giacutter writes:
But the slope of the decline is steeper in this bust, so maybe it will overcorrect more sharply but end sooner. (?)
giacutter | 03.25.08 - 2:09 pm | #

michael schumacher writes:
been saying that for more than a year. This is not even halfway over........

but for the stupidity that passes as financial "news" we would be farther along the road to recovery....

Hey the Dow just went green go figure...

Ciao
MS
michael schumacher | 03.25.08 - 2:09 pm | #

Mike writes:
I think it will overcorrect because the bubble brought so much new supply online.
Mike | 03.25.08 - 2:11 pm | #

Rob Dawg writes:
First. Reversion to mean is not correlated with ultimate decline. We can overshoot.

Second. There is an investment component of housing prices that may be flushed out unlike previous declines.

Third. There is a possibility that recent improvements in construction techniques and materials may drive prices even lower still as replacement costs inflation adjusted decline as well.
Rob Dawg | Homepage | 03.25.08 - 2:12 pm | #

Jim writes:
If the composite is at about index 145 now, and needs to fall to around 80 (it seems to overcompensate after a recession) that would be more than a 40%+ drop from now, right? How many homeowners would that put "upside down" on their mortgage? BTW Tanta has never drawn us a picture of an "upside down" owner yet, has she? I'm sure she could.
Jim | 03.25.08 - 2:13 pm | #

charlie writes:
I think prices will drop in real terms for the next ten years. Once we get past the current turmoil in a few years, we'll face baby boomers selling their homes and moving to condos and nursing homes.

Rents will drop along with home prices so it will be a long time before buying a house as an investment makes sense.
charlie | 03.25.08 - 2:15 pm | #

Anonymous writes:
It certainly looks the large drop in interest rates from about 2002 to 2004 sent the RE market into a frenzy. And of course the big bust follows.

The question is then, if people such as readers of this blog etc., think it looks pretty darn obvious, what are the decision makers thinking?
Anonymous | 03.25.08 - 2:20 pm | #

Red Pill writes:
I think the inflation correction may be misleading. The price of a house primarily depends on income and loan availability, correct? So really, WAGE inflation is the important inflation. What we have now is price inflation in things families need to buy without wage inflation which would take away from income that could be devoted to housing.
So prices should go even lower nominally than predicted, yes?
Red Pill | 03.25.08 - 2:20 pm | #

Turbo writes:
Fed funds at 2.25%, and probably heading lower, while headline inflation is running 4-4.5% is designed to create an environment to deflate real housing prices quickly, while minimizing the apparent impact on nominal housing price (and hence the underlying debt). Previous housing busts happened in periods of disinflation brought about by very high real interest rates - this time appears to be the opposite. While I agree that we're only about half way through the nominal price adjustment process, inflation will accelerate the process and house prices could bottom a year or two sooner than you project. Also, if inflation doesn't go down, people will pay a premium to own real assets like housing, as is currently the case for commodities.
Turbo | 03.25.08 - 2:21 pm | #

Troy writes:
TAing the charts is not going to be accurate. You need to overlay area RENTS over your particular graph of interest to get a truer picture of the pricing dynamics, both in the past and going forward. Rents will indicate the floor, regardless of past charting, quite accurately IMO.
Troy | 03.25.08 - 2:22 pm | #

dryfly writes:
If there is curve symmetry then the overshoot will be significant & make the correction worse. Look at 89-90 peak vs. 97 trough on that chart - almost symmetrical in magnitude & duration. If we see that happen in the years going forward from the last boom than we have much more fall yet to experience.

There is no reason to expect or NOT expect symmetry - just the haunting shadows of boom/busts past.

dryfly | 03.25.08 - 2:24 pm | #

Troy writes:
Turbo also brings up our non-constant interest rate environment. Prices went up a lot 2002-2004 in response to increased buying power thanks to the lower rates.

Should rates rise (unlikely?) or fall (also unlikely??) then price will inversely adjust proportionally.
Troy | 03.25.08 - 2:24 pm | #

Troy writes:
inflation will accelerate the process

we're going to have to see WAGE inflation for this to buttress housing costs.

absent WAGE inflation, PRICE inflation is actually deflationary to housing costs.
Troy | 03.25.08 - 2:26 pm | #

Interesting Times writes:
Troy: Rents will indicate the floor, regardless of past charting, quite accurately IMO.


Exactly. 1:100 is the rule of thumb right?

If your rent is $2000 a month, fair value for the property is $200,000 ?
Interesting Times | 03.25.08 - 2:28 pm | #

CalculatedRisk writes:
giacutter, maybe. My feeling is the time frame will be similar in some cities that saw the most appreciation (shorter in other cities). We will just have to follow the bust and see!

Red Pill, I'd like to graph prices vs. median income for each MSA (metro statistical area), but I can't find the data. If anyone has the link, I'll plot it (I agree that is a better measure).

dryfly, it's hard to predict the overshoot - if it happens, we will probably be discussing how to take advantage of it!

Best to all.
CalculatedRisk | Homepage | 03.25.08 - 2:29 pm | #

Troy writes:
(crapo, I just what Red Pill said, above)
Troy | 03.25.08 - 2:29 pm | #

AlanY writes:
I also strongly advocate adjusting for wage inflation. It doesn't make sense to adjust for general inflation.
AlanY | 03.25.08 - 2:31 pm | #

Bob Dobbs writes:
OT:

Another sign of the slumping economy -- business is off even at high-end restaurants in New York City. Check out a great report from the field from http://www.waiterrant.net , one of my favorite blogs of all time.

