Question regarding housing market recovery

I'm sure this doesn't apply to all of them, but I beleive when the finance media people speak of the market recovering they are not talking about a return to peak prices, but a return to a normal growth rate.

e.g. prices not flat or falling, but growing 3-5% per year. the only way to know if that is going on is to wait until after serveral years have passed and look back.

Hardly an Expert wrote:

Ok, so a big cause of the recession we're currently fighting to get out of was the housing "bubble." Am I correct in defining a "bubble" as a kind of mass overvaluation of a good, and the "popping" of the bubble being that mass overvaluation ending for whatever reason, with a resultant plummeting of prices?

House prices may be back to normal right now but sales are dead. A recovery would be when people start buying again.

I think it is a pretty fair question to ask what people mean by a housing recovery.

I think it means different things to different people.

Some think of it as recovering what they paid for their house. I don't think this is realistic nor a good thing. Houses need to be priced right and priced as people can afford them. The only way to recover in this manner is to have the median household income go up 50 percent or so. We'd all love that.

Another perspective of a housing recovery is for prices to stabilize and sell at a consistent predictable rate. Maybe have it take 2-3 months for the average listing to sell.

The problem here is the huge backlog of foreclosures and high percent of short sales where the bank needs to agree to get less than what is owed.

In my opinion, the bulk of the looming foreclosures need to be processed, listed and sold while at the same time the banks need to get very efficient at short sales.

Once that happens there will be a healthy housing "recovery" without house prices going way back up.

I read recently that if 2006 was considered the top of the market pricewise, and 2011 is the bottom, that 5 year drop in prices will require another 10 years for prices to return to their 2006 levels. In other words, in 2021 a house will finally cost again what it cost in 2006. I have no idea if this will end up being true, but it does seem reasonable.

I'm 41, and I have bought a lot of real estate over the last 17 years, but never planned on selling any of it until I am in my 60s (if I sell at all). So, while my net worth has dropped significantly in the past 5 years, it's all ok given that I am not in a position where I have to sell anything. The rental income is still coming in!

The above is almost entirely correct, however, housing prices are still much higher than they should be, and you can expect them to decline further in the near future. Read:

That was the best non running question I have ever seen on this board.

Here is an interesting chart from the NY Times dated 2006:

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

I have serious doubts if the peak of housing prices will ever come back within the next, say 25 years. And past that many years it starts to get ridiculous in speculating the kind of world we will live in by then.

It would be nice if some of our leaders would stand up and say 'the peak is never coming back, and btw, that should be a good thing. Lets move on.'

Because I think a lot of the "recovery" you hear about is not so much about prices going back up but just that transactions are happening again in the housing market. But owners and banks have a motivation to want to believe the prices are coming back and they should hold on to their property a little longer.

Letting prices fall would also help construction work. The thing about the high prices is that it ignored a fundamental principal that houses depreciate over time. Therefore, for value to go up you have no choice but to create value. In other words, build or repair something.

Slow and Steady wrote:

I'm sure this doesn't apply to all of them, but I beleive when the finance media people speak of the market recovering they are not talking about a return to peak prices, but a return to a normal growth rate.

e.g. prices not flat or falling, but growing 3-5% per year. the only way to know if that is going on is to wait until after serveral years have passed and look back.

i agree with this. "recover" in a macroeconomic sense mostly means something like "stops being a drag on the economy". in GDP terms, residential real estate is mostly important with respect to new construction. so a recovery is important then, again in GDP terms, if demand for new construction returns. it is also important, of course, to the extent that bad debts are a drag on the economy - either because the debtor consumes less or the creditor has to write off losses.

on an individual basis, the OP's example homeowner probably considers "recovery" to mean something like return to peak paper value.

i think most economics commentary you read in the papers is talking about the macro sense. a big exception might be just about anything you read in a real estate section of a newspaper.

Hardly an Expert wrote:

When people talk about housing prices "recovering" are they talking about houses reaching their "actual" worth (in my very simplified example here, another 8,000, or about 5% more than my home is now valued in the post-bubble world) or talking about homes reaching their previous (overvalued) high values?

When people talk about the housing market "recovering," they are not necessarily talking about any price point being reached. You are right-- the tulip market has "recovered" even though the same (inflation-adjusted) prices have never been reached.

Instead, they are referring to various other things about the housing market that are still out of whack. For example, the number of foreclosures is still extremely high. There is a huge overhang of unsold new homes. Many banks have been relatively slow in foreclosing on people who aren't paying their mortgages.

These and other things add up to a housing market that is not "normal" and that hasn't yet "recovered."

I would take a bet that most housing will be at all times peaks in the next 25 years. Normally housing appreciates at about 3-4% (i.e. just above inflation). At 4% houses will be 2.5x what they are now at 3% they will be 2x. There definitely are some places that are off 50% form the peak (and maybe a few more by the time things finish) but now many. If we enter into a high inflation period (see the 70s) housing could go up much faster. Hell 25 years is enough time for everyone to forget about this so we can have another real estate bubble:). Now if you are using non inflation adjusted dollars, it will be much longer till we hit all time peak prices. And of course there is always the japan disaster where prices fall for the next 20 years.The problem is more the next 5-10 years where something like 1/3 of homeowners will still be underwater but they want to sell (new job, divorce, bigger family,....). Most of them don't have the assets to sell at a loss (remember you need to be up about 6% to just break even). That lack of mobility can have some bad side effects.Houses sort of depreciate. Every year it tends to cost more to build the same house (appreciation) but the house you have is getting worn out (depreciation). Where that balance is depends on a lot of factors.

Thanks everybody! You've all been very helpful. I'm also shocked the thread got 9 very legitimate, reasonable responses!