After all their shameless boosterism, BusinessWeek comes out with this. You boys are way behind the curve on this one. But still... this is the most bearish I've seen BusinessWeek in a long time.
So a return to trend-line for housing, a reversal to the mean?! No... really? Who would have thought that? And these guys have Ph.D.s for chrisakes! We're in the wrong career.
Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's half-percentage-point rate cut on Jan. 30.
While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.
Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation.
Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy.
22 comments:
Doesn't the chart suggest that prices might first dip well BELOW the mean before settling back to "normal"? The pendulum swings back and forth. It never stops at the bottom. Or is a dip below the historical mean too much to ask for with real estate, just wishful thinking on my part?
The interesting part of working out the ROI on housing is valuing the fact that you get a place to live as part of the deal. To my mind I buy a house, long term is appreciates at fractionally greater than inflation and I get to live in it without losing principle. That works for me evan at 0.4% over inflation. I think a lot of the problem really comes down to this: people stopped thinking about houses as a place to live and started thinking about them as retirement investments or short term speculative investments.
I agree that part of the problem has been viewing a home primarily as an investment rather than as a place to live. But my point is that one cannot take for granted even a 0.4% appreciation. For the people who bought around 1918 and sold anytime before the late 1940s, they would have lost half of what they paid. With the current bubble being such a huge deviation from the mean, who is to say that we're not about to enter another 30-year period like the one in the first part of the 20th Century?
Everyone has their own needs and wants, but for me, I look at that graph and think it wise to at least wait 2-3 years, and hopefully get some idea of where we are heading long-term.
"Back to the trend-line"... Ya think ? C'mon, can't be.. ain't gonna happen.. can't happen because Leslie said so..
That trend line also represents wages... deviations from the trend line represent unusual economic events, just like we've seen heading up and are seeing now heading down..
The initial first wave of this revision will likely be below the trend line...
The other interesting thing about graphs like that is the choice of start point. Is 1890 reasonable? What happened before then? If they'd picked 1930 the trend line would look very different, it would look different again if they picked 1945. Someplace I have a book on how to lie with charts (by Gerald Jones).
John, that's a pretty lame argument. Fine. Choose 1950 as starting the beginning of the post-war, "modern" era. The trend line would be even flatter.
My point is not that you could make it look better by starting at a different date just that there is enough variation in the data that any choice of start date has a big impact on the trend line making me wonder why they picked 1890.
...why they picked 1890.
Because Dr. Shiller wanted to get the most complete dataset and 1890 was the earliest he found housing data. He's covered this topic in several interviews.
Then again, maybe it's just doomsaying on Shiller's part...it's not like he's ever been right.
I don’t agree with that trend line. I think the appropriate line has a slope much closer to zero. Technological changes in the construction industry reduced costs in the 1920s. The Great Depression reduced prices in the 1930s. Then there are those two mini-bubble peaks in the 1970s and 1980s. The actual line should be about 0.1% - 0.2% per year, which is in line with other estimates. One economist tracked the prices in an Amsterdam neighbor over a period of 400% years! He found 0.1% annualized increase. Why should a house increase in value over inflation unless you improve it? It’s the same house-- a little worse for the wear and tear. Of course some regions experience an increase in demand because they become popular. Rents tell you the demand for housing. When you see a divergence between the cost of renting and owning, you have a strong indication of a bubble.
Supply and Demand folks. The very "green" bay area limits supply by our various parks, ocean on one side, bay on the other, and terrain too steep to build on. Demand clearly out paced supply and will continue to outpace supply until we open the floodgates to new construction. Wacky lending laws, dubious realtors and a stupid public all too eager to believe the hype only exacerbated the issue, but they weren’t/aren’t the root cause. Prices in Marin will go down. They have to. If I had to draw a diagram the down slope would resemble more of a bunny slope and less of a black diamond like cities like Stockton, Antioch, etc. Right now I say “WTF these prices are insane I’m packing up and moving to Tulsa.” In two years I’ll be saying, “Good golly this place is super expensive. $500k for 1900 sp ft. Oh well.”
On the national level where land is plentiful I’m sure we will level out to the normal .4% growth and continue seeing those black diamond graphs in locations like Vegas were land is plentiful and prices are stupid high. Go Giants!!!!
The chart shows a huge uncharacteristic rise.
Is there a way to do another plot that would show this as normal?
Do you really think that Marin prices are supported by fundamentals?
Even with the green acres and NIMBY stuff...
The red line will fall. It is the nature of gravity.
I think Grandis made some good points. I'll add a few more. I think it is safe to say that yes-the housing bubble was national and affected even the areas that were...'cheap'.
But What I've seen that appears to be a more recent alteration in the migratory pattern of the avg US resident. Simply put, the hottest, most overpriced areas have created a new consumer whom views housing as a sort of escape plan: Buy the super-overpriced house in NY,MA,CA,Fl, etc etc... wait for it to appreciate, then move to other places like NC, GA, or during the boom-AZ. People seem to have lost an interest in staying in any one area for longer than it takes them to have a severe financial advantage for other regions.
