Housing Prices To Return All the Way To Pre-Bubble Levels?

It won't be pretty folks. If Goldman and Shilling are right, and historically housing bubbles have always deflated back to about where they started, consumer spending will die out and we'll see a recession by early next year.

Gary Shilling, who I chatted with Tuesday for this piece for CNBC and who is quoted below, thinks we will see a recession due to the housing crunch by the end of the year. Good luck folks.

If you think the decline in home prices is bad now, just wait.

Two reports out his week show the once high-flying housing market is quickly losing altitude and that prices are likely to head still lower.

According to the S&P/Case-Shiller Home Price Index released Tuesday, prices fell 3.2% in the second quarter, the sharpest decline since the index was created in 1987. The pace of decline accelerated from 1.6% in the first quarter.

On top of that, the National Association of Realtors reported on Monday that the median price of existing homes eased 0.6% in July, to $228,900.

Both reports portray weakening housing prices, but the declines have been in the single-digits or smaller so far. That may be about to change.

"I think we’re yet to get to the main event," said Gary Shilling, president of A Gary Shilling, a money-management firm. "We continue to look for a 25% decline in median single-family house prices. I think this is really just getting started."

Of course, for first-time homebuyers, a decline that big would be good news. But for existing homeowners, a 25% drop could be devastating, Shilling said.

It "would wipe-out the equity of the average homeowner who has a mortgage," he estimated.

Shilling's forecast may sound as if it's on the fringes, but he said, "a number of people are not in our camp, but moving toward it."

Last week, Goldman Sachs chief economist Jan Hatzius said in a note to clients that "our working assumption has been that U.S. home prices are about 15% overvalued."

And On Tuesday, another Goldman economist, Andrew Tilton, expressed concern that prices are falling at a faster-than-expected rate.

"It does look like there's a bit of acceleration in the pace of decline and this comes before the credit crunch," Tilton said.

Comments

[Rocktex]

Look at Japan's real estate for reference.
In early 90's, Japanese residential housing lost more than 80 percent and has been taken 15+ years without a sign to go back to pre-bubble stage.
I am not saying that USA should follow the same patten, but there is such a possibility that could be the case.
I was there thru 1991-1997 Los Angeles RE market and had seen it happen. People surrendered their house simply because there were no equity in homes. What the damage can do to them? They love to keep a good credit score, but it is just beyond their reach.
We won't give our sympathy to anyone who became a strawman in a financial scandle. Those who trapped in this "liar mortage" plot help to create inflated market. In some way, they fooled themselves as the bosses of American Dream Co. until they found out they are just a strawman.
I have some friends speculating lately who bought houses for flipping in 2004-2005. They made huge profit out of the first three deals, but now the last deal in Pasadena went wrong.
They listed it for $ 1.25m and now reduced to $980K after 3 month without an acceptable offer. Yes, they did receive an offer of $870K before the stock tumbled. Now they regret not following my advice to take it and cut possible loses.
All their profit in the past 2 year will be lost and end up with nothing or loses, if they could be lucky enought to sell the last one for $800K.
Well, let's look at the bright side. It is a crisis for some and it is also an opportunity for others, just as today's stock market people is picking up cheap stocks after yesterday's 280 points south.
Don't panic. Just be cool and sharp to explore the opportunity, guys.

[Nidhi]

Is that 25% in addition to what has dropped already? When do you consider the start of housing bubble? 2004?

A simple way to rationalize the correction is that the housing market will fall till the annual ~6% growth (linear line) of housing market is reached. We might overshoot this correction by a little bit, but we will get in line with this linear growth of ~6% annual. Assuming that fed will intervene to make this happen as much as possible.

creating-wealth.blogsp...

[substrato]

Well that would have been true a year back when the mortgage companies still lookedlike they would survive. However, since the availability of credit to both new/first-time home-buyers and existing mortgage borrowers whose rates will reset up higher over the next 12 months remains fairly poor with so many mortgage companies shutting down and the market dropping bonds backed by these loans in a hurry, it is difficult to see where the money will come from to stop the fall. We would really need to see widespread loan modifications so that the borrowers facing resets will not be forced to default. There will still be borrowers out there who cant really afford their mortgage payments but had betted on the housing market to keep going up who could "walk-away" from there homes.

