Why Home Prices Should Either Stabilize or Recover This Year

I have been following the real estate prices of New Jersey for a long time. Based on memory and based on the feedback I received from previous home owners, I estimated that the real-estate in New Jersey has been going up at a rate of around 7% per year between 1945 -2000. This translates to doubling of home prices every 10-12 years.

However, the real estate went up over 120% between 2000 and 2005. One could give any reason for the increase in prices, like low interest rates, over-leverage, sub-prime loans etc. My own analysis trying to link the growth in the density of population in New Jersey with the price rise did not reach anywhere.

After 2005, the prices started falling and are now around 35% below their peak. This had to happen in any economic scenario due to the law of average returns.

The prices now are around 70-75% higher than what they were in 2000. Based on historical growth rates, this is where the home prices should have been. This leads me to believe that the home prices should either stabilize or recover this year.

Some would argue that the wages have not gone up since 2000. However it is a known fact that wages have gone up for specialized skills since 2000. Even government salaries have gone up considerably since 2000.

Comments

[James Levy:]

Good analysis. Brief and to the point, and told me something I didn´t know that could be important. Many thanks!

Jan 15 06:03 AM

[patio:]

Other than completely ignoring the worst macro fundamentals in 80 plus years, the demographic shift of baby boomers retiring ( if they can; downsizing nonetheless ), banks not lending or lending to only the highest rated buyers, yes, truly outstanding analysis.

Jan 15 07:02 AM

[CautiousInv...:]

With NJ having the highest state and local tax burden of 12%, I'm surprised it's densely populated.

Kidding aside, with the massive layoffs on Wall Street and the redefined landscape of banking and investment banking...........I don't know where demand will come from.

NYC prices are expected to fall over the next year around 11 percentage points based on CME trading and Schiller of Case-Schiller expect the national market to fall another 12 points.

I think you are early.

Jan 15 07:12 AM

[walters:]

Truly outstanding analysis. I believe Bush/Cheney used the same sources in their analyses: their memory and accounts from other home-owners.
World -Class - Sanjeev

Jan 15 09:22 AM

[freemarketguy:]

I think its a common sense analysis that has value but does not address the possibility (liklihood) of undershoot. If prices can overshoot by 50% on the upside why cant the materially undershoot on the downside? I think you are early also.

Jan 15 10:29 AM

[San Diego L...:]

After a run up of 120%, a 35% correction is not enough to call for a bottom. Another 155 -20% is required before a bottom may be in place.
A very good post on the 2009 forecast for San Diego real estate that should also apply to other bubble areas is located at:
www.brokerforyou.com/b...
it's titled: San Diego Real Estate Predictions 2009…Watch Out For The Bull!

Jan 15 12:19 PM

[P. Kalven:]

Good point.

Although the comments referencing the concrete wall of the financial crisis and the struggle and drama of recovery are valid, if I am reading your analysis correctly, the fallback is to the historic average for the period; there is equal validity to the view that if it can overshoot it can undershoot too.

That said; I agree with you, year over year long term you are correct.

Only those forced to sell are faced with the dire consequences of current uncertainties and it is those uncertainties that will determine the time frame. It is not a time to sell, but if your baseline is correct; it is a time to buy; the risk of undershoot is reduced by entering on the mean.

Jan 15 01:55 PM

[scotty1560:]

agree with patio....baby boomers are scaling down and about done...
this is a generational correction and expect 10-15 years to the next
real estate boom....

Option ARM's peak in 2012 in California...so expect at least 2 more years
to see a bottom in residential real estate...

third...lending ratio's have changed dramatically...money is tight..

Jan 15 09:47 PM

[Sanjeev Sharma:]

Factors like layoffs and economic recession have been a part of US economy for a long time. Bailout packages from government would be balances some of these.

Based on the historical average growth rates, home prices will not reach their 2005 levels till 2013.

Jan 16 12:32 AM

[prudentinve...:]

You state "The prices now are around 70-75% higher than what they were in 2000. Based on historical growth rates, this is where the home prices should have been."

You are implying that a 7% compound annual increase is natural, even though US GDP per capita increases at about 4% per annum. Logic dictates that assets like housing cannot continuously outpace GDP per capita, and thus suspect we have further drops ahead.

Jan 17 11:46 AM

[Sanjeev Sharma:]

PrudentInvestor, home prices are influenced by the gap in demand and supply, there is no known correlation between GDP growth rate and Home price increases.

In densely populated countries, home prices have gone up beyond any rationale. eg in New Delhi, land prices have gone up by 2000 (two thousand) times in the last 40 years.

BTW, US GDP grew a cumulative 7% in nominal terms from 1945 – 2000 ( from 221 Billion to 9.7 trillion).

Jan 20 12:09 AM

[David in D:]

Wow! I couldn't disagree with you more. It seems you have overlooked two critical factors: First, people are losing their jobs... this means that wages will likely be depressed... real earnings are certainly tied to home sale prices in a rational market. Secondly, consumer confidence has to significantly improve for the type of recovery you are predicting. People aren't going to buy an asset that they think will depreciate.

I wish you the best and (again) I think you are gravely mistaken on this analysis. At best, I'd look for a housing bottom sometime between mid-2010 to mid 2011 range.

Jan 21 12:25 AM