Guess even the high rollers, or wanna-bes, aren't rolling so high anymore. Especially the finance types, probably.
Bob Dobbs | Homepage | 03.25.08 - 2:32 pm | #

Rob Dawg writes:
Interesting Times writes:
If your rent is $2000 a month, fair value for the property is $200,000 ?

It is so much more complicated than that. Cost of funds, tax breaks, depreciation, local taxes and operating costs, utility splits, on and on. 140x in parts of California is a good deal. 80x in Buffalo is likely a losing proposition.
Rob Dawg | Homepage | 03.25.08 - 2:32 pm | #

Troy writes:
If your rent is $2000 a month, fair value for the property is $200,000 ?

The 1:100 ratio is bogus for OO. 1:200 is about right.

My spreadsheeting says that with 5.5% 30YR a $417K loan on a $440K property has a monthly carrying cost of around $1800, net of all tax benefits and miscellaneous costs.
Troy | 03.25.08 - 2:32 pm | #

Jas Jain writes:
--
These are MoM declines since July 2006 for Case-Shiller Composite-20:

-0.2%
-0.2%
-0.2%
-0.4%
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.2%
-0.3%
-0.4%
-0.7%
-0.8%
-1.4%
-2.1%
-2.1%
-2.4%

As you can see, the decline started to accelerate during Aug-Sep 2007. At the current rate of decline things could get really bad real quickly. Additional 10% decline in 4-6 months from here would be a challenge for the economy and the financial markets.

Stay away from long positions in the Scam Market unless you think that housing prices are close to the bottom. Born-losers should double up on Fraudentials and other Scams of their choice.

Jas
Jas Jain | 03.25.08 - 2:37 pm | #

Anonymous writes:
By my calculations, chaining the index to Dec 2007 dollars, the index is down to April 2004 levels. This is still way beyond affordable for most Americans.
Anonymous | 03.25.08 - 2:38 pm | #

Liv writes:
CR -

I know you probably have better things to do, but if you do have the hankering to make graphs, could you maybe put some other cities on *separate* graphs and just post those in an update? Maybe 4 cities to a graph? I am sure people in other cities would like to see what is going on.
Liv | 03.25.08 - 2:38 pm | #

Turbo writes:
Not exactly Troy. I'm arguing that at the end of the day J6P is going to be poorer, whether it happens through price inflation absent wage inflation (what I expect), or through straight asset deflation (what I'd expect if the Fed wasn't flooding the system with money). We can disagree on the path, but I think most people here agree that the end result is lower real house prices. The USA in the 1930's and Japan in the 1990's show that deflation is very dangerous to a highly leveraged system, so the Fed will opt for the inflate our way out approach, reasoning that no matter what the cost, it will still be less than a repeat of the Great Depression. I mean, as long as I don't have to wear brown velour, I'll take the 70's over the 30's any day.
Turbo | 03.25.08 - 2:39 pm | #

Troy writes:
Liv: check out http://themessthatgreenspanmade....e.blogspot.com/
Troy | 03.25.08 - 2:39 pm | #

Angry Saver writes:
If the median income in the U.S. continually trails inflation, the recovery could take just about forever.

ZIRP here we come. Oops, ZIRP doesn't work so well in an inflationary global environment.

People forget, Japan got the disinflationary benefit globalization. That trade is ending imo.
Angry Saver | 03.25.08 - 2:39 pm | #

w writes:
But Troy it is closer to 1:100 because your property will appreciate 6% per year into perpetuity. Your down payment will double in value just in the first year. Thats 100% return forever!
w | 03.25.08 - 2:39 pm | #

Anonymous writes:
Off hand, one would think that most, if not all, major booms and busts overshoot and then undershoot in price, but not neccesarily in time. The time could be shorter as a possibilty.
Bear markets tend to be more violent and shorter in duration than the previous bull, I believe. But who knows for sure. Japan was very long as we know.
Perhaps with low interest rates the RE market may "bleed to death" versus a crash in some RE markets of 40+ percent during 1980 to 1982.
Anonymous | 03.25.08 - 2:39 pm | #

Troy writes:
Turbo: I agree that inflation is the desired policy approach, and I wouldn't bet against it, but this situation is different from Japan in the 90s and even us in the 1970s. Annual consumer lending zoomed from $200B/yr in the 90s to peak at $1T/yr in both 2005 & '06, while our manufacturing -- wealth creation -- base has been falling steadily from the 1970s.

My rule of thumb is that if you can't successfully strike for higher wages you're not going to be seeing wage inflation this decade.

It is a curious puzzle and I have no real idea how it's going to play out.
Troy | 03.25.08 - 2:43 pm | #

AllenM writes:
People should remember that this is the *real* index, not the nominal. In other words with sufficient inflation in *wages* which is the funding source for real estate purchases for 99% of real folks, the decline will continue until that rather funny equation bandied about between Dawg and another commenter starts working. My personal threshold is 120x monthly rent to consider a property for rental use.

Massive inflation will prop the banking system up by allowing grow out of the problem. OTOH, builders then croak because the cost of raw materials, land, and *legal* labor will exceed the costs of existing housing stock, which after all is already built and can sell for *below* replacement.