[Mikey]

6% annual appreciation isn't sustainable and no institutional investor would ever use this as an assumption in their models. The growth in the price of housing can't exceed real income growth without there being material adverse affects on the economy. From a recent FRB Bank of NY report on housing prices:

"Between 1975 and 1995, real single-family house prices in the United States increased an average of 0.5 percent per year, or 10 percent over the course of two decades. By contrast, from 1995 to 2004, national real house prices grew 3.6 percent per year, a more than seven-fold increase in the annual rate of real appreciation, and totaling nearly 40 percent in one decade. In some individual cities, such as San Francisco and Boston, real home prices grew about 75 percent from 1995 to 2004, almost double the national average."

[Lee Carlson]

Mikey,...Whoever said that single family home prices rose an average of .5 pct. during the 2 decades, 1975-1995 is absolutely nuts. During the late 70's and early 80's home prices were going up like crazy !
Especially, if you purchased income property, at that time, the IRS rules said that 40 pct. of the capital ganes were forgiven and one only had to pay cap. gains on the remaining 60 pct.
I for one was buying small apartment buildings 6-10 units , holding them for a year and a day and reselling for a big profit ! One place I purchased was a small mobile home park for $300,000. and sold a year later for $475,000. That was from Jan. 1980 to Jan. 1981 !
I think that's a bit more than .5 pct. return any way you want to
figure it and at time, those kinds of returns were common. Things fell apart to a large extent during the Reagan / Herb Volker ( Fed.chief ) years during which time interest rates were about 17-18 pct. for home loans, but by the end of Reagan/Volker terms, interest rates fell below 10 pct and increases in sales and values restarted !
Can't believe everything you read,..I don't care who makes the comments. I only deal in facts ! LC

[Brian Croner]

That's what a bubble is like. It expands, then collapses. No happy real estate agents. Mortgage companies are broke. So who's selling houses? Who's buying? Who'd pay 2.5 to 3 times the value of a pot to pee in?

[Lee Carlson]

Home prices dropping by 25 pct. I don't think so !!!!
All the really bad news I read on home prices seem to forget that
the US dollar is in a "free fall" and the dollar as compared to the Euro and the Canadian dollar indicates that the weak US dollar means that it's bargain time for Canadians and Europeans ! I fully expect that housing prices will continue to fall moderately during the next year or so, but I have been selling R.E. for 25+ years and
have seen the interest pick up even now by Canadians and Europeans. In addition, China is holding so many greenbacks that they could buy just about the whole inventory of homes for sale and still have a surplus !
In essence, a weak dollar will prop up US home prices simply because they are already priced cheaper than Canadian home prices and many places in Europe.
My big hope is that the new Fed. Chief won't do anything to screw up the economy any more than it is. Another worry is that congress doesn't seem to have the guts to stop Bush from asking for sums of money like the recent request for "another 50 Billion",..like it was nothing but pocket change. ! Whats wrong with these people. ??
Just run the presses and print more bucks, seems to be the Feds. response ! Bush makes statements like he is getting ready to wind down the war, but in the meantime is putting the finishing touches on the worlds largest embassy in the heart of Bahgdad !
What we really have is government gone nuts ! LC

[Just as Ipredicted]

The problem with the housing market is that the real estate industry STILL won't admit that housing is at least 25% overpriced and their commission greed helped create the problem. The truth is most people will have to walk away from a house that can only be sold at a price less than the amount owed if they can no longer afford to make the payments or have to relocate. You are going to all get what you deserve, I guess. If we had all refused to buy or sell for these ridiculously inflated prices this would not be happenning, so blame yourselves. I sat tight and DID NOT refinance when my "paper" equity ballooned. I have no worries with my fixed mortgage and my equity will be no less than it was to start with if the prices crash, so who cares. My house is a place to live and a great tax shelter but should not be perceived as a money making venture unless you can afford to lose that money as well just like any other investment. The fact is housing "market" value is subjective like everything else, the Realtors do not want to believe it is all. In truth a house is ONLY worth what someone is actually willing or able to pay for it and nothing else. You rode the wave and now get ready for a mouth full of sand and grit when you hit land. Sad but true.

[www.funderschoice.com]

Just look at the delta between affordability and housing prices (about 25%) and 15 to 20% correction seems not only possible but inevitable