Wednesday, June 10, 2009

Massive Deflation in Houses; Potential Relevance to Stock Market

From Calculated Risk comes a post on how far home prices have fallen in some less-than-prime areas of Southern California:

Inland SoCal: House Prices at 20 Year Low

Here is most of CR's post:

From the LA Times: Median home prices drop below 1989 levels in some parts of Southland

To return to the past, take a stroll down Mulberry Avenue in Lancaster. John A. Beatrice, 55, bought his spacious two-story Spanish-style house there brand-new for $120,000 in 1989. It was a price he could comfortably afford, and he planned on staying through retirement, so he wasn't worried about price swings....But he never imagined his neighborhood would drop off the charts. In April, a slightly larger home two doors away sold for $66,500. That's just over half the $130,000 it went for new in 1992. In 2005, that house sold for $330,000.And another example ...

[Patricia] Hynes bought her three-bedroom home in Lancaster brand-new for $119,000 in 1989 ... Her home is an island in a sea of repos. Houses on both sides have fallen into foreclosure; one is priced $10,000 less than the amount she paid 20 years ago.Nearby, a four-bedroom, 2,100-square-foot home sold in May for $89,000.Most of these areas are suffering negative absorption (families are moving out) and are the least desirable areas in SoCal. And there are more foreclosures coming ...

Another tsunami of foreclosures is threatening to swamp an already saturated market. In Palmdale and Lancaster, 903 homes were sold in April, but according to ForeclosureRadar, more than 7,500 are in some stage of foreclosure.Some buyers who thought they were getting bargains didn't. In Lancaster, Beatrice's eldest son, Daniel, bought a house near his father's for $175,000 in April 2008; comparable properties are now selling for about $95,000.

What is happening in the real world for old real estate can happen in other asset classes. This includes stocks, many of which represent tired companies that like 20 year old houses, have lost their raison d'etre, are no longer in desirable or up-and-coming neighborhoods, and need expensive "renovations".

A bigger picture perspective is that the limited liability stock company, known collectively as the stock market, may be an innovation from past centuries whose time is going the way of other inventions that have outlived their usefulness.

Thus, the well-known charts that even bears use to show that adjusted for inflation, stocks are not near historical bear market lows may be overly optimistic. There is no law of man or nature that dividend-paying instruments such as most large-cap stocks must always rise in asset value adjusted for inflation.

If you doubt the plausibility of what I am saying, just consider what the houses described above have done in price adjusted for twenty years worth of inflation.

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