Ah well, patience, something that Wall Street never has in abundance.

Someday this war's gonna end...
AllenM | 03.25.08 - 2:44 pm | #

Breakout writes:
"dryfly, it's hard to predict the overshoot - if it happens, we will probably be discussing how to take advantage of it! CR"

Guess there is a good reason to preserve cash, even at zero interest rate.
Breakout | 03.25.08 - 2:46 pm | #

Nemo writes:
Hey CR --

By "inflation", you mean CPI?

On the one hand, houses (unlike, say, oil or wheat) are not subject to demand from the rest of the world. So CPI might overstate the relevant inflation and bias your chart to be too optimistic about how far we have to go.

On the other hand, you cannot pay children 10 cents an hour in rural China to make houses. (Although you can pay illegal Mexicans...) So maybe CPI understates the relevant inflation, and we are actually closer to bottom than your graphs suggest.

For an accurate picture, the right deflator to use here is probably one based entirely on U.S. wages...
Nemo | Homepage | 03.25.08 - 2:47 pm | #

Angry Saver writes:
We don't have wage inflation. We DO have cost of living inflation.
Angry Saver | 03.25.08 - 2:47 pm | #

askin writes:
Anyone else see the pretty picture on bloomberg of the Federal Reserve building in DC?
What exactly is inside this building?
askin | 03.25.08 - 2:47 pm | #

Red Pill writes:
This is from housingtracker.net where they have an affordability link from their main page. Below is their price to income ratio. They use HUD for income information.

"
Price to Income Ratio

The price to income ratio compares the median single family home sale price to the median family income for City, State. Again, the financing terms assume a 20% down payment on a 30-year fixed rate loan and the historical median home sale price is determined by fitting the HPI index to NAR's median home sale price over the last few years. The median family income is again provided by HUD. Lower price to income ratios generally mean homes are more affordable.
"
Red Pill | 03.25.08 - 2:47 pm | #

Pondering the Mess writes:
Inflation only fixes the problem if wages increase.

Wages are not and will not increase.

Costs for everything else, however, are increasing.

Therefore, housing still has A LOT farther to fall.
Pondering the Mess | 03.25.08 - 2:48 pm | #

Jas Jain writes:
--
During 1997-2005 prices in SD went up 246% (or a factor of 3.46)! A 50% haircut during a severe recession is more or less guaranteed. If there were no recession then we wouldn't be at -20%.

Jas
Jas Jain | 03.25.08 - 2:48 pm | #

Red Pill writes:
I also think the rent as price floor discussion is interesting. I guess it is possible that both rents and prices could stabilize at a higher precentage of average income. But, at what cost to an economy dependent on consumption.

I think we have a real mess here.
Red Pill | 03.25.08 - 2:50 pm | #

safe_as_apartments writes:
I agree with many of the posters:

WAGE INFLATION IS IMPORTANT, NOT CPI.

Your oft-made comment Of course, more inflation means less prices need to fall in nominal terms. is a bit obnoxious given that many people would disagree with it.
safe_as_apartments | 03.25.08 - 2:52 pm | #

ron writes:
thanks for the great charts and info this morning, CR
ron | Homepage | 03.25.08 - 2:52 pm | #

blueridge writes:
Dryfly beat me to it...."dryfly writes:
If there is curve symmetry then the overshoot will be significant & make the correction worse. Look at 89-90 peak vs. 97 trough on that chart - almost symmetrical in magnitude & duration. If we see that happen in the years going forward from the last boom than we have much more fall yet to experience...

I was struck by how that modest little peak in the early nineties was folllowed by a very symmetrical trough in the late nineties. If that same pattern holds, well, does Case-Shiller go below zero???
blueridge | 03.25.08 - 2:53 pm | #

Ministry of Truth writes:
Red Pill, why would both rents and prices stabilize at a higher precentage of average income? We have too much supply for the demand.
Ministry of Truth | 03.25.08 - 2:53 pm | #

Anonymous writes:
"The S&P/Case-Shiller Home Price Indices are calculated monthly using a three-month moving average"

So the decline is actually worse than that reflected with a moving average.
Anonymous | 03.25.08 - 2:53 pm | #

ac writes:

I think I heard Robert Shiller quoting Jas Jain on CNBC earlier today.

ac | 03.25.08 - 2:54 pm | #

jim a writes:
Well I would argue that overshoot downward is somewhat limited by rental rates. In a normal market, owning only pays off if you've lived there for seven years or so. Prices can't really drop below the point where buying is profitable after one year. Now in places like FL and the IE where overbuilding has been rampant, rents will also decline.
jim a | 03.25.08 - 2:55 pm | #

Rob Dawg writes:
OTOH, builders then croak because the cost of raw materials, land, and *legal* labor will exceed the costs of existing housing stock, which after all is already built and can sell for *below* replacement.

And another apostle joins the Dawg in the wilderness. I know, contradictory signals (nevermind arrogant presumption).

Okay, explanation. Replacement costs inflation adjusted are going to fall from technology and changing preference and energy balance and such. This affects existing ill suited house prices negatively.

