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Buy Later, Not Now

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A couple of weeks ago, the AACI sent out a link to what I believe is one of the most disastrous examples of journalism I have ever seen in my life.  The article, which was printed in Ha’aretz on August 8, shouts, “Buy Now, Not Later.”  In this article, the author defies logic, standard economics, and all of the experts he interviewed in order to encourage buyers to purchase a home at what may arguably be the worst time to buy in Israel’s recent history.

After stating that people on the internet (like me) believe housing prices are falling, the author insists that conversations with five experts “lead to some different conclusions.”  He points out, correctly so, that the real estate market is more complex than people realize.

Then the article gets ridiculous.

… if people think contractors who paid a lot for land on which to build will agree to sell it at a loss, they are very, very wrong. Nor can the government make them do so. Developers are already doing the math ahead of possible changes, and may well hunker down and not build. Yes, the developers are leveraged (they borrow money to buy and develop the land ) and yes they have to repay debt. But don’t forget that in the last few boom years, they accrued profits and achieved liquidity. They still have a great deal of breathing room.

While I am sure that the developers are making their calculations about holding onto their land to sell when the market is high, they’d be idiots to refuse to build on land they already bought because prices have gone down.  The land they bought is a sunken cost, and if the real estate developers have any common sense, they will not let it affect any of their business decisions.

Even at year-end 2008, when contractors really were in distress, they didn’t lower prices. So, in short, if developers have already bought land, they will simply wait to develop it.

These two situations are not comparable at all.  At the end of 2008, consumers were afraid to invest, so realtors waited for the initial hysteria to pass and then went about business as usual.  In our current situation there will be a fundamental drop in the cost of land, and new suppliers will enter the market, driving down prices.

The banks have also been doing some math. Because of the increase in interest rates and the war the government declared on property speculators, they’ve concluded that demand will be diminishing. Therefore, they have to be more tight-fisted and stringent when lending to developers. That in turn means that in contrast to the government’s wishes, the supply of housing is not about to increase, and the problems wracking the market today will not disappear in the foreseeable future.

Banks will, of course, do the math to see which developers are more viable than others.  And perhaps they will show themselves to be more elastic and the developers will have to take a bigger cut in their profits.  This may be seen as a slight increase in the cost of developing and will shift prices slightly upwards.  Just because a counter-force exists doesn’t mean that buyers will not benefit at all from the tremendous drop in the cost of lands.  Remember, consumer don’t have to buy; they can rent.  Investors don’t have to invest in real estate; they can invest in something else.  But it isn’t simple for real estate developers to change their entire business.  The consumers are more elastic than the developers and will therefore gain more from the drop in price and suffer less from the slight counterforce of the banks.

In general, there’s more and more evidence that the thesis guiding the government – that housing prices have been skyrocketing because of meager supply – is wrong. Most of the problems are on the demand side. Studies by the Bank of Israel and other bodies clearly show that the drop in interest rates is the chief explanation for the jump in transactions and price increases since 2008 (bold mine). Low supply brought less responsibility.

Just because the problem was caused by too much demand, doesn’t mean that additional supply will not fix the problem.  Let’s say  I was the only maker of ice cream.  Everybody wanted what I had to offer and I jacked up the price to $1,000 for a scoop of vanilla (a demand problem).  If you add 1,000 more vendors (supply solution) the price will go down.

Many think the supply more or less meets the demand of housing which people buy to live in: What changed matters was a 50% leap in buying homes for investment purposes from 2003 to 2009, they say. That upset the balance. Here again the problem is demand, not supply.

Here the author makes a good point.  Housing prices didn’t just go up due to low interest rates.  What started the hike in housing prices was the worldwide trend to invest in real estate.  This trend began in the late 90’s in the United States and went viral.  The Banks of Israel’s only made the problem much worse and turned it into a full blown disaster.

Finally, the author finishes his economics lesson and gets to his experts.

Hi first expert, Avraham Kuznitsky, is a controlling shareholder of construction company, so you know he is going to be impartial.  While conceding that prices will fall, Kuznitsky says that people will continue to buy.  He does not address the investors leaving the market, nor that many Israelis simply cannot afford a home.  Most importantly, he does not say the words that are written in bold before his name in the article, “prices will never drop.”

The next expert, Avi Drexler, head of the Israel Lands Administration from 1998 to 2000, is summarized as having said that he personally feels that “prices have peaked and will either stagnate or recede.”

The third expert, Dr. Yair Duchin from Ono Academic College, an economist specializing in real estate, says that “If you want to buy a home to live in – find the right one and buy it.”  He doesn’t make mention of those who currently cannot afford to buy, nor does he state that house prices will remain stagnant.  He simply suggests that “when you buy a home to live in, leave aside considerations of whether prices will either rise or drop to some extent.”

The fourth expert, Zvi Stepak, chairman and chief investment officer of Meitav Investment House, states, “The trend now is prices stabilizing with a tendency toward going down. It’s hard to estimate how much they will drop, but I expect the rate to reach 10% to 15% or even more. It largely depends on the global economy and on Israel’s macroeconomic situation.”

Are you keeping score?  So far out of four experts, none of them have said that prices will not go down.  Let’s check in with number five, Dr. Avichai Snir of Bar-Ilan University.  Dr. Snir says that people are in fact attracted to higher priced housing because of the socioeconomic status that comes with it.  He then summarizes what he believes to be the cause of the current housing problem:

Anyone who couldn’t afford a high-priced apartment beforehand suddenly discovered that with interest rates low they could enter the market. But for the same reason – the low interest rates – investors also entered the market and a situation developed where tenants competed with landlords, meaning investors, over the same apartments. Since landlords are more powerful they won out over the tenants as prices rose.

Dr. Snir makes a very good point.  But by pointing out that tenants don’t have the money to buy a home in the current market, he leaves one problem wide open.  Now that investors are leaving the market and the tenants don’t have the money for the high prices, what’s going to happen to prices?  Yeah, I thought so.

In short, none of the experts quoted in the article said that prices will not fall, not even the impartial expert who works for a construction company.  People will buy; people always continue to buy, but the amount is declining and prices are falling.

Next: a post that is not about the housing crisis!

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