Conservative Property Index Predicts We're Less than Halfway Through Fall 20 comments
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Price Trends
The most conservative price data on residential properties predicts that values have fallen from the peak less than half of the way towards their long-term trend.
The total projected fall from Federal Housing Finance Agency (FHFA) data shows a peak-to-trend fall of 27%. Values on this index have fallen 11% from the high. The index predicts prices will fall an additional 18% from their current levels (please see chart above “Figure 2: Monthly House Price Index for USA”).
The FHFA prediction of a total fall of 27% is far less than the total fall of between 49% and 60% predicted by Case-Shiller. Click here and here to see recent posts with Case-Shiller data on either 22 years or 118 years of prices.
Based upon the three data sets reviewed, we can estimate a total fall of between 27% to 60% from the bubble top to the long-term trend. After averaging the three indexes, we may estimate a total fall of 45% from the bubble high.
Looking ahead from today, property values will fall a total of between 18% to 44% if they return to trend. The average of the three data sets says we still have 27% to fall from current levels. Please see the chart below which shows the three data sets and the averages.
Click here to see the data in both numbers and charts at “Property Price Index”.
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This article has 20 comments:
In your world, the sky is falling indeed... and I have a thousand graphs with kick-ass trend lines to prove it.
You can aggregate the real estate market to get overall trends, but you ALWAYS need to apply LOCAL math to a specific market. This is not hard: apply price/rent ratios. Today, "comps" in real estate should be based EXCLUSIVELY on rents and a proper Earth-bound rent/price ratio like the handy "6k/millon" rule (monthly rent to purchase price).
Just like the .bomb era made (and ruined) millions of "arm chair Buffetts" the housing bubble is going to eliminate the weekend "flippers" and return the practice to the realm of professional full-timers that know what to look for in a market. They will properly be called "speculators" and "investors" and NOT "homeowners".
OP
> ratio like the handy "6k/millon" rule (monthly rent to purchase price).
>
how could you make that work? $6k month in income?
with 50% for expenses (including vacancy) you have $3k/mo. for a mortgage which would support about $528,000 at 5.5% on a 30 year--i.e. buyer would put up $472,000 in down payment to cash flow? I would suggest that $6k a month supports a value of approx. $666,666 or 2/3 of your rule of thumb. And when interest rates rise it would drop. However, when interest rates rise a new ship of fools will be buying and bidding up prices through the help of FHA funny money/rules.
On Nov 09 12:57 PM Location Cubed wrote:
> Mr. White (or should one say Mr. Gloom) is at it again. Unlike whatever
> most commentators on this block sell for a living, real estate is
> location specific. A good example are 2 markets that I'm active in:
> Phoenix has seen a decline of over 45% according to the all-powerful
> Case/Schiller, but the location-specific area that I invest in and
> build homes in has suffered a net-loss of less than 11% and bottomed
> out a year ago (you have to have eyes on the ground at the LOCATION
> to know this). In Boston, while the Quants on this blog keep terrorizing
> the readers with general, half-baked info, my group's investment
> portfolio in downtown has gained 6% in value.(again location-specific
> information that you quants are too lazy or don't have the resources
> or the patience to look at)...
>
> In your world, the sky is falling indeed... and I have a thousand
> graphs with kick-ass trend lines to prove it.
On Nov 09 09:15 AM doubleguns wrote:
> 10.2% unemployment and climbing, greatly adds to the likeliness of
> this scenario.
On Nov 09 09:50 AM Griz wrote:
> But, this time is different (ha, ha, ha, ha)... Stimulus has only
> temporarily plateaued the fall in prices; we are only halfway through
> the total descent back to trendline (if we are lucky).
On Nov 09 10:20 AM Shaggieman wrote:
> My realtor says a LOT of his sales are the so called Short Sale and
> the banks aren't approving them. After folks do all the work to
> satisfy the buyer and the seller the sale goes to the bank for approval
> and they're just sitting on them, propped up by tax payer dime, waiting
> for a better price. Bottom line, no ones getting paid so we're sitting
> in Limbo for years. Just like Japan.
On Nov 09 12:36 PM hamsandwich wrote:
> Pardon my math skills, but by including Case-Shiller at both 22 and
> 118 years, isn't your average somehow over-weighing those numbers?
> It would seem that the 22 year average is already included in the
> 118. No?
On Nov 09 12:57 PM Location Cubed wrote:
> Mr. White (or should one say Mr. Gloom) is at it again. Unlike whatever
> most commentators on this block sell for a living, real estate is
> location specific. A good example are 2 markets that I'm active in:
> Phoenix has seen a decline of over 45% according to the all-powerful
> Case/Schiller, but the location-specific area that I invest in and
> build homes in has suffered a net-loss of less than 11% and bottomed
> out a year ago (you have to have eyes on the ground at the LOCATION
> to know this). In Boston, while the Quants on this blog keep terrorizing
> the readers with general, half-baked info, my group's investment
> portfolio in downtown has gained 6% in value.(again location-specific
> information that you quants are too lazy or don't have the resources
> or the patience to look at)...
>
> In your world, the sky is falling indeed... and I have a thousand
> graphs with kick-ass trend lines to prove it.
On Nov 09 02:03 PM OptimizedPrime wrote:
> @Location Cubed -- Spot on. There are some areas that have probably
> fully corrected and some that are still partying like it's 1999 (2007)
> and sitting on a cliff ready for a 50% fall.
>
> You can aggregate the real estate market to get overall trends, but
> you ALWAYS need to apply LOCAL math to a specific market. This is
> not hard: apply price/rent ratios. Today, "comps" in real estate
> should be based EXCLUSIVELY on rents and a proper Earth-bound rent/price
> ratio like the handy "6k/millon" rule (monthly rent to purchase price).
