Case-Shiller Still Predicts Massive 45% Fall from Today’s Values 88 comments
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The 10 major cities in the Standard & Poor's/Case-Shiller home price index have risen 5% from their April low, but the index is still predicting a massive 45% fall from today’s values.
Tuesday's new number from the index showed a gain of just under .5% for the month of September, but the index remains 30% below the high in June 2006. Based upon a trend generated from the actual prices of 1987 to 1997, and generated forward in a linear projection, the index will fall a total of 62% before it reaches the trend norm.
A more comprehensive analysis of the 10-city index based upon a 120 years of data shows current values off 36% and a comparatively modest 20% fall ahead.
Review four charts and key data based upon major real estate price indexes at “Property Price Index”.
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In addition, real incomes are declining after you allow for rising health care bills etc, so the base-line for the income multiplier is likely to be on a downslope for as far as we can see.
So far, no real case has been made for why the West should emerge from recession and resume growth, except that this has happned in the past.
Well, in past they did not have demographic headwinds, competition from China or high oil prices likely to rocket at the first hint of recovery.
9% of people who bought a house in the past year are already underwater.
When the realisation sinks in that house prices are not going to make up for past losses for many, many years if at all then a lot of people are going to mail their keys back.
to davewmart. when all these buyers mail back their keys where will they then go. i bet for those who can make payments it is cheaper to stay than try and find the same dwelling and then lose their credit standing.
We don't have non-recourse morgtgages in the UK, so how they work is pretty alien to me.
I don't imagine that many people in the US will make a cold appreciation of their best financial course and come to the conclusion that their best course is to default, but presumably if they are in trouble anyway due to loosing a job or being on short-time then it makes it easier to give up.
I doubt that many in such circumstances will be in a position to rent equivalent accomodation, they will mostly be going for cheaper rentals, even if not actually homeless or boarding with relations or friends.
During times of increasing inflation hard assets and collectibles go up because people are seeking a safe haven for their money.
Only reason prices haven't fallen further is most new loans are FHA 3% down, with temporary higher caps, and Fed ability to keep rates at 5%, and the GSEs buying up all the new garbage loans. The $8k incentive may be significant in some areas and price ranges, but in still-bubbly areas like southern California (another 35-50% downside to go, in mid-level and higher areas priced at 700k and above) it is nothing. The second tsunami wave of option-arm recasts/resets is coming ashore and there is no avoiding the defaults through 2012 and beyond.
The key metric is when prices in any area get down to cash-flow positive investment levels for investor buyers - this will set the bottom. In Orange County, CA where I live, we are still nowhere close. Any people who walk away can easily rent a similar apartment for 1/3 of what the house costs, or an equivalent house for less than 2/3 of the cost to buy (incl. all taxes, maintenance, HOA fees, and borrowing costs). See irvinehousingblog.com for daily data points and archives of valuation metrics - blogger has a book with all details.
Today's buyers are tomorrow's trapped owners.
Simplest way to explain situation is this: the average owner could not afford, using normal borrowing metrics, to buy the home he lives in at current prices. The pool of potential buyers is made up of his peers. Who will the boomer retirees sell to? Investors are sitting on sidelines waiting for right-pricing.
Hope this helps explain the situation.
How do we have non recourse mortgages in the US. A couple of states dont allow deficiency judgements. You can't get rid of 1st mortgage debt on primary home in bankruptcy.
On Nov 26 08:42 AM Davewmart wrote:
> bartpr,
> We don't have non-recourse morgtgages in the UK, so how they work
> is pretty alien to me.
> I don't imagine that many people in the US will make a cold appreciation
> of their best financial course and come to the conclusion that their
> best course is to default, but presumably if they are in trouble
> anyway due to loosing a job or being on short-time then it makes
> it easier to give up.
> I doubt that many in such circumstances will be in a position to
> rent equivalent accomodation, they will mostly be going for cheaper
> rentals, even if not actually homeless or boarding with relations
> or friends.
3.5% FHA mortgages and the first-time homebuyer tax rebate have dramatically improved the ability of low income, young, inexperienced and naive people to purchase a house or condo.
The government should be ashamed of inducing these people to make the worst decision of their lives.
Here in the UK bankruptcy does discharge mortgage debt, but short of that you are still liable for all costs and so people are very reluctant to give up their homes.
There is also not the oversupply that there is in the US, and house prices are surprisingly resiliant.
The 90s is not the long term trend. In 1991/92 the US experienced a recession, which kiled the real estate bubble and caused a severe real estate crisis (remember the Savings and Loan Crisis).
Sloppy, sloppy, sloppy!!!!
On Nov 26 08:31 AM bartpr wrote:
> you cant take a trend that developed in 89 to 97 and then superimpose
> it on the current market. there is no basis for this in economics
> or math. the only trend that is visible here is continued volatility.
> who knows where this all ends
>
> to davewmart. when all these buyers mail back their keys where will
> they then go. i bet for those who can make payments it is cheaper
> to stay than try and find the same dwelling and then lose their credit
> standing.
The 90s is not the long term trend. In 1991/92 the US experienced a recession, which kiled the real estate bubble and caused a severe real estate crisis (remember the Savings and Loan Crisis). '
Mmm, if you are talking about me I did not mention any long term trend in comparison to the 90's, but OTOH it is unclear to whom you are addressing this, which is, well, sloppy.
Mortgage debt constituted about 45% of that, roughly $11 trillion and owner equity of 55% or $14 trillion.
The recent Case-Shiller average house price declines from peak of their twenty city survey is 28.1%.
This makes the current loss of value at roughly $6 trillion. House values have receded not quite halfway to their long term trend line. We are still nowhere near a house price bottom. With the Feds artificially propping up the real estate market and banks holding foreclosed properties off the market, or refusing to foreclose so as to not have to recognize failed loans on their balance sheets, the housing recovery will endure much more pain before a long, slow recovery can take place.
Right now you can't build a new house at a profit. Home prices are therefore down to the inflation adjusted trend line, or a little below.
The dollar is down to the point that offshore money is coming into the US, buying up our incredibly cheap residential real estate.
Hmm, maybe China has found something to do with it's hoard of $$.
ALT A resets don't peak for another 18 months.
I don't know anyone who has done an ounce of homework who agrees that housing is recovering. The long term trend line is accurate and will overshoot as normal.
And, the argument cannot be made that those years (1998-2000, if not later) represented phony escalations due to "easy-money" policies, either, because during that period the prime rate was approaching upper single digits and nobody cared about housing, as the Internet stock bubble was attracting all the capital.
If any of those latter 1990's years is included in computing the trendline, then, the slope is much higher, with no residual gap to be filled in.
This analysis is based on self-serving assumptions and cherrypicked partial data samples, rather than a representative population. As such, it's mostly worthless as a predictive tool; in fact, misleading.
One of the problems is that bias in the tax system towards putting money into housing rather than into investment which actually produce something is that many people bought 'too much house' - ie they went for massive McMansions with thousands of square feet in the far suburbs and utterly dependent on cheap oil to be habitable.
The cost of building these is not that relevent, so they are wasted investment.
The need in future seems likely to be for much smaller houses within walking distance of amenities.
So apart from better weatherisation many of the materials currently needed to build a dwelling are likely to be much reduced.
Labour costs are obviously also under considerable pressure.
In any case, with a huge amount of housing surplus build costs are not relevent for a long time to the price houses are likely to fetch.