Housing Data Shows Downturn Could Be Prolonged

The image below comes from the Economist's daily chart feature, and looks at the YoY change in home prices from 1988 to present:

Graphic courtesy of The Economist

As you can see from the chart it took about eight years for housing prices to stabilize during the last downturn, and that even during a housing boom there can be periods of decline. Aside from laying to rest the idea that housing prices simply always increase in 'straight line' fashion, it also indicates that it will likely take several years for housing prices to stabilize as opposed to the near imminent bottom that many are always predicting.

More importantly the analysts, politicians, pundits and realtors that are talking about foreclosure relief, putting a floor on the housing market, ending the slide in housing prices, protecting home equity, etc., need to start being honest with people and admitting that housing is a market just like any other. Meaning: prices fluctuate, prices go up, they go down and after a period of hyperinflation the market needs to give-up the inflated gains (and then some) before it can stabilize; and it will may be well into the next decade (if not the 2020s) before many homeowners regain the equity lost during the  housing downturn.

It's not something that any homeowner in the country wants to hear right now, but it's a harsh truth that we all have to accept.

It would be better for the politicians, pundits, realtors, et al. to start telling people the truth rather than filling their heads with pipe dreams, whilst they attempt to thwart reality and prolong the inevitable.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[investor88:]

Markham's article is very useful, keep the chart above for reference. Looks like housing will be weak for years.

2008 Nov 03 06:39 PM

[thannagan:]

There's a couple of parts to this - the slide down (and when it will bottom) and the recovery of values to some higher level. It's easy to say it may take a long time to recover the boom period level of values. But that doesn't mean the bottom isn't near.

2008 Nov 03 07:33 PM

[Steven Hansen:]

Markham, the point you miss is that this crisis hit the heart of the economy - the consumer. it was a big correction, and it may continue its downward journey for a year or more. this destroys consumer confidence, and causes the consumer to hunker down instead of spending.

the system in american is consumer credit driven. if consumer not buying, economy goes in toilet. so you should expect continued attention in the home price arena by the politicians.

2008 Nov 03 08:12 PM

[sickofthehype:]

Hence the inflationary campaign that has begun and will end up inflating our way out of this. Just watch.

2008 Nov 03 11:34 PM

[rogersails:]

An interesting difference between 89-90 downturn and this one - the prior downturn happened in an era of 9-10 % interest rates. This one is happening despite the full efforts of the government to keep low cost money flowing to the mortgage markets.
Imagine how it would look if interest rates floated up to market determined levels !!!! See mortgage-x.com/trends.... for historical mortgage rates.

2008 Nov 03 11:52 PM

[REITBull:]

I agree with this article, however, I am not sure why IYR is referenced as a related stock. IYR covers commercial real estate, not residential.

2008 Nov 04 08:42 AM

[BlueFire:]

The thing of it is that we are creating a huge inventory of properties being sold off at bargain basement prices either to investors at the preforeclosure stage as banks are forced to sell short, or as REOs as banks are forced to sell off this huge backlog. As a result, the housing values we are seeing are artificially low. These properties are being sold BELOW value. As a result, they pull down the comperable values of entire neighborhoods.

Now the inventory that needs to clear is still huge. But, anyone willing to buy and hold for a minimum of 3-5 years is going to make a killing in real estate. When that inventory does clear, there will be a significant uptick in real estate values as real buyers start paying real prices.

Patience, people. Everyone thinks in quarters. It's time to be making five year plans here.

2008 Nov 04 08:51 AM

[Kunst:]

If housing prices doubled because the money supply doubled -- and incomes would rise to match -- well, look at that, problem solved! No more underwater mortgages, mortgage payments half the percent of income, and yes, a housing boom.

Coming soon to an economy near you.

2008 Nov 04 10:19 PM

[doubleguns:]

When another huge number of homes go on the chopping block (ARMS resetting in the next year) will the decline accelerate? We could be down at the -30% rather smartly. Do not hop into this with a 5 year plan you might need a 10-20 year plan and if retirement is somewhere in there dont opt for property to be part of your golden years. Best to wait and see if the gov can actually get this market inflated prior to the fed going broke, We must assume that the chinese are not going to buy many more of our bonds to help us inflate our market. Best advice is to learn how to can food.

2008 Nov 05 01:30 AM

[mallarde:]

A corollary to this article is that any money thrown at the housing market in an attempt to stop prices from declining further is wasted money.

I do not want my tax dollars wasted. It's like trying to stop an iceberg's movement. All that some of the relief plans would do is pay for a failed speculator's rent (mortgage) for another few months before he finally finds an apartment or a house he can afford.

I want no part of this.

2008 Nov 05 05:33 PM

[nana1:]

Because some manipulators - criminals and idiots want to gain, short sellers or people who want to buy at lower price. They know nothing about commercial lending, they are stupid like banks that went bankrupt including Washington Mutual and others. I am doing commercial lending as a mortgage broker and formula to get commercial loan is such that Gross Income = 100% minus all expenses =40% equals net income = 60%. This net income from rental properties should cover full mortgage payment in the ratio 1.20 to 1. For example if mortgage payment are $2.000.00 a month than net income from rental property should be $2400.00 o r more. Other words rental property income should pay for mortgage payment. In calculating net income vacancies are taken into consideration. Bank will not give any commercial loan if net income will not pay for mortgage.I do not understand why investors dump these commercial stocks that are paying good dividends. Most USA large commercial - public corporations are in good shape, they always paid dividends. There are always some companies that have bad management or fraudulent management and this is the reason the company can fail. Please diversify your portfolio, the best is IYR- long term, it will alway survive because bad companies are removed from index.

On Nov 04 08:42 AM SellXHB! wrote:

> I agree with this article, however, I am not sure why IYR is referenced
> as a related stock. IYR covers commercial real estate, not residential.

2008 Nov 15 02:43 AM

[nana1:]

In my opinion, housing downturn will not be prolonged because:
1. Prices went down in some cases -70% - California. It means that affordability is much better.
2. I am real estate broker and mortgage broker and I see that first time home buyers that could not afford houses are buying now because they can afford.
3. Children of baby boomers are entering housing market as first time home buyers and these prices are heaven for them because they can afford.
4. FHA- loans - require only 3.5% down payment - conforming loans that are insured by Federal government - are welcome by banks, so please do not tell me that banks do not want to give you loan.
5. Interest Rate is steady - about 6% - for 30 year fixed - full amortization - you can always get if your credit score is OK

2008 Nov 15 03:15 AM