Home prices have been falling for several years and inquiring minds want to know if the pain is going to end. Of course, a home owner’s pain is a home buyer’s gain, but I digress. At his excellent blog, Calculated Risk (link below), Bill McBride shows a chart covering two sources of data on home prices. Based on the data going back to 1976, it looks as though we are near the bottom in terms of price.
If you take a look at the chart, two things will no doubt jump out at you. First, the absolute magnitude of the real estate bubble is the most obvious point. But second, we can see that prices have fallen far enough that we are approaching the historical trend line as shown in the chart below.
Source: Calculated Risk
In the chart, there are two streams of price data on homes — S&P / Case-Shiller and Corelogic. From the post accompanying the chart, here is the explanation [emphasis added]:
…The … graph shows the upward slope for both real price indexes. Even the Shiller Irrational Exuberance real price index has an upward slope – and the CoreLogic upward slope is steeper.
…Right now the real CoreLogic HPI is less than 5% above the trend line (it could overshoot), and the Case-Shiller national index will probably decline sharply in Q1 too and not be far above the trend line.
…Prices might overshoot to the downside because of supply and demand issues; there is a large overhang of vacant housing units and many distressed properties still coming on the market, plus demand is soft with weak employment, fairly tight financing, negative home buying sentiment and some usual buyers excluded because of credit issues. But I don’t think national real prices are that far out of line.
Note: usually near the end of a housing bust – after nominal prices stop falling – real prices decline slowly for a couple more years, and we will probably see that this time too. Of course, right now, nominal prices are still falling.
After seeing the chart, I emailed Calculated Risk to find out what the annual percentage rate of increase has been in the two measures of home prices. The S&P / Case-Shiller average has gone up at 0.2% per year and the Corelogic rate of increase has been 0.8% per year or slightly less than 1% per year. In other words, in the aftermath of the bubble, price increases per year have been modest indeed.
Home prices, George Soros and reflexivity
The point made above about overshooting is a good one. In hindsight, we know that prices overshot on the upside and went far above the historical trendline. Therefore, it is reasonable to suggest they might overshoot and fall below the trendline too.
This is a common market reaction. In his book, The Alchemy of Finance (Simon & Schuster, 1987), George Soros described market activity as being an example of reflexivity. With stocks or real estate going up, more and more folks enter the market and, in turn, their buying moves prices higher. Risk is not a big factor in the buying decision. Think of the mood about real estate in 2005 or technology stocks in 1999. Eventually though, all potential buyers are on board and then the flip side takes over. Reflexivity also works on the way down because falling prices beget more selling and prospective buyers decide to delay buying so prices fall further.
Government interventions in the housing market have failed to stem the ebb tide for prices. So far, we have not hit what is known as a market clearing price. That is, the price at which bargain hunters move in and snap up what they see as bargains. We are beginning to see buyers move in, but the number of unsold homes is still very high.
Though we may be close to the end of price declines, the last part may be very difficult. This is because the process of getting to a ‘market clearing’ price is always messy and painful. For example, think back to the stock market lows of March 2009. That was not a time when it was easy to hang on to stocks much less to add more. So it will be as we approach the bottom in home prices. We are likely to see very negative news and sentiment in terms of homes. However, that is a necessary part of the bottoming process.
See also:
Zillow.com reports major real estate woes
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Here is a pretty simple calculation:
Avg income of married couple: $60K yr Avg savings rate: 5% Amount saved a year: $3K
Current avg home price: $150K 20% of home price: $30K
Number of years needed to save for a down: 10
I wish my real estate tax falls along with the price. To add insult to injury, my tax bill is higher every year!
depends where your property is, some areas have stabilized at bit while others keep tanking (e.g. Vegas)…no bottom in sight for some unfortunately…
Case Shiller is not reliable. Just go to Reggie Middleton’s site. He has dissected their methodology meticulously. CS methodology is facile, and unreliable.
You cannot go by this chart. You have to go by what the person was making before the real estate boom. And also what the house cost then. Prices will have to fall another 25% to have the same ratio of debt to income on a house. 2015 should be the time to buy.
What should also be looked at from this chart, is that once a bottom is developed it takes about 6 years before it begins to rise again. Under this assumption we have about 7-8 more years of flat home prices ahead of us. So people that are under water now will still be under water 10 years from now, which is probably why banks are so reluctant to loan any money for anything right now.
How far will home prices fall?
That depends upon the banks and their shadow inventory
crashtic — You have a very good point, with which I agree. I don’t look for a quick bounce back even when prices bottom.
