Interesting theory. Certainly merits watching.

Another thing that could support prices is that non-distressed homeowners may not be willing to sell for a loss. If you can afford your current mortgage and you don't have to move, why would you take a $50,000 hit? While that's likely to prolong this lower level of sales, it could very well provide price support.

If you go by price per square foot, sure many homes of size are a better deal (McMansions on former country-side). Also, the taxes are low. It is not very "green" or inclusive...

This post misses the obvious issue that a large percentage (anywhere from 20%-40%) of new home prices come from raw land prices. A reduction in sales pace could force land prices down which could result in lower costs to the homebuilders. This in turn could facilitate additional construction at prices lower than today's prices.

Good point, Ryan.

I agree with Ryan on the land. Also consider increase volume (demand) means increase prices. With the lax lending standards that occurred during the boom, more people were able to buy. This goes back to supply and demand. This is why the same house I would drive past in 2003 was going for 400K and last year was being sold for 700K. No improvements were made, no changes at all. This is the heart of the price bubble. This is also why your tax assessments have increased so much.

Talking about Baltimore - where are these large mew constructions? All I see around are old houses falling apart, which some buyers rescued by purchasing and rehabbing, while in hope of making quick profit...it actually worked for some time, but it may be that some made more of a favor to the city, than themselves.

John, there's actually been a lot of new construction in the city in recent years, at least relatively speaking. But there was a lot more rehabbing, and you're right that not all those investors ended up making money -- or even breaking even.

Hi Jamie, you are absolutely right about much of new construction in the city recently. My point was referring to the 'new homes are bigger ' section from the original article (though I wrote "large" instead of "bigger"), as I thought it doesn't really apply to Baltimore City.

Ah, I see what you meant, John. Some of the new city homes do seem to be bigger than their predecessors, though not necessarily on the scale you can see in the 'burbs. The ones clustered around the waterfront are generally full of high-end touches, in any case.

There's was also a great piece in the WSJ about two weeks ago comparing different methods of (existing) homes sales price data:

http://online.wsj.com/article/SB120294518936866623.html

Seems to me that mid-priced homes financed with GSE (Fannie and Freddie) loans are still holding up well in price. It's jumbo-loan and subprime financed homes that are leading the way lower. Which suggests that much of the home price drop is foreclosure or distress sale driven. If this segment of the market were to stabilize, prices would as well.

For those making the land case, supply of land is always an issue. And likely will only be more so as Smart Growth and other environmental concerns (theoretically) restrict sprawl.

As far as the bigger/larger homes in the city issue, yes, they are growing. Take a look at the Lennar homes next to Fed Hill - they're huge. Plus the Poultey development in Locust Point aren't little 12-foot wide brownstones either.

To answer Mitch's question, people like myself are selling now because I'd rather take a 20k hit now than a 50k hit in the next year or two. In other words, prices are much more likely to go down over the next several years and nobody is predicting a price upswing anytime soon. So if you're planning on moving in the next five years or so, it seems to me now is the time to sell before prices drop another 20%. Thats my take...

I'm skeptical that prices will drop much in the Baltimore area. The coming housing demands from the base realignment and the 900+ jobs being added to T.Rowe Price should mitigate any drop in prices.

Ryan- The land sales theory is not as simple as it may seem. My team has a land sales specialist, and so we've spent a lot of time dealing in land values. There's a couple of complicated issues involved here.

Small, single lots owned by individuals that have potential for 1-4 home sites are definately falling in value. The drop is caused by people motivated to sell and the need to adjust their pricing accordingly to adapt to the current market.

However, large-scale home builders are not in the business of buying lots like this. They're buying large parcels that can be engineered to hold 25+ homes. This means that the parcels are large, and as the size of the parcel increases, typically you see a reduction in price per acre (There has to be the incentive for a developer to take on the inherent risk of development).

Very rarely have I seen large land parcels that have any sort of financing on them. They are often land that has been in a family for generations (perhaps an old farm or homestead of some sort), and there is typically not a NEED to sell RIGHT NOW. Often times the tax rates on raw land are low as well, so the cost of sitting on the land rather than selling is not terribly unappealing for many large parcel owners.

The OTHER issue is that any large parcel that was put under contract by a developer TODAYwould require a bare minimum of 18-24 months (and likely longer) before they could start breaking ground, another 3-4 months for laying infrastructure, and then a minimum of 90 days to actually build the first home.

This means at least 2-3 years of developmental time to get a housing development going. The difference in values of land that would be seen now would not be realized by a developer (and would not be a value they could pass on to buyers) for at LEAST 2 years.

Thanks for that explanation, Jonathan. This has been a great discussion, guys.