Housing Prices: How Much More Downside?

The Case Shiller Housing Index showed a positive month to month change of 1.6% from June to July but had a year on year decline of -13.3%.

How do you interpret this? Is there more upside or downside in housing prices from where we are?

The simplest way to figure this out is to compare changes in the Index base year of 2000 (2000 equals 100) with the inflation since that year. The government provides an inflation calculator so this is easy to do. Since 2000 to today, the inflation index is 125.35% so we just divide the July housing index by this and subtract 1 to get the change. I used the seasonally adjusted numbers for this analysis.

As you can see below, prices in Midwestern cities, Atlanta, Phoenix, Las Vegas and Charlotte have already fallen below the rate of inflation but others still have a ways to go. The composite 10 cities are still 23% ahead of inflation as a whole and the complete 20 city index is 14.1% ahead.

July Housing Index vs. Inflation from 2000

	% ahead/behind Inflation
AZ-Phoenix	-15.6%
CA-Los Angeles	29.6%
CA-San Diego	18.8%
CA-San Francisco	1.5%
CO-Denver	0.9%
DC-Washington	39.3%
FL-Miami	17.6%
FL-Tampa	13.3%
GA-Atlanta	-13.4%
IL-Chicago	1.8%
MA-Boston	21.5%
MI-Detroit	-44.5%
MN-Minneapolis	-6.5%
NC-Charlotte	-4.8%
NV-Las Vegas	-15.9%
NY-New York	38.5%
OH-Cleveland	-15.0%
OR-Portland	18.2%
TX-Dallas	-4.8%
WA-Seattle	18.0%
Composite-10	23.4%
Composite-20	14.1%

Disclosures: None for this article

Comments

[LilBob]

I would expect housing prices to eventually fall below the rate of inflation. The real problem with the real estate boom was that people came to believe that a finished home was worth far more than the cost of construction. There was a seperation from reality where homebuyers forgot a basic rule of economics: when the attributed value of an asset exceeds the production cost of said asset, people will rush to produce more of that salable good. We are oversupplied with homes and given that many younger Americans no longer have access to the same kind of career opportunities that the Baby Boomers had we can expect that when the Baby Boomers do start retiring and moving to warmer climes or downsizing to smaller properties we will see another crash in suburban real estate that will take the index to (potentially) well below the rate of inflation.

You can still make money in real estate but only if you take a dollar/sf approach and specialize in very small modestly priced properties.

2009 Sep 29 11:09 AM

[robert.b.ferguson]

Real estate as an asset class continues to appear over valued. For the majority of the last century real estate values grew at a relatively slow rate. We find the greatest volatility is very recent including the last decade and a half of the last century and all of this one until the bubble burst two years ago. For that reason I expect more down side in this asset class. Even if we were able too some how reinflate the bubble it would probably not be a good idea. Commercial real estate (CRE) may very well be in danger of a severe down turn and does not appear to be in the buy basket either.

2009 Sep 29 01:02 PM

[carey_jim]

Agreed but habits die slowly. It is said that the shadow of the Buddha remained on the wall of the cave where he meditated, for a thousand years after he died. Let's hope the real estate bubble doesn't last as long ;)


On Sep 29 11:09 AM LilBob wrote:

> I would expect housing prices to eventually fall below the rate of
> inflation. The real problem with the real estate boom was that people
> came to believe that a finished home was worth far more than the
> cost of construction. There was a seperation from reality where
> homebuyers forgot a basic rule of economics: when the attributed
> value of an asset exceeds the production cost of said asset, people
> will rush to produce more of that salable good. We are oversupplied
> with homes and given that many younger Americans no longer have access
> to the same kind of career opportunities that the Baby Boomers had
> we can expect that when the Baby Boomers do start retiring and moving
> to warmer climes or downsizing to smaller properties we will see
> another crash in suburban real estate that will take the index to
> (potentially) well below the rate of inflation.
>
> You can still make money in real estate but only if you take a dollar/sf
> approach and specialize in very small modestly priced properties.

2009 Sep 29 01:08 PM

[Donald Ingram]

After the rug gets pulled out from under such high price rises that occurred in housing, the resultant dive in prices back to the long term trend line, usually overshoots the mark to the low side, taking longer to come back to the long term trend. House prices have yet to reach the long term trend line and look to indeed overshoot. It will be years before any semblance of normality returns to the residential housing sector. As for commercial (CRE) it's going to hell in a hand basket! Over the next 3 - 5 years commercial mortgage/construction loans that default have been forecast to bring about the failure of up to 700 regional banking firms. These small banks are top heavy with commercial paper - strip malls, condos, small industry, apartment buildings, etc.

2009 Sep 29 01:25 PM