However, the two periods you mentioned were quite different. The downturn that began in 1979 was triggered by sharply higher interest rates. 1979 was when Paul Volcker was appointed and he quickly jacked up rates. The next downturn was triggered by the recession of 1990-91 and had a much slower turnaround.
Sammybaby — Actually, housing affordability is very good now because prices have fallen and mortgage rates are very low so monthly payments for many homes are less than rent.
These indexes of home prices are pretty reliable, but not definitive. I think they track trends very well, but as Nate pointed out results vary considerably depending on the local market.
Thanks for stopping in.
H Oy wrote :”Avg income of married couple: $60K yr Avg savings rate: 5% Amount saved a year: $3K
Current avg home price: $150K 20% of home price: $30K”
Yeah, that’s how I always heard things are supposed to work. But I’m curious how many buyers are putting 20% these days? I just went to an open house the other day. The sellers bought it a year ago, distressed sale, for about $575k. A year later the house is a short sale, advertised at $525k. There is no way the current sellers put 20% down when they bought last year. I saw another house in the same area. Asking price $564k: “Special Financing – $2,900 Down – For qualified buyers with minimum 580 credit score or above. 1/2% down available on most homes.”
I can see why banks don’t require 20% down yet –since that would reduce the pool of buyers and force prices down lower. But they just end up getting screwed either way don’t they.
Trying to predict anything with the housing market, based on history is utterly futile. One thing no one in the mainstream media is discussing is the slow-motion train wreck that is happening with the MBS fraud.
Sure, you’ll hear a blurb on ‘deadbeat homeowners’ and robo-signing foreclosure documents – but all of these things are just the tip of the iceberg. It’s starting to come into crisp focus exactly how pervasive the securitization fraud was over the last 10-12 years. Imagine that when the originating lender sold your mortgage documents to wall street, your debt to that lender was paid off. That lender then had to transfer the paperwork into the investment trust (Goldman, BoA, etc).
Turns out, those transfers never happened. The RMBS packages that pension funds bought are empty. They should contain the ownership rights to the properties – but the banks, for various criminal reasons – held on to the papers. Unfortunately, the Pooling and Service Agreements had a very brief time window where those documents could be transfered (usually 90 days after the trust was closed). Now that defaults are starting to happen, the investors go to reach into the RMBS box to pull out the paperwork, and SURPRISE!!! It’s not there. The banks, who very willingly took the investors money, in most cases destroyed the original paperwork (arguably to hide the true value of the paper). So, the investor can’t foreclose without the docs, and the banks can’t foreclose because they have no standing (they were made whole the moment the investor bought the security.
What does all this mean? Millions of homes – not just the ones in default or foreclosure – but any home that has had it’s mortgage paperwork sold to Wall Street – have DEFECTIVE TITLE HISTORY. No one with a mortgage less than 12 years old can prove who actually has claim to the debt.
Most people don’t realize it yet – as it’s only affected foreclosed properties. But once the depth of the fraud is revealed publicly, no title insurance company will survive the onslaught of claims. At the very least, no one will issue any title insurance on a property that has ever had securitized mortgage paperwork. Early estimates put that somewhere around 60+ million homes.
So, when you draft up all your gee-whiz graphs and tables, see how that figures into your projections.
The point is, the banks destroyed the titles to our homes. No different than finally paying off your car, only to get the title from the bank and it reads “SALVAGE” or “Odometer inaccurate”… Had you known that the title was defective when you bought it, would you have paid full price? Would you have even bought it at all.
If you think we’re close to the bottom, I can assure you, we’ve seen NOTHING yet.
Kurt ~
You reflect upon an interesting period, 1979, when you point out that there was a downturn when interest rates went up under Volcker.
If history repeats itself, and we end up (some day) with a replacement for Bernke who pursues a course of higher interest rates, isn’t it quite likely we will again see a (perpetual) softening of the market?
Perhaps an example might prove validate my point: A $200,000, 5%, 30 year mortgage runs about a $1,000 per month, while a $200,000 , 10%, 30 year mortgage would be about $1,900. With wages not expected to rise much in the near (or mid term) future, many prospective homeowners will (again) be priced out of the market.
If this isn’t a foreboding of a dismal outlook, I don’t know what is.
About the only homes that will be affordable for middle income earners will be those old fashioned ‘Craftsman’ (900 square foot) homes, rather than the ‘new & improved’ McMansions (2,500 square foot) houses of the earlier part of the last decade.
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