Thursday, August 30, 2007

Goldman Sachs Predicts House Prices Down 7% this year, another 7% next

From Calculated Risk's excerpting of a Goldman Sachs research note, we see Goldman Sachs expects house prices to go down 7% this year, and another 7% next year.

They say the reasons are:
Nonconforming mortgage rates are rising and credit is being rationed.
Substantial excess supply remains.
Residential investment as a share of GDP is still high.
Foreclosure rates are increasing.
Note these forecasts use the Case-Schiller index, which more accurately reflects actual price changes, though it's not the one you usually read about in the headlines.

My predication in summer 2005 that prices would be at that same level 5 years later may prove to be bullish!

But as someone who still has lots of real estate, I'm not as as worried about our houses because a major component of our strategy has always been to only buy houses for which rent payments more than clear the mortgage payments. This has two main benefits: assuring we can pay our mortgage without dipping into our own funds each much, and also as a general indicator that the houses aren't dramatically overpriced. It's the people with a $500,000 house that can only get $1,800 per month in rent in that need to worry the most.

As one good survey of housing affordability notes, household incomes is a good measure of affordability, and lots of the country is overpriced by that measure (one big exception- Texas). Household income also plays a large role in the rental market. And while as the saying goes, "markets can say irrational longer than you can stay solvent", it's good to keep that information in mind, because eventually you expect at least some reversion to the mean.

So even if we won't cash out for the capital gains we did in 2005 and 2006, unless rents drop dramatically (unlikely, especially given our market. And in fact we're anticipating healthy rent increases for next year.), we will just take the monthly cashflow, which is still more than worthwhile. But there's a reason that barring our last two purchases (which we consider to be special situations), we've been very inactive recently. The doldrums are not at all over for housing, and may in fact get worse.

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