The end result is a massive oversupply of ill suited existing housing AND a replacement cost decline that further freezes every current homemoaner in place.
Rob Dawg | Homepage | 03.25.08 - 2:55 pm | #

Ceilingfan writes:
I never thought I was buying my house as an investment but I never thought putting 20% down would be such a huge mistake either.
Ceilingfan | 03.25.08 - 2:57 pm | #

E F writes:
I'm wondering why one would look at the CPI-adjusted cost of housing.

One potential argument is that if you expect (over the 'medium term') expenditure on housing to remain constant as a % of total expenditure (the CPI basket AND *you expect real interest rates to remain constant*. In this case interest payments 'should' behave like the rest of the CPI and thus house prices should track the overall CPI index (given constant affordability because of constant real interest rates).

But if you think that 1) real interest rates have fallen in a 'secular' way OR 2) improvements in productivity in the global tradeable goods sector mean that inflationary pressures are HIGHER in the housing sector than in the rest of the CPI then one would expect the rise in house prices to outpace the CPI basket.

Other measures you could look at would be

1) House prices vs. wage inflation or
2) House prices vs. a cost inflation index of the homebuilding industry (this at least would take care of the 'inflation is sustainably higher in the house-building sector' argument)
E F | 03.25.08 - 2:58 pm | #

Red Pill writes:
Red Pill, why would both rents and prices stabilize at a higher precentage of average income? We have too much supply for the demand.
Ministry of Truth | 03.25.08 - 2:53 pm | #

I agree. But, I have often seen comments that suggest rents will not fall of even rise and thus stabilize house prices. An opinion I do not share.
Red Pill | 03.25.08 - 3:00 pm | #

Interesting Times writes:
Anyone have the correlation of rents to housing prices over time ?
Interesting Times | 03.25.08 - 3:01 pm | #

REBear writes:
I'm wondering why one would look at the CPI-adjusted cost of housing.


The best way to make home prices look good is by tying it with an index that always goes up.
REBear | 03.25.08 - 3:02 pm | #

jim a writes:
Wow, it actually looks like we have wat passes for a consensus here: Wages are a more appropriate index than CPI for housing costs, and rents provide a limit to the downside.
jim a | 03.25.08 - 3:02 pm | #

scav writes:
A small multiple view of the data could be more useful than a simple throw all the data together chart. Especially if one arranges the multiples as geographically as possible, e.g. West Coast cities as much to the left as possible and New York next to Boston on the upper right. Or one could plot all the NE cities in a single graph and put that in the upper right. Of course, you could also group them by size, or degree of bubble-dom or who knows what. It would take some playing to figure out the best presentation and CR's got a lot on his plate as it is!

CR - I'm assuming one major problem is getting a single value of median HH income for each Metro Area - that would be tricky as the areas change over time and you can't recompute medians without the underlying data. Rand McNally's Commercial Atlas would have Estimated Median HH Income for the contemporary MSA defintions, but you'ld have to enter them by hand as its only a print product and that doesn't solve the change in spatial basis problem.
mmmm. Maybe you could do something rather seat of the pants using min, max and average county HH inc for the counties in the relevant Metro Area... but even then, I'm not thinking of an easily available (free) dataset with much between census resolution. American Community Survey data doesn't go back far enough but could at least track the last couple years at the county level.
scav | 03.25.08 - 3:03 pm | #

energyecon writes:
Red Pill,

Haven't got all the way downthread yet but your post strikes me as spot on - if in fact wages are declining in nominal terms - and maybe so if in real terms with nominal increases...

(on the one hand lol)
energyecon | 03.25.08 - 3:03 pm | #

Sebastian writes:
CR said: "...Also look at the length of the housing bust in the early '90s. It took over six years from peak to trough in some cities. If this bust takes the same amount of time, prices will not bottom in some cities until 2012 (or there about)."

The only missing ingredients now to make the present conditions similar to the previous 1990's bust are a recession and +1 million net jobs lost from non-farm payrolls.

Just saying that's what we need to be looking for next if this is bust is going to unfold like the last one.


Sebastian
Sebastian | 03.25.08 - 3:04 pm | #

AllenM writes:
Dawg, this scenario has played out before, but most NAR economists choose to ride the trends of bigger houses further out. Funny how those 1920 mansions in the wilderness ended up abandoned in the 1930s and in some cases never reoccupied or restored untiil the 80s and 90s.

Not really joining you in the wilderness so much as pointing out that it *can* happen again, and might happen sooner than we think.

Like I jokingly said before, Kunstler is partially correct, but most likely for the wrong reasons;-)

And quite amusing too.

Someday this war's gonna end...
AllenM | 03.25.08 - 3:05 pm | #

Angry Saver writes:
Higher inflation means higher monthly fixed costs - property taxes, insurance, utilities, etc.

Wage inflation would help house affordability, but I just don't see it when billions of people around the globe are willing to work for less.
Angry Saver | 03.25.08 - 3:05 pm | #

dc1000 writes:
bob dobbs:

i clicked through to that link, great reading. but by this indicator, DC is still booming like crazy. I went to dinner at Cafe Milano here in DC on saturday night with 7 other people. $1200 later we were out the door.

The place was packed the whole night, bar packed all night.

All bars, clubs, and upscale eateries still seem to be slammed. the demand seems unlimited, seriously. new places open up all the time and the old ones stay just as busy.

i have no clue what that means here but its what i seen with my own two eyes.