Most Californians I seem to meet have 'big' plans for other states, especially Washington, Oregon, Nevada, or Texas. Why- it's soooo cheap there!
But this creates a degree of economic and social destruction for the areas that they move to. Many move with the only money being from their houses. Of course this flow has stopped to a degree since the house-money well has now stopped, but as a person with all my family still back in TN, the flow of Floridian and Northeastern ex-pats is still troubling.
Secondly, I was thinking about this the other day. The cost of oil is expected to reach $280 a barrel by 2013. If that be the case, then anyone living anywhere that requires heat will suddenly find themselves unable to afford to heat their homes. This could prove dire to areas that already suffer from economic fallout. States such as MI, upstate NY, and much of the rust belt will suffer greatly... which makes me think that there will be a mass-migration away from these states and into warmer climates.
If that be the case, then the US will become a kind of Canada, with most of the populace compacted into the lower portions of the country. It will be interesting to see how this works out.
The cost of oil is expected to reach $280 a barrel by 2013.
What's your source for this, Bob? Not necessarily doubting you. Just curious.
why they picked 1890.
The more data you have, the better understanding of what the heck is going on, and the more accurate you will be in spotting the trend.
Supply and Demand folks. The very "green" bay area limits supply by our various parks, ocean on one side, bay on the other, and terrain too steep to build on.
Although there are plenty of slops heavily built upon here, your point is well taken. The points you make are why the BA is comparatively more expensive than some other areas of CA. But that is not to say that we have not experienced a horrendous housing bubble like the rest of the state. In Marin the bubble was focused primarily on the bottom 1/2 - 2/3 of the market. We will and currently are correcting like the rest of the state and I am confident that we will end up back where we were and still selling at a premium compared to much of the rest of the state.
My comments were pertaining to 'Peak Oil'. I've never been a huge supporter of this theory, but the fact that GM and Ford are desperately trying to push alternative fueled vehicles into production: The Chevy Volt and the GM hydrogen program, has me thinking that they are doing so because a public that suddenly has to pay $10-$15 a gallon will put a massive halt to sales. They must do so to protect their future growth.
There's a number of things that are quite possibly going to happen, and some that are already doing so: The housing bust followed by the credit card crash. The retiring boomer population, the election of Democrats who will push socialized health care as well as introduce packages that try to save homeowners. All of this will assure that we're likely going to have a rough ride for a number of years.
Places like CA, FL, NY, MA, and other higher priced states are going to be in a vulnerable position: Their residents are already bankrupt from the housing booms which were far more significant in those areas. More economic fallout will be amplified in these areas.
My advice: Live cheap, live small, save big, and invest wisely. Secondly- stay away from cold places.
While we're talking about future disasters take a moment to consider what a 6' rise in sea level is going to do to the bay area ...
consider what a 6' rise in sea level is going to do to the bay area
When that happens, waterfront homeowners in Larkspur, Bel Marin keys, Corte Madera, Tiburon, and much of Belvedere Lagoon will be mopping seawater off their floors--particularly at winter high tides. Long ago, I posted an article to this forum on this very subject.
No one knows exactly what the impacts will be on the weather pattern caused by global warming. Recently, it is the south China that experienced sever snow storm not the north.
When that happens, waterfront homeowners in Larkspur, Bel Marin keys, Corte Madera, Tiburon, and much of Belvedere Lagoon will be mopping seawater off their floors--particularly at winter high tides. Long ago, I posted an article to this forum on this very subject.
Here are two of them:
http://tinyurl.com/yt7v34
http://tinyurl.com/2gqbyj
Getting back to the discussion on charting...
When I look at Shiller's graph I cannot help but wonder if there are two or three distinct trends in this data:
1) Pre ~1914
2) 1914 - 1945
3) Post ~1945
Maybe 1) and 2) are two parts of the same trend interrupted by the two world wars.
So the real question is whether post-2000 is a fourth/new trend? I am sure the housing bulls are all hoping it is. Or is post-2000 another blip and the trend in 1) and 2) will continue on?
Just read a thread posted by a trading website stating that the commerical real estate is going down hill as well. The following is the quote:
"...I am in close contact with lenders in the auto business and some of them are running at 15% loses right now, credit cards are not doing much better. Securitization for good solid underwritting has been cut in half for the good lenders. Commercial Real Estate is starting to implode, drive around thru strip malls and take a look at the vacancies everywhere and have in mind the properties rents do not cover the morgage payment, most of them were purchased thinking their price was going to go up 15% per year at infinitum. CRB Ellis estimated in October in Bloomberg that price decline for comm property in 2008 was going to be 15% and that "everybody that can get out is getting out right now". To top all this off, we should remember that Banks make money from the Fed cuts only if the long end of the curve steepens, borrowing at 3% and getting 3.5% in a 10 year treasury is not going to make it for them. Today I even had news that a Credit Union here in California was holding funding for 2 approved car loans because they did not have the money, and they are forbidden from the subprime market. 40% of credit applications at Car Dealerships in CA shows people late in their mortgages and/or car payments. Things are not looking up."
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