Modern Living room apartment 311.
(photo credit: Uriel Messa)
Despite the expectations of so many naive young couples, and belying much talk
and many forecasts that predicted a collapse, home prices are not
The drop in prices reported by the government
assessor, a 1 percent fall in the fourth quarter, following a 1.2% fall in the
previous quarter (which means something like a NIS 20,000 drop in the price of
an average apartment in six months), reflects the most stagnant, most
social-protest affected and most buyers’-market half year that the real estate
market has known in recent years, and it restores some proportion to the
expectations that any minute any young person would be able to buy a home at a
A few weeks ago, Bank Hapoalim chief economist Leo
Leiderman predicted that home prices would fall by single digits. “Prices in the
real-estate industry have never fallen by double digits,” he
Leiderman is right. In the past 20 years, the greatest drop in home
prices (in real terms) was in 2003 (a year in which more than 100 Israelis were
murdered in suicide bombings), when prices fell by 5.9%. In nominal terms, the
highest drop in prices was also in 2003, at 5%.The fence on which
Why is this happening, after we were told through out last six
months of 2011 that home prices were falling and would continue to fall, that
all the young couples were sitting on the fence, that investors had quit the
market, that the market was full of apartments for sale, that foreign investors
have their own troubles and that the banks were not as generous as before? The
main reason, the classic reason, is that there is no real price tag for an
apartment. Despite everyone’s efforts to tell us the precise price for an
apartment, no two apartments are exactly alike. Even in the case of two
apartments in the same neighborhood, even in the same building – the area is
different, the floor is different, the direction of the windows is different, or
the standards and design are different, and so on.
It follows that there
is no clear value fixed in any market that, at the end of the day, clearly sets
the new price for the start of the next day. Therefore, each individual can
justifiably feel that nothing has happened and that his apartment is still worth
yesterday’s price, especially if he isn’t under pressure to sell and he has no
other investment options.
Consequently, and in contrast to the securities
market, where people aren’t in a hurry to sell at a loss either, in the case of
a home, the denial is even stronger. You will not find people giving their
real-estate agents an order to sell their home at the end of the day “for the
price you can get,” as many people do when they decide to dump their stock
In addition, it should be remembered that after contractors
jump on the bandwagon to buy land during the boom, it takes years for the newly
built apartments to reach the market and change the supply-demand
Hard to accelerate on the slope
There is another side of the
coin, however. Close attention should be paid to recent remarks by Prof. Robert
Shiller of Yale University, the cofounder of the Case-Shiller Home Prices Index.
At the World Economic Forum in Davos last month, he told Business Insider CEO
and editor- in-chief Henry Blodget what affects home prices even more than the
interest rate and housing inventory.
“I think historically, if you look
at it, interest rates don’t seem to matter very much in determining home
prices,” Shiller said. “In terms of forecasting, which you’re asking me to do,
to forecast the change, the big thing in forecasting home prices is momentum.
It’s different than the stock market. So if it’s been going up it will continue
going up, and if it’s been going down it will continue going down. By
that model, which is the most successful forecasting model for home prices,
prices will keep going down.”
In other words, falls take time to gather
momentum, but when they do, it is very hard to stop. That is the power of
momentum, for better or worse. Historically, anyone looking for volatility and
cycles in the housing marketing will have to look at a graph marked in decades.
In 1998-2007, prices fell slowly and steadily for 10 straight years (in real
terms), for a total drop of 22%.
The many housing starts, the measures by
the government and the Bank of Israel, and most of all, the change in the
public’s mind, are processes that take a long time to mature but are then very
hard to stop.
Do falling prices for two quarters constitute momentum that
might last for 10 years? Unfortunately, we will only know in retrospect. As
Shiller told Blodget, and apropos of the latest report by the Government
Assessor: “That’s the fundamental problem of economics. We’d like to be
statisticians, but in fact the world is always changing on us. So we end up
having to use judgment. We’re not very good at that.”