Residential Real Estate: Erosion Ahead

My prior piece, “U.S. Housing Market: Dis-assembly Required”, compared a) the $1.4 trillion spent on the bailout through month-end November, with b) the slightly smaller amount needed to raise family incomes to a level consistent with current home prices. It suggested that the current Administration should simply “Declare Victory and Leave.”

But what if this $1.4 trillion IS enough?

Suppose that the bailout efforts-to-date WILL ensure that today’s home price correction simply follows the average historical correction of the past. If so, what might the future really look like?

Torto Wheaton Research (TWR) is an independent research firm owned by CB Richard Ellis, the world’s largest real estate services company. Its research combines a rigorous academic foundation with sophisticated modeling techniques as well as “vast local knowledge.” Its Senior Economist is Gleb Nechayev, who has a Master of City Planning degree from MIT. He is also a member of the Urban Land Institute and American Real Estate and Urban Economics Association.

Mr. Nechayev provided an answer to my question in TWR’s “The Real Housing Recovery Is Years Away”. This is what he found:

Following the housing cycle of the late 1980s, real [i.e., inflation adjusted] prices declined by 8.1% percent from a ‘89Q3 peak to a ‘95Q1 trough, returning to the previous peak in ‘99Q2 a decade later.

Following the housing cycle of the late 1970s, the same real home price index showed a decline of 14.3% from its ‘79Q1 peak to the ‘82Q2 trough, only approaching (but still not quite reaching) its previous peak in 1989—also a decade later.

A composite index for 10 cities, … from S&P/Case-Shiller, show[ed] … an inflation-adjusted decline of 26% between the peak of August ‘89 and trough of February ‘97. It took over 7 years for home prices to reach the real bottom across those major cities, but it was another 4 years after that—in March 2001, which coincidentally marked the start of a recession—that real prices returned to their 1989 peak [about 11 years after the peak].

He concluded his prior-cycle-based forecast with the following words and graphs:

If home prices follow the timeline of previous cycles, one might expect a real recovery around 2016 at the earliest.

While a faster recovery is possible, it seems highly unlikely, considering how weak the current economic conditions are, compared to periods following previous housing bottoms.

Source: G. Nechayev, TWR – The Real Housing Recovery Is Years Away [See References].

Note: Horizontal axis of the top OFHEO chart is in Quarters, and horizontal axis of the bottom Case Shiller index is in Months.

If you hope that the fallen star of the American economy – residential real estate – will reclaim its real past glory in less than ten years, then you are effectively assuming that the erosion of the past will not be encountered on the road ahead.

Comments

[bigmoney:]

>> If home prices follow the timeline of previous cycles, one might expect a real recovery around 2016 at the earliest.

it's easy to imagine that in the face of any real recovery, cheap easily-drilled low sulfur oil will become expensive again, added a headwind for those hoping to motor around suburbia at a reasonable price. In addition, an army of Baby Boomers will be retiring, or wanting to retire in the near future. So I don't know how both of those factors will factor in.

2008 Dec 03 02:25 PM

[Moon Kil Woong:]

Ummm why buy now when you can get 4.5% in a few months through Fed/Treasury manipulation. Why be solvent when the government is now asking the insolvent Fannie Mae and Freddie Mac to gut their margins and lend to people who are or liable to be insolvent soon. Will the Us ever learn?

Why buy at 4.5% when the fed may lower to .5% or 0% bringing down loan rates to 3-4%. In fact, due to their inappropriate actions why buy at all in 2009. Then image how bad the graph is going to look. And you can blame it all at the doorstep of a Fed and Treasury that never studied their economics and don't know anything about a free market economy. I suggest they watch Commanding Heights rather than spout inane policy every day.

2008 Dec 04 02:21 AM

[billp37:]

Blame assignation:

The other four on his list - along with the regulatory decisions that he also called "incredibly incompetent" - in the following order were:

1) The Federal Reserve's easy money policies early this decade, 2) the Fannie Mae and Freddie Mac mortgage mess from coziness with Congress, 3) overdoing encouragement of affordable housing for low-to-mid income Americans, and 4) too much reliance on sub-prime mortgages to put many people in their own homes.

www.kvbc.com/Global/st...

2008 Dec 04 08:52 AM

[WAKEUP:]

I've been saying it will take ten years, for over a year, now. Looks like the data-crunchers are finally catching up.

2008 Dec 04 04:48 PM

[TWR fan:]

TWR is the premier big league market research organization, they have been preaching this for some time. Everyone's been listening to the NAR hacks with ulterior motives like Yun rather than looking at professional research. If you look at CB's 3Q report you'll see that they began taking drastic cost cutting measures over a year ago based upon the coming headwind. TWR provided CB the intel to hedge their bets well before most of its competition. This forecast is likely the most accurate and moderate estimate of what will transpire.

2008 Dec 05 05:57 AM

[Donnie B Good:]

Darn I am so sad I'm missing out on all this action. I guess that's what you get when you live in Gotham, WI. No bubbles, no bust, just 3bd 3bath houses on 2 acres that remain at $145K. Oh well.

2008 Dec 05 10:48 AM

[Suziclue:]

According to a survey conducted at Home Price Trends, only about 17% feels home prices will fall past 2015. So the American public is still pretty optimistic about prices.

See survey results at::

www.homepricetrend.com

2008 Dec 05 01:05 PM

[scotty1560:]

Still think the biggest culprit of the housing bubble (at least
in South Florida) was de-regulation and outright scamming.
Take 100%-110% financing (no equity), bogus appraisals,
lying on applications and you create a monster.
Builders-Title Companies-Underwriters...
all part of the scam, mostly in new construction.
Condo flipping was another past of the scam.
These combined title-mortgage-real companies need
to be broken up, to easy to scam the system.
That said, probably 1-2 summers to bottom and 3 years
sideways. South Florida is 3 1/2 years into this
and probably 7-8 years into price roll backs for land
cost, so it's pretty far down the trail. Real estate is
a localized market so national figures are not the best
tool in most cases.

2008 Dec 06 03:17 AM

[Ira Artman:]

seekingalpha.com/artic...

re: Scotty1560.

Agree on impact of regulation. See my Nov 20 post, "Fed Regulatory Powers, The Dog That Didn't Bark" [link above], for more supporting your comment.

2008 Dec 07 02:16 PM

[Tim Harris:]

Excellent post...
From the perspective of someone who coaches Realtors how to succeed in this market...Sellers don't get it. OK, sure..they understand that the housing market is in a recession/ depression but, not their home. Sellers believe that the housing market will simply 'bounce back' and all the lost home value will magically reappear.
Its clear that Warren Buffet was correct when he said that this recession "will be longer and deeper than anyone is expecting..."

2008 Dec 07 09:45 PM