Oops, I failed to use proper punctuation and capitalization. My mistake.
dc1000 | 03.25.08 - 3:07 pm | #

Ministry of Truth writes:
Let's face it, most homemoaners are "Priced in forever".
Ministry of Truth | 03.25.08 - 3:07 pm | #

K. Morgenstern writes:
Here in Las Vegas the unwinding has been at an excelerated pace. Prices for bank owned, shorts, etc., which are dragging along the bottom, are at pre-boom levels. Of course, I presume, that is what is selling. With that said, I think the "median" price of re-sales are of little use when compared to reality. People will buy the cheaper priced homes. Median price doesn't mean much if people aren't buying the homes at "median price" levels. Home builders have come 30-40 percent off peaks and are selling for pre-boom prices. I purchased a new home this year for 400,000 that was priced at 600,000 last year (arguably the best area to live in Vegas). The builder is still putting up houses in my subdivision and have actually been selling for about 10,000 - 15,000 less than what I paid 9 months ago. It's just a matter of time that the "median" reaches the bottom that has already been set - in my humble opinion.
K. Morgenstern | 03.25.08 - 3:08 pm | #

Angry Saver writes:
The 20% down is a house price killer. Without the free put option, people will want to be damn certain they are not over-paying.
Angry Saver | 03.25.08 - 3:10 pm | #

dc1000 writes:
Angry Saver:

Localized service providers might be able to demand higher wages soon enough. Our little professional firm has passed on rate increases (but held back from giving employees raises until they demand them I guess).

So many things are more expensive (eggs more than doubled, milk almost doubled) and so many are cheaper (40" LCD HD TV $500) that it is very confusing.

Lawyers, accountants, architects etc seem to be charging higher and higher rates. Thats like wage inflation isn't it?
dc1000 | 03.25.08 - 3:11 pm | #

sdtfs writes:
If your rent is $2000 a month, fair value for the property is $200,000 ?

It is so much more complicated than that.

I think 1:100 is a great rule of thumb,...but I wouldn't even begin to open my wallet without doing a real analysis for rentals. My personal approach is to factor all the costs especially the vacancy factors (WAG) and carrying costs and if I think it's a break even looking at the numbers, it's a sure loser. Too many unexpected costs. Theoretical landlording is much simpler for business majors than you might think.
sdtfs | 03.25.08 - 3:12 pm | #

4822 writes:
"Lawyers, accountants, architects etc seem to be charging higher and higher rates. Thats like wage inflation isn't it?"

pricing in loss of equity of their rental properties.
4822 | 03.25.08 - 3:13 pm | #

Interesting Times writes:
dc1000 So many things are more expensive (eggs more than doubled, milk almost doubled) and so many are cheaper (40" LCD HD TV $500) that it is very confusing.

If only the chinese could also make eggs. Oh wait...

http://news.xinhuanet.com/ englis...ent_7746258.htm
Interesting Times | 03.25.08 - 3:14 pm | #

Fair Economist writes:
I'm predicting two parts to this decline, based on two separate aspects of the price increase. One is from the speculative increase of prices far above rent equivalence. That crash will be fast and hard, and I estimate (very roughly) that it's about half over, although of course locations vary a lot. I expect that will be over in bubble locations by next year - the rates of decline are breathtaking - 3% a MONTH in most California regions.

The second part of the decline will be prices going down as interest rates increase back to nonrecessionary levels. That will be relatively slow but of course details depend on exactly what will happen to interest rates and that's very hard to predict.
Fair Economist | 03.25.08 - 3:15 pm | #

Jas Jain writes:
--
"The only missing ingredients now to make the present conditions similar to the previous 1990's bust are a recession and +1 million net jobs lost from non-farm payrolls."

Seb,

I match your bet and a double raise. I got severe recession and 4M job losses before 2009 is out.

Jas
Jas Jain | 03.25.08 - 3:15 pm | #

Angry Saver writes:
dc1000,

Its the fixed monthly costs that are hurting people - gas, insurances, medical, taxes. The discretionary items have no pricing power.

In aggregate, median incomes are lower today than they were eight years ago on a nominal basis. It's really ugly on an inflation adjusted basis.
Angry Saver | 03.25.08 - 3:16 pm | #

sdtfs writes:
RE: DC
Is it too obvious that politician's wages (and implying the extended effects) aren't tied to the real world?
sdtfs | 03.25.08 - 3:17 pm | #

Ceilingfan writes:
LOL to homemoaners being priced in forever, that certainly describes me.
Ceilingfan | 03.25.08 - 3:18 pm | #

jim a writes:
The 20% down is a house price killer. Without the free put option, people will want to be damn certain they are not over-paying.
I actually think that the bigger effect of this will mean that the market won't be able to keep stealing sales from the future by putting younger and younger people into houses. The homeownership rate has gone up ~4% and IMHO alot of this is because of reduced downpayment requirements. That will take the younger 20 somethings OUT of the market. Add them to those who were foreclosed on and the "owner-occupier" demand goes down.

