The Brighter Side of Falling Home Prices

The Case Shiller home price index fell just over 2% from September to October, which is somewhat faster than the 18% annualized pace that we've seen for the past year. Projecting more of the same through year-end, real home prices according to this index will have fallen about 30% from their highs. That goes a long way to solving the housing affordability and attractiveness problem.

Real home prices are now back to where they were in 2002, which was just before the housing bubble started to take off. Since 2002, real disposable personal income is up just over 15%, and now mortgage rates are the lowest they have been in our lifetimes, and substantially lower than they were in 2002. So homes are clearly more affordable today than they were six years ago.

As long as the economy doesn't fall down a black hole (and last time I checked, the freeways in Los Angeles were as jammed as ever), the combination of these forces (lower prices, lower borrowing costs, and rising incomes) should put a floor under housing prices before too long. And that would dramatically reduce the threat to our financial system.

Comments

[fatcat:]

In most cases,bubbles overcorrect...expect that with housing,especially with unemployment surging for the next few quarters.

This thing ain't over...but I appreciate your optimism.....

2008 Dec 30 02:32 PM

[jswede:]

the problem is that nobody has 20% to put down. those 'lower rates' are not available to anyone without it. further, many who THINK they have 20% actually do not, and will find out thru a devastating appraisal when they TRY to move....

2008 Dec 30 02:45 PM

[Joseph Wagda:]

Dude! (LOL)

The housing market in SoCal will bottom shortly after Christian Fletcher gets a real job.

2008 Dec 30 03:54 PM

[mallarde:]

We are not close to housing affordability -- as that term was known before 2000 -- in Los Angeles. 600-sq-ft condos in some neighborhoods selling for $515K? No, there is still further to go before younger people can feel they have the same opportunities as previous generations.

2008 Dec 30 03:57 PM

[double beta:]

This is a interesting angle, that is likely to become more attractive even if prices stay static due to the debasing of the currency.

2008 Dec 30 06:48 PM

[Griz:]

I can still rent in Orange County for 60% - 70% of the cost of buying, all things considered (i.e. taxes, HOA fees, maintenance, tax add-back, etc). When that number reaches parity, as driven by an additional 30% decline in home prices, then I will know it is time to buy...

2008 Dec 30 08:17 PM

[CautiousInv...:]

I think this subject must be looked at from more than one perspective.

Falling home prices (deflation) encourages most potential buyers to delay the purchase decision.

Additionally, many of these potential buyers have depressed expectations, job security worries and challenges in qualifying for mortgage loans that have higher underwriting standards.

2008 Dec 30 09:38 PM

[Can'tSpotAB...:]

You are seriously mistaken if you think 2002 was the beginning of this bubble. It has its' roots firmly in the 1990's. In my midwestern city people are still attempting to cling to 2005 prices and I still rent at 35% the cost of owning the same space in the same neighborhood. We've got A LONG WAY DOWN to go with prices before this market stabilizes.

2008 Dec 30 11:21 PM

[PV:]

Fact check:
"Real home prices are now back to where they were in 2002" - you are talking about Los Angeles? FALSE. Because Oct'08 (index=180) is where Feb'04 was, right in the middle of the bubble. The same goes for other bubble areas. Adding dying Detroit and non-bubble Cleveland, Dallas etc in the mix just muds the water.
"2002, which was just before the housing bubble started to take off" - FALSE. The bubble started in some cities (such as Boston and San Francisco) at the end of 90s, and by 2002 it was in full swing almost everywhere.
"Since 2002, real disposable personal income is up just over 15%" - last time I checked (stats for 2007), real (inflation-adjusted) income of 90% of people was actually slightly DOWN since 2000. I do not think crisis and hyperinflation of first half of 2008 increased income of these 90%, and last 6 months destroyed wealth (and much associated income) of upper 10%.

Are you a RE agent? Because you are surely lying like one.

2008 Dec 31 09:38 AM

[Smalltownba...:]

"the combination of these forces (lower prices, lower borrowing costs, and rising incomes) should put a floor under housing prices before too long. And that would dramatically reduce the threat to our financial system."

I guess 2 out of 3 ain't bad as Meat Loaf once said but in this case it does not result in a housing price bottom. Incomes are not rising! Layoffs are rising, cuts in hours are rising, cuts in bonuses are rising, offshoring of jobs is rising, debts are rising, and none of these lead to rising incomes. One more thing that is not rising is consumer confidence and without it parts 1 and 2 will not put a floor under home prices.

2008 Dec 31 10:05 AM

[Guero:]

This is the first place I have seen anyone declare that personal income is UP this decade....everyone else I have read has cited downward trending personal incomes. Who is right??

2008 Dec 31 10:09 AM

[petetoth:]

"That goes a long way to solving the housing affordability and attractiveness problem"

Tell that to the guy who just got canned from work and has to fork over 20% down. The fat lady won't be singing for a while.

2008 Dec 31 10:58 AM

[jackooo:]

If you got canned from work you did not plan ahead. When will these losers quit cring??

2008 Dec 31 11:59 AM

[jackooo:]

Crying

2008 Dec 31 11:59 AM

[Umm, yeah:]

This is the same kind of doublespeak that led to "the Fundamentals of the Economy are Strong" statements.

Jan 08 08:54 AM