Housing Price Musings - Don't Believe the Hype
Here's what I'm seeing daily:
1) Housing prices are not going down, they only go up. Because of x,y,z...
2) Housing prices are going down, but not as bad as 2007. Because of x,y,z...
3) Housing prices are going to crash worse than 2007. Because of x,y,z...
Reality:
1) Nobody knows for sure, because everything causes everything.
2) Nobody knows for sure, because everything causes everything.
3) Nobody knows for sure, because everything causes everything.
I was reading through a Bloomberg report and created this Frankenstein graph below of probabilities. Why probabilities? Because you can't know, and therefore the best thing you can learn to do is think in probabilities. Anytime I hear someone telling me what is going to happen, I simply ask - what are the probabilities that will happen.
Far left - we know that equities were higher than their normal values on a P/E basis, they've sold lower to adjust for that. Housing is still way above it's normal valuation range - the probability is that they will go lower to reprice just as equities have done. We don't know for sure, buy....the far right chart show the probability that we still have further to go based on current interest rates. How far - we don't know. The probability is lower for equities.
Second from left - we know that high LTV mortgages are much fewer than they were last time around - and job strength is on sounder footing, and banks have on average 2-3X the capital reserves they had in 2006. This means the probabilities of a market crash are very low. However, if we look at third from left chart, we see that the 'market path' probabilities based on rate hikes that are planned shows housing correcting from 160 to 140, which is about 12.5%. Given we saw a 20%+ growth rate in house values last year alone, this is more than reasonable. However, a $400,000 house in the US dropping 12.5% = $50,000. That feels like real money and may affect other spending, so as a consumer feels less wealthy they spend less and this can lead to a bigger recession.
TIP: How do you live a life of probabilities? You ask what is needed right now? If I need to move, I move now. If I need to refinance to build an addition or pay for college, and my rate is higher I do that now. If I can' wait now I wait now. Trying to decide what to do based on what might happen is like trying to plant a flag in the ocean. It's impossible, and if you can find the flag you won't know if it's where you left it originally. It's all relative anyway. If you see a house you love and you need to buy a house, you but it. If you can wait to refinance when rates are lower you wait. The life event is the key - ask yourself if it requires something of you now. If so, you stay aware of the probabilities and act accordingly to the best of your ability now. Avoid making a decision right now based on a belief that houses will go up, or houses will go down, or housing will crash. That will drive you crazy and take precious energy away from making the best decision you can now with the resources you have now.
