  5. Because most people are already LONG the housing market and bought too high :D

    The real problem was the false demand that occurred from the ridiculous loans being handed out and very low down payments, interest-only, balloon payment ARMs etc that enabled people to "justify" buying a house that was WAY OVERPRICED because they could get a bank to give them the money to do it.

    Because people were buying, the too high prices became entrenched and perceived as NORMAL. I mean basic common sense should tell you that paying $650K for a nondescript 3-bedroom ranch house in crappy neighborhoods in California is overpaying. It was the greater fool theory carried to extremes.

    "Fair" house pricing should be where people can buy a house with 20% down at a non-skewed normal range interest rate ( 7% or so ) and spend no more than 28% of their income on the PITI. Try doing that with a $650K house and see how many people really are qualified to buy something at that price level.

    Now the bank rules changed, the music stopped and nobody can really make a justifiable reason for overpaying anymore. Personally, I think this market still has a LONG ways to go down. Consider the following:

    1. Interest rates are still abnormally low and likely to rise over time.
    2. Many people can't afford the down payments required now.
    3. A large number of people have impaired credit
    4. The demographic trends are turning negative.
    5. The overhang of foreclosed and distressed homes out there.
    6. There is no longer any secure long term employment.
    7. Real estate taxes are increasing in many locations due to budget issues.

    There is really no reason to buy any more house than what you NEED, and if you are anticipating moving within 5-7 years, you are probably better off renting a house anyways since there will basically be zero appreciation and then you won't have to deal with the hassle of selling it later.

    Now, back to the question about why would this be bad? Many reasons:

    1. Declines in construction employment.
    2. Reverse wealth effect impairs consumer demand.
    3. People going underwater and adding to the foreclosure issue.
    4. Neighborhoods declining from too many bank owned properties.
    5. Declines in demand for appliances and house furnishings.
    6. Impairs mobility because harder to sell homes at an acceptable price.
    7. Increased cost to consumers from bad credit
  6. if you agree with theory like creative destruction, slumping housing prices are actually a good thing in the long run.
  7. S2007S


    Housing prices along with the cost of living in general when owning a house such as utilities, taxes, insurance are still way out of touch considering where the economy was and where it is now. With all the stimulus and programs to keep housing propped up has only caused housing prices to remain inflated, yes in certain markets housing prices are down significantly, but in general prices are still out of reach. Housing prices in general are still overvalued by at least 30%-50%.....

    So why are slumping house prices bad, well the reason is the millions of people who do own houses feel less wealthy when they see a house they bought lets say 20 years ago for $250,000, worth $1.4 million in 2007 and now only worth $1.10 million in 2011.... well they feel less wealthy because there house isnt worth $300,000 more than it was just 4 years ago and it hasnt increased in value 10% yoy so you now feel even more saddened by the fact that you cant continue to borrow against your house like its a big fat piggy bank. Add that into the mix of higher taxes, higher cost of living and maybe a decline in wages and your pretty much down across the board to go out and spend as a consumer should since it makes up 70% of the GDP.....they figure why not artificially drop the 30 year fixed rate to historical lows so people can go out and refinance and use those extra hundreds every month to buy new cars, electronics and fun vacations....so instead of people borrowing against their houses which many people cant do today since they are underwater go out and refinance at a lower rate and take the extra money and have fun! Just wait till mortgage rates go up and housing prices continue to move further down!
  8. olias


    in the long run the housing market has to correct at some point. In the short run deflationary pressure in housing is a tremendous albatross round the neck of the economy, but it has to happen. Sure you can find a silver lining in the situation which is why terms like 'good' or 'bad' are not really to the point. They are too simple
  9. It puts the banks under water it's a simple as that.