>
>
> Just like the .bomb era made (and ruined) millions of "arm chair
> Buffetts" the housing bubble is going to eliminate the weekend "flippers"
> and return the practice to the realm of professional full-timers
> that know what to look for in a market. They will properly be called
> "speculators" and "investors" and NOT "homeowners".
>
>
> OP
On Nov 09 02:46 PM Jeffreygordon wrote:
> On Nov 09 02:03 PM OptimizedPrime wrote:
On Nov 09 03:58 PM willynill wrote:
> I understand the thing about location, but that doesn't help us home-buyer-dwellers
> if we don't want to live in that location.
However, it really comes down to the return you want on your cash. You are right in saying that this ratio can certainly be more like $12k/million in certain situations, for instance on a property where you cannot count on full occupancy. I think the "15x annual rent" ($6k/million) rule-of-thumb is just a starting point, and you then need to work the number down from there.
When interest rates rise, housing is a TERRIBLE investment since you are hit with a double-whammy: 1) your capital is worth more when it's invested (so your effective "cost of capital" is higher); and 2) your asset loses value since house prices are highly indexed on interest rates since that is how they are typically purchases by non-investors.
By the way, if you are a individual homeowner wondering, "why should I care about what investors think" the answer is the "price/rent ratio" determines the "fundamental" value of your asset and usually portends the long-term direction of the price.
OP
On Nov 09 04:49 PM OptimizedPrime wrote:
> @Jeffreygordon -- We're not talking about mortgage here, we're talking
> about the perspective of a cash investor. In this case the $1m in
> capital "costs" about $50k/year at 5% (just a ballpark assumption
> of what you might get from your capital in other markets). Then you
> pay property tax, other expenses, upkeep, etc. etc.
>
> However, it really comes down to the return you want on your cash.
> You are right in saying that this ratio can certainly be more like
> $12k/million in certain situations, for instance on a property where
> you cannot count on full occupancy. I think the "15x annual rent"
> ($6k/million) rule-of-thumb is just a starting point, and you then
> need to work the number down from there.
>
> When interest rates rise, housing is a TERRIBLE investment since
> you are hit with a double-whammy: 1) your capital is worth more when
> it's invested (so your effective "cost of capital" is higher); and
> 2) your asset loses value since house prices are highly indexed on
> interest rates since that is how they are typically purchases by
> non-investors.
>
> By the way, if you are a individual homeowner wondering, "why should
> I care about what investors think" the answer is the "price/rent
> ratio" determines the "fundamental" value of your asset and usually
> portends the long-term direction of the price.
>
>
> OP
On Nov 10 02:33 PM Birdsnest wrote:
> I’ve come to the conclusion that real estate that you live in is
> almost ALWAYS a bad investment. What are the long term returns?
> Over the long haul residential real estate has tended to appreciate
> 1-2% above income growth, and in bubble periods perhaps 10%+ for
> a limited period of time. Sounds like a good returns eh? Yet when
> analyzing housing returns people commonly only consider purchase
> price and selling price, some number of years later. If they buy
> at 1x and sell at 2x they think they have doubled their money. They
> nearly always ignore carrying costs – e.g. property taxes, maintenance,
> utilities, and transactions fees on that asset sale. In years past,
> the common wisdom was to move “up” as frequently as possible, into
> an ever larger more expensive home. Yet consider the carrying costs
> above. In much of the country property taxes are commonly about
> 3.5% of the “normal” market value of the home. Also, maintenance
> and heating bills commonly may total another 2% of the market value.
> Those are fees simply to tread water with an existing home, not to
> improve it, and cannot be avoided. Remember that any home is still
> is still wearing out physically, creating costs, just sitting there
> over time – roofs and siding are wearing out, rubber and plastic
> is degrading, copper is oxidizing, kitchens are become obsolete,
> etc. So even in good years any price appreciation must be scaled
> back by 5-6% for asset carrying costs. You don’t face these costs
> with other financial assets. In an era of flat or falling home prices
> (e.g. now) tack on the above added annual loss. In the three years
> since the start of the downturn add on close to a 20% added carrying
> cost loss. Then there are those nasty transaction fees, often a
> 6% commission and a 1% transfer fee. If your home doubles in value
> then that expense is equal to a 14% deduction of your nominal price
> gain, excluding the added carrying cost loss. Even with homes appreciating
> at bubble levels of 10%+, real annual gains were probably in the
> range of 4-5% -- for a very illiquid asset. In non-bubble years
> annual gains are probably in the range of 1%. Finally, people never
> consider demographics in their home investment. Consider all the
> age 35-50 year old families living in recently build McMansions,
> with 3500 ft2 of space and massive carrying costs. Consider the
> pure demographic trend. Ten years from now there will be 5% fewer
> people aged 35-50 than today. Who will be the potential buying pool
> for your large box? Undoubtedly many more large homes will get
> built in the interim. Who will be buying these big homes 10 years
> from now, after a decade of income stagnation? Who will you sell
> to when there are 5% fewer families that today? I am convinced
> that 1.) even in “good” times the true financial return from residential
> real estate that you live in is far less than implied by simple selling
> prices, 2.) the current large pool of recently built large suburban
> homes will likely stagnate for the next ten years and perhaps never
> regain their price peak, and 3.) the conventional wisdom of frequent
> move-ups to ever larger homes is exactly the opposite of a sound
> financial decision. On the other side, rental property with cash
> flow which you rent but do not live in is a whole different story.