Of course these people will still live in rental housing so prices will come down until landlords can profitabily rent to them. This is of course complicated by the differing mix of the rental/sales market.
jim a | 03.25.08 - 3:18 pm | #

es writes:
need to adjust for increased income (or maybe rental rate changes) as well as mortgage rates (maybe a rolling average or something) which are lower today than in the 90s, and even more so than the 80s.

best
es | 03.25.08 - 3:19 pm | #

jim a writes:
Fair Economist: Add to that huge oversupply built in some markets. This will lower rents even as the rent/price ratios are returning to sanity.
jim a | 03.25.08 - 3:20 pm | #

Nova writes:
DC10000000000

But the Starbucks have a lot shorter lines in DC lately.

FFDIC - Spank me!

I don't think the metro DC area is the same ... somehow I think it's different here.

Oh my axxhole BIL - a "stockbroker" sez people are panicing - bail me out of this fund!!!!!!!!!!!!!!!!

He reassures them that "everything is ok and stocks will continue to rise."

I love him
Nova | 03.25.08 - 3:20 pm | #

dc1000 writes:
Stdfs:

There are about 600 politicians in all of Washington DC right? with a regional population of 3 or 4 million. i'm guessing it doesn't have that big of an impact.

what does is the lawyers, doctors, accountants, developers, IT, scientists and the like. there are really quite a bit of rich people here.
dc1000 | 03.25.08 - 3:22 pm | #

Sebastian writes:
dc1000 said: "Lawyers, accountants, architects etc seem to be charging higher and higher rates. That's like wage inflation isn't it?"

Yes, if the money is going into the people instead of the objects, "labor" instead of "capital investment."

You can follow along with free (highly questionable, deliberately falsified for nefarious political purposes) data here, like "Total Private Average Hourly Earnings" or "Employment Cost Index."


Sebastian
Sebastian | 03.25.08 - 3:23 pm | #

Pondering the Mess writes:
Hahaha... "everything only goes up!"

Except wages. And no, just because some lawyers, consultants, and other such people can charge even more absurd rates does not mean that wages are going up. Are the teachers, firemen, police, manufacturing workers (we still have those?)getting big wage increases to match the absurd REAL inflation we're seeing, much less CPI? Nope, and the same holds true for most of white-collar America.

If wages don't rise faster than REAL inflation, that means less money to spend on big, stupid McMansions - assuming you can even get a loan anyway since nobody has a down payment.

Price have a long, LONG way to fall, IMHO. I do believe, however, that government and Fed meddling will drag this out for as long as possible; maybe 10% per year for the next 5 or 6 years.
Pondering the Mess | 03.25.08 - 3:23 pm | #

Sebastian writes:
Sorry, left out the link for the fraudulent wage data:

http://data.bls.gov/cgi-bin/surv.../surveymost? bls


S.
Sebastian | 03.25.08 - 3:24 pm | #

Matthew Saroff writes:
You neglect overshoot.

It will settle where you think it will, but the trough will be lower.
Matthew Saroff | Homepage | 03.25.08 - 3:24 pm | #

Rob Dawg writes:
AllenM writes:
Dawg, this scenario has played out before, but most NAR economists choose to ride the trends of bigger houses further out. Funny how those 1920 mansions in the wilderness ended up abandoned in the 1930s and in some cases never reoccupied or restored untiil the 80s and 90s.

It isn't about "further out" and not even much about "bigger." Those are consequences not a causatives. Adaptive reuse is going to be as difficult this time as last. And this time there are codified planner agendas that will further interfere.

Not really joining you in the wilderness so much as pointing out that it *can* happen again, and might happen sooner than we think.

That's okay. I'm used to it. I was wrong a year ago plus when i thought the stair step gap down in prices we see now would happen last Fall. Very few are calling the timing correctly. Most are surprised at how long it took.
Rob Dawg | Homepage | 03.25.08 - 3:25 pm | #

dc1000 writes:
I recently did some research on local DC bureaucrat's wages and was absolutely shocked.

Vast numbers of DC Municipal employees make over $100,000 per year. Even "junior" positions are paying that much.

Many people making over $200k.

So if the lame-o local govvie pays six figures, who doesn't?
dc1000 | 03.25.08 - 3:26 pm | #

Fair Economist writes:
jim a: Yes, there are demographic effects from the size of the building boom that are hard to predict. The oversupply is huge, but much of is is in a form (large remote houses in a population with small households looking to reduce commutes) that will be hard to use. I'm expecting a fair amount of slumification/abandonment which will make the median a poor descriptor.

Also, in some areas the market-clearing price will drop from owner rent equivalence to landlord rent equivalence. That knocks off another 15% from the price because the mortgage interest deduction is lost.

These are all aspects of a potential overshoot I'm ignoring (as you note) because there are no historical analogues and it's so hard to predict.
Fair Economist | 03.25.08 - 3:28 pm | #

Angry Saver writes:
dc 1000,

I used to live in the DC area (East Capital St., Seminary Road, Falls Church, Rockville).

The DC area is very much immune to the wage stagnation problem. In general, government jobs are linked to CPI via cola. Also, government jobs come with full retirement packages and medical benefits so the DC area doesn't feel the huge cost increases.

DC is not reality for much of the U.S.A.
Angry Saver | 03.25.08 - 3:29 pm | #

w writes:
dc1000, you will see the same crazy wages here in CA. City and State government have to post the wages of their employees publically now. It sure could infuriate the general populace when it come to tax increases and cutting benefits and this info is public.
w | 03.25.08 - 3:29 pm | #

dc1000 writes:
No, no. It can't be different here. It can't be different anywhere. Nowhere is immune. Blood in the streets everywhere. Foreclosures everywhere. Wage stagnation everywhere. Welfare claims up everywhere.

