Property Values Set to Fall from Bubble Peak to Long-Run Average

Price Trends / WAR OF THE WORLDS (Round # 2): If you use 120 years of data for your time horizon, and assume prices will return to the average, then our residential property bubble will fall 49% from the bubble peak to the long-run average (see above (a) aka “(x) - (z) / 202” aka “Projected Fall Peak to Trend”).

This total projected fall is less than the 60% predicted in my recent post based upon 20 years of data and a trend line drawn with the eye (click here to see that post).

This long-horizon data also shows values falling much less from today to the bottom than was predicted in the time frame of the 20-year data. This chart shows values falling 20% from the current prices to reach the long-term average. The previous estimate showed a 43% fall from current prices to trend. Obviously it is a huge difference.

I will continue to work with all data sets until I have a more complete picture of property values. Please send your suggestions about the best information. We will put it all together. Maybe we will see the future.

What we know today based on the best information is that values will fall a total of between 49% to 60% from the bubble top to the trend. Still ahead is a fall in property values of between 20% to 43%.

For a more complete picture of residential values, please click here for “Property Values: 10 Key Charts”.

Comments

[Fanatical Y...:]

Yours is a very refreshing investigation of a fascinating and crucial subject, and I look forward to your next installment.

Mind you: I would strongly encourage you NEVER to employ terms such as "What we know...will (happen)..." It is insanity to pretend that we are dealing in anything but Probability.

I'd be interested in your take, regarding what effect the degree of the Housing Bubble might have on its ensuing Retraction. Case in point: The Jones, in burning off ~ was it 89%? ~ of its 1929 High unquestionably annihilated any predictions made in 1930, regarding whither it might sink, in finding its Low, whereas most Lows ~ both before and since 1932's ~ tend to resemble SOMEbody's notion of where they ought be.

Likewise, I'm pretty confident that not too many folks expected the Nadsdaq to slip and slide all the way to 1108, in the wake of 2000's 5132 High, unlike most lows, which at least ball parked SOMEbody's prognostications.

You get my point: I'm wondering what thoughts you ~ or any others ~ might have regarding the SCOPE of the Burn we've commenced. Most will agree that this particular Housing Bubble ~ like the Stock Bubble that preceded and indirectly spawned it ~ was One For the Ages.

As such, it seems to me pretty likely that the Housing Bear we've undertaken is very likely to OBLITERATE most folk's predictions.

***

As I see it, the chance of the CSI holding at 104 is very small.

More likely, in my view ~ based on intense downward momentum, combined with my perception that Imploding Bubbles tend to OverShoot to the DownSide ~ is that it plunges all the way to the lows of the World War I Era...and probably FURTHER: to 60, 50, or even 40.

Leaving Inflation out of it, that would be an ADDITIONAL 55-70% plummet from today's prices.

One understands, of course, that the dynamics of the Housing Market are different from that of the Stock Market. In short: Paying the rent tends to rank as an higher priority than owning Stock...Well, except, perhaps, for a few months, there, in 1999!

I understand, of course, that these projections will doubtlessly seem WILDLY insane to most. Just remember where you heard it first, is all I ask!

Nov 05 09:19 AM

[Marty Boardman:]

Joe Williams, co-founder of Keller Williams Realty once said that "there is no such thing as a national real estate market...real estate is a local business." Your data may make for interesting conversation but I don't know of any intelligent real estate investor that makes buying or selling decisions based on the Case-Shiller home price index, or any other index for that matter. In Phoenix, Arizona there is less than a 3 month supply of homes priced under $150,000. Prices are moving slowly upward and it has little to do with the tax credit or government backed loans. The reason these homes are selling so quickly is because they are affordable again, to first-time home buyers and investors.

Nov 05 09:29 AM

[Robert Gosney:]

Our local market is down 70% from peak already.

Nov 05 09:59 PM

[Michael Dav...:]

I overstated my case. I should have said "Based on the best data, and assuming a 120-year trends hold true, it appears that we will fall 20% from current levels." Thanks for your note. mdw


On Nov 05 09:19 AM Fanatical Yankee wrote:

> Yours is a very refreshing investigation of a fascinating and crucial
> subject, and I look forward to your next installment.
>
> Mind you: I would strongly encourage you NEVER to employ terms such
> as "What we know...will (happen)..." It is insanity to pretend that
> we are dealing in anything but Probability.
>
> I'd be interested in your take, regarding what effect the degree
> of the Housing Bubble might have on its ensuing Retraction. Case
> in point: The Jones, in burning off ~ was it 89%? ~ of its 1929 High
> unquestionably annihilated any predictions made in 1930, regarding
> whither it might sink, in finding its Low, whereas most Lows ~ both
> before and since 1932's ~ tend to resemble SOMEbody's notion of where
> they ought be.
>
> Likewise, I'm pretty confident that not too many folks expected the
> Nadsdaq to slip and slide all the way to 1108, in the wake of 2000's
> 5132 High, unlike most lows, which at least ball parked SOMEbody's
> prognostications.
>
> You get my point: I'm wondering what thoughts you ~ or any others
> ~ might have regarding the SCOPE of the Burn we've commenced. Most
> will agree that this particular Housing Bubble ~ like the Stock Bubble
> that preceded and indirectly spawned it ~ was One For the Ages.<br/>
>
> As such, it seems to me pretty likely that the Housing Bear we've
> undertaken is very likely to OBLITERATE most folk's predictions.
>
>
> ***
>
> As I see it, the chance of the CSI holding at 104 is very small.
>
>
> More likely, in my view ~ based on intense downward momentum, combined
> with my perception that Imploding Bubbles tend to OverShoot to the
> DownSide ~ is that it plunges all the way to the lows of the World
> War I Era...and probably FURTHER: to 60, 50, or even 40.
>
> Leaving Inflation out of it, that would be an ADDITIONAL 55-70% plummet
> from today's prices.
>
> One understands, of course, that the dynamics of the Housing Market
> are different from that of the Stock Market. In short: Paying the
> rent tends to rank as an higher priority than owning Stock...Well,
> except, perhaps, for a few months, there, in 1999!
>
> I understand, of course, that these projections will doubtlessly
> seem WILDLY insane to most. Just remember where you heard it first,
> is all I ask!

Nov 05 11:25 PM

[Michael Dav...:]

It doesn't make sense to me to make a serious investment decision without looking at the best information. Local markets and their price trends should have precedence when you make a buying decision. The investor should also review national trends, and if they suggest a nationwide bubble, a smart investor will use that information. Thanks for your note. mdw


On Nov 05 09:29 AM Marty Boardman wrote:

> Joe Williams, co-founder of Keller Williams Realty once said that
> "there is no such thing as a national real estate market...real estate
> is a local business." Your data may make for interesting conversation
> but I don't know of any intelligent real estate investor that makes
> buying or selling decisions based on the Case-Shiller home price
> index, or any other index for that matter. In Phoenix, Arizona there
> is less than a 3 month supply of homes priced under $150,000. Prices
> are moving slowly upward and it has little to do with the tax credit
> or government backed loans. The reason these homes are selling so
> quickly is because they are affordable again, to first-time home
> buyers and investors.

Nov 05 11:29 PM

[Michael Dav...:]

Sorry to hear that. Maybe it's time there to consider buying. Thanks for your note. mdw


On Nov 05 09:59 PM Robert Gosney wrote:

> Our local market is down 70% from peak already.

Nov 05 11:29 PM

[MLKlein:]

I would suggest taking a look at the cost of ownership in relation to incomes over the extended time frame as well as availability of and cost of mortgages. As we witnessed in the bubble years, cheap and easy money resulted in accelerating prices to the point where very few people could actually afford, by conventional measurements, a home.

The chart shows that post WWII the value of homes was higher than prior to the war (ex depression). I believe that this is a result of having a deep market of good (and rational) financing options available to homeowners. So as a suggestion, I would overlay a graph depicting mortgage payment as a percentage of median income. For the payment calculation it would seem to make sense to use a 30 year fixed rate loan at the best available rate in the period. This may give additional clarity on the valuation process as most home buyers and underwriters relate their purchase and loan decision to the amount of monthly payment in relation to income (assuming we are not in a bubble).

Good luck. Thanks for the analysis.

Nov 06 11:01 AM

[Gary A:]

The only reason this is not declining faster is because of the no money down loans that are being made. I would suggest that this is making houses too expensive compared to historical average.

Face it people, without tax credits and no money down there is no housing market.

Nov 06 12:04 PM

[Michael Dav...:]

Good idea. I will try to do that. Thanks for the note. mdw


On Nov 06 11:01 AM MLKlein wrote:

> I would suggest taking a look at the cost of ownership in relation
> to incomes over the extended time frame as well as availability of
> and cost of mortgages. As we witnessed in the bubble years, cheap
> and easy money resulted in accelerating prices to the point where
> very few people could actually afford, by conventional measurements,
> a home.
>
> The chart shows that post WWII the value of homes was higher than
> prior to the war (ex depression). I believe that this is a result
> of having a deep market of good (and rational) financing options
> available to homeowners. So as a suggestion, I would overlay a graph
> depicting mortgage payment as a percentage of median income. For
> the payment calculation it would seem to make sense to use a 30 year
> fixed rate loan at the best available rate in the period. This may
> give additional clarity on the valuation process as most home buyers
> and underwriters relate their purchase and loan decision to the amount
> of monthly payment in relation to income (assuming we are not in
> a bubble).
>
> Good luck. Thanks for the analysis.

Nov 06 04:07 PM

[Michael Dav...:]

It is a conservative statement to say the housing market would undergo the most radical reversal of the last 120 years if private banks (not the government) funded mortgage loans. Thanks for your note. mdw


On Nov 06 12:04 PM Gary A wrote:

> The only reason this is not declining faster is because of the no
> money down loans that are being made. I would suggest that this is
> making houses too expensive compared to historical average.
>
> Face it people, without tax credits and no money down there is no
> housing market.

Nov 06 04:09 PM