No no no!

No but seriously, this area is taking it on the chin in many places. I feel like a relative out-perform will happen here. But who knows.

Should be some decent real estate velocity once the administration changes.
dc1000 | 03.25.08 - 3:33 pm | #

Ralph Cramdown writes:
I match your bet and a double raise.

No string bets, please, gentlemen.
Ralph Cramdown | 03.25.08 - 3:34 pm | #

sdtfs writes:
There are about 600 politicians in all of Washington DC right?

I admit I was thinking more about the lobbyists and panderers and foreign visitors who need to be feted. More along the lines of,...if the government wasn't based there, what would the area be like?
Maybe an analogy like Moscow in the days of the czars, vis a vis the rest of the country, or Paris before the first revolution.
sdtfs | 03.25.08 - 3:35 pm | #

steveb writes:
The housing index value of 100 is an arbitrary number. Only fractional changes are meaningful, not the absolute value. Thus I think the vertical scale should be logarithmic, not linear. The linear scale produces a distorted view.
steveb | 03.25.08 - 3:36 pm | #

scott writes:
CR, what did you use to correct for inflation, CPI? Many of us out here use the PCE implicit price deflator, but there doesn't seem to be anywhere near a perfect tool.

Wages might provide a better measure, but what we really need is wages for the upper two-thirds of households, which have appreciated more than for the lower third.

Median household income is a challenge--Census Bureau now has it for all the metro areas on an annual basis through the American Community Survey, but the ACS methodology doesn't quite match with Census 2000.
scott | Homepage | 03.25.08 - 3:49 pm | #

eric in vegas writes:
"K. Morgenstern writes:
Here in Las Vegas the unwinding has been at an excelerated pace. Prices for bank owned, shorts, etc., which are dragging along the bottom, are at pre-boom levels."

The best areas of Vegas/Henderson will stop at 50% off peak but the other areas are going to be crushed.
eric in vegas | 03.25.08 - 3:56 pm | #

Ralph Cramdown writes:
"Recall that immediately after September 11, 2001 General Motors stepped in to provide 0 percent financing as part of keeping the economy growing. We need a similar response by the mortgage lenders." -- John McCain on the stump (not Stumpf!) today.
Ralph Cramdown | 03.25.08 - 3:56 pm | #

Troy writes:
how come nobody in power understands basic economics ? ? ?

0% . . . sheesh. I thought prices were high already . . .
Troy | 03.25.08 - 4:50 pm | #

Uncle Jeffy writes:
Now we know why Ben & Co. haven't given a rat's rosy rear end about inflation - they're just trying to make the required adjustment to nominal home prices a little easier to swallow (like the other blue pills we've been fed for the last 7 years or so...)
Uncle Jeffy | 03.25.08 - 4:54 pm | #

DaveJ writes:
You Bubbleheads are still going to get priced out forever!
DaveJ | 03.25.08 - 6:42 pm | #

R. Timm writes:
One leap of faith in viewing the real Case Schiller chart is that you must believe the reported CPI numbers after the formula has been bastardized over the past decade. If you use previous CPI estimating techniques you would find we are much closer to the 100 mark on the graph.

Predicting future housing values on Case Schiller mean reversion or future wage increases requires us to assume that housing provides exactly the same utility that it did in the past. It could be that changing tastes or priorities have shifted the percentage of income Americans are willing to spend on housing. For example, we have seen a dramatic shift towards increased spending on health care as a percentage of GDP and family income. American families may be paying more for housing because of an affinity for granite counter tops or increased perceived value for good public education opportunities.

A third factor that has already been discussed at length previously is affordability in the face of extremely low long-term interest rates and favorable tax treatment. This is also coupled with declining transaction costs and improved information which should increase market efficiency in the long run.

Lastly, Government intervention such as increasing the conforming limit, the Fed Purchasing mortgages or inflating the money supply, and increasing tax deductions will have an impact on future housing demand.

For all of these reasons it is extremely difficult to predict the timing or price level of a housing bottom. Case Schiller may hit 100 within the next year or may not ever hit 100 in our lifetimes.
R. Timm | 03.25.08 - 6:45 pm | #

DaveJ writes:
The Case Shiller is a nominal price index right, not corrected for inflation?
DaveJ | 03.25.08 - 7:03 pm | #

Jim D writes:
Anyone who thinks that a 200:1 monthly rent to price ratio is "normal" really, really needs to study historical price data.

In the notoriously pricey SF Bay area, where the current ratio is cruising at above 300:1, it fell all the way to 120:1 (on average) during the last bust.

In many areas of the country, the ratio is already at 80:1. I.e., it's already cheaper to buy than rent. *That* is normalcy, guys.

It varies by region, and by the place were at in the economic cycle, but anyone who thinks it's going to bottom out at 200:1 in any part of the country this time around is seriously deluded.

And that's assuming we don't enter a depression: apparently (or so I've been told), during the last depression, many folks lived for free in their foreclosed houses with tacit approval from the banks. Since there was noone to buy the properties, at least they wouldn't become squatter havens in the interim.
Jim D | 03.25.08 - 8:06 pm | #

Jim D writes:
BTW - it'd be helpful for everyone to remember what the Case-Shiller graph looks like when you go back in time even further - there was a fall off a cliff during the depression, and then things bounced back to an even higher equilibrium level afterwards - I think that the higher level was the result of the introduction of the 30-year fixed as a standard, as well as the backstop of Fannie Mae.

For the graph to settle out at a new, higher equilibrium point than the past,there'd have to be some new sort of financing arrangement to support it. None is forthcoming, so, expect it to fall back to where it was. Or lower (and my bet's on lower). After all, the falling dollar means we're all going to be much, much poorer fairly soon, and that money is going to come out of something. It ain't going to be food, so I suspect it'll be housing.
Jim D | 03.25.08 - 8:12 pm | #

halbhh writes:
Sometimes the late bird gets the worm. ;-)

How's this for psychology!!??

From CNBC at 4.15pm the video clip: Housing Market Bottom?

Maria B asks Chris Thornberg to give his view:

Chris: ".....[Los Angeles] in 2001 a median home [buyer] spent about 25% of their income to buy a median house, in 2006.... about 65%...
until houses come down...there is no bottom to this market."

Maria B: "So you're saying prices really need to sort of stabilize."

--------------

lol!!

Ships don't have to pass in the night. They pass all the time in front of the bright lights.

lol
...
halbhh | 03.25.08 - 10:40 pm | #

CathyG writes:
Hi Sebastian -

With a 4Q 2007 GDP of just 0.6%, it's a good bet that the recession started in December. And during the Shrub's benighted reign we've already lost 3.2 million manufacturing and service jobs. Looks to me like the similarities are pretty striking.
CathyG | 03.26.08 - 3:34 am | #

BrantW writes:
Seb,

You do know the the statistical methodology for determining employment/unempployment stats, etc has been tweaked since the 91 recession, right? That is not apples to apples.

Sort of like the .8% deflator used for 3rd Quarter 07 GDP growth was 'correct'.
BrantW | 03.26.08 - 4:22 am | #

DanG writes:
Is median income the right number to use in comparing income to housing costs?

The bottom half of the income distribution has never been able to afford to purchase. In the last couple of decades, income distribution has gotten far more unequal. While median incomes have not risen at all, top .5% incomes have soared. So the income available for luxury homes has in fact increased quite a bit, and quite a bit faster than CPI.

Maybe the luxury home market isn't as overpriced as these graphs suggest.
DanG | 03.26.08 - 10:42 am | #

halbhh writes:
DanG-- It's a very useful number to use, yes, as it will have a consistent relationship to the group that *is* normally able (historically) to buy a house. Since home owership is normally over 60% of households, then the median will itself represent the mid-low-end buyer.

But more significantly, the consistency means we can plot the ratio over time and deduce trends and the situation. Because of the consistency, the ratio tells us what is happening not only to the mid-low end buyer, but also tells us about the general affordability of houses for Americans.
halbhh | 03.26.08 - 10:53 am | #

halbhh writes:
DanG, remember a median avoids the skew that an average suffers from the high end tail of the curve.
halbhh | 03.26.08 - 10:55 am | #

Jet writes:
R. Timm Makes best points. Other variables include utility of house with high speed internet, price / sq ft, rising wages, retirement of boomers, financial help from extended family, value of moving or not moving, value of being close to city center. Local variations of all of these factors

Other ratios which need to be looked at ratio house price and total housing stock value to GDP, total mortgage principle and yearly mortgage payments to GDP, Wages to house prices and house payments.

People were buying more house than they needed in order to increase leverage.

I have read that 13% more houses now exist than are needed - plus the occupied houses are too big.

I think Pension Funds, IRA's, 401K's were the source of funds to allow housing bubble to expand. Debt by home owners to Pension funds is circular "we own it ourselves"

Someone should look into the effect of $20Trillion in retirement funds sloshing around a $13Trillion GDP economy. Are these capital pools useful or dangerous?

Can that amount of value be transferred across time? Or is retirement always provided for by the working population?
Jet | 04.08.08 - 11:35 pm | #

Jon Y writes:
I think you all are a bunch of idiots to think that you really know what is going on. Never has the country seen this situation before with interest rates low and a huge housing decline and commodoties inflation at the same time.

Unfortunately no one has any idea when this market will hit bottom nor how much more decline will take place.

To all of you who think you know more than anyone else. - - Just keep guessing and you'll continue to show your intelligence - or should I say the lack there of.
Jon Y | 04.10.08 - 2:49 pm | #

IAS360 writes:
IAS360 House Price Index Provides First Monthly View of Housing Price Trends Based on Neighborhood Level Data.

Integrated Asset Services (IAS), a leader in default management and residential collateral valuation, just launched its monthly-reported IAS360 House Price Index http://www.iasreo.com/ias360.html

The new Index represents the industry’s first clear representation of U.S. housing market trends at a county level. IAS360 House Price Index is a comprehensive housing index tracking monthly change in the median sales price of detached single-family residences in more than 15,000 “neighborhoods” across the U.S. This data is then rolled up to report on the changes in 360 counties, nine census divisions, four regions, and the nation overall. The timeliness of the data, which is based on all arms-length transactions occurring in underlying neighborhoods, makes the IAS360 the leading indicator for housing price trends in the U.S. April Index: http://www.iasreo.com/ias3600408.html
IAS360 | 06.03.08 - 7:19 pm | #