Housing Prices Expected to Bottom in 2010, 21% Off '06 Highs

Based on the current prices of CME housing futures that track the S&P/Case-Shiller home price indices, the median home in the U.S. is now projected to fall 21% from its peak in 2006 to its expected trough in November 2010. The chart below highlights the historical Case-Shiller data as well as the CME housing futures that track the index.

Hey, look on the bright side -- at least the futures are predicting a bottom in 2010. By November 2011, the average home price is only expected to be down 18% from its peak.

click to enlarge

Comments

[vboring:]

the markets are very optimistic.

in what world does the price of a commodity rise 100% due to speculation while the supply is increasing, then only fall 21% while supply continues to increase.

the rate of increase of supply is falling, but the supply of houses countrywide is still increasing faster than the demand for them.

add to this mortgage rates and lending standards that are unlikely to get any lower and other recessionary problems and a 21% fall from peak in nominal prices can only be achieved through major inflation or market manipulation.

not to mention increasing numbers of high LTV borrowers making the rational decision to walk away from underwater loans.

2008 Jan 17 03:16 PM

[User 124892:]

The stock market, is crying to flush the garbage out of the market place. This can only be done by raising interest rates. Cutting interest rates will only prolong the disaster that we find our self's in.
Please Mr FED, give the market, the medicine it is craving for. A good enema.

2008 Jan 17 04:59 PM

[locke:]

"in what world does the price of a commodity rise 100% due to speculation while the supply is increasing, then only fall 21% while supply continues to increase."

Everything is relative. You overlooked the fact that the population is increasing faster than the supply of homes, the fact that there has been inflation through the entire run-up, the fact that the quality of homes is increasing, and the fact that our ability to create wealth is steadily increasing thanks to technology.

Also, a run-up of 100% only requires a fall of 50% to break even. A fall of 21% from the high is actually a fall to 158% of the original value. Inflation alone could account for a big chunk of that 58% appreciation.

Depending on my job situation, I'll start looking for my first home in 2010if the prices come down at a level in-line with this projection.

2008 Jan 17 05:41 PM

[Hysteria:]

Everything is relative. You overlooked the fact that the population is increasing faster than the supply of homes, the fact that there has been inflation through the entire run-up, the fact that the quality of homes is increasing

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Exactly the kind of rubbish sentiment that started the housing bubble in the long run. Remember, in the long run houses retain their value in real terms, they do not appreciate. For this crash to be over prices must fall back to their historic norms, which even with high inflation will be much more than 21%.

2008 Jan 17 11:07 PM

[Jason in FL:]

"the fact that the quality of homes is increasing" What world do you live in. Most of the houses thrown up over the last 5-7 years are trash. They were built by unskilled labor and with junk materials. Most contractors cut every corner they could.

2008 Jan 17 11:31 PM

[emike:]

"in the long run houses retain their value in real terms, they do not appreciate."

I was always under the impression that land APPRECIATES while houses DEPRECIATE. They certainly do not retain value.

2008 Jan 17 11:40 PM

[Expat:]

Once again, another house appreciation number based on long-term historical increases. The facts are: house prices bubbled WAY above affordability, "owners" over-extended themselves massively, builders over-built, recession is here, real wages have NOT increased in ten years, banks are bankrupt and new loans will be very hard to get and very expensive.

All this means that house prices will need to hit historical lows (in P/E and income ratio terms). In order to revert to the long-term 2.8 times income ratio, we need to go seriously under the long-term average to compensate for being so far over it.

Owners will not be trading up for years to come as they work through the huge negative equity in their existing homes. New buyers will have a hard time buying as banks demand 20% down and limit price to income. How many under-30's have $40k lying around? How many over-30's have it?

Forget about inflation justifying a 5% rise per year. Take median income, multiply by two. That's your new target for house prices in 2009 and 2010.

2008 Jan 18 04:21 AM

[Yoski:]

Fairly optimistic assesment. Suppose inflation is 3.5%, median price in 2000 was $100K. 1.035^10=1.4. So inflation adjusted we're looking at about $140K in 2010. Given a peak of 226K we're looking at 140/226=0.62 or about a 38% decline. Since wages are not increasing any faster than inflation there's nothing to support higher home values. Especially in light of tightening lending standards even a 38% decline seems somewhat optimistic. Of course it could all drag on for several more years in which case inflation would take a bigger bite out of nominal declines. We might not see a bottom until 2012 or later.
As for the argument "the population is increasing faster than the supply of homes", certainly not here in Miami. Tens of thousands of condos and homes are sitting empty, rents are falling. Builders have clearly proven they able to outbuild any population increase anywhere in the country.

2008 Jan 18 06:37 AM

[kurt walter:]

The sooner we start the real estate auctions the better. Time to use the law of supply and demand to determine real estate prices. Any phony welfare mentality gimmick to stop foreclosures is only delaying the foregone conclusion that prices will be lower in the future.

2008 Jan 18 12:43 PM

[Roman:]

Lowering interest rates will only prolong inevitable. Higher interest rates will give us the shock therapy we need and we ll start making money using other investment options (CD's, high return savings etc).. I am hoping Fed will come to his senses and realize that inflation is at high 6% and the dollar is not worth much.. You need higher interest rates to slow the inflation down and give people an opportunity to make money elsewhere, since the housing market is dead... The higher the income, the more money they will spend elsewhere, thus stabilizing our crippled economy..

2008 Jan 18 01:12 PM

[cmich:]

Keep in mind that the CME housing futures are pretty thinly traded even for the nearest (currently February 2008) contract expiry. For anything further out than that the [url=www.cme.com/daily_bull...]open interest[/url] is pathetically small and the bid/ask spread is huge. So I wouldn't trust this futures market to be efficient at all. So the numbers are pretty meaningless.

2008 Jan 18 01:13 PM

[jagerdjs:]

Im just curious how they get these numbers. With 600-1000 foreclosures a day in LA we are seeing neighborhoods drop 20% in a month. Florida and many other states are also way beyond 20% from their market heights. Are the states that never saw a big boom just holding the national curve in check? It seems to me that the curve should be a lot steeper and rebounding by 2010.

2008 Jan 18 01:50 PM

[phantomfive...:]

Yoski's analysis makes the most sense. But estimates on the severity of the decline depend on too many other things, such as the general trend of the economy (down) and how the fed will try to deal with that (massive inflation?). Assumptions based on returns to historical norms only tell part of the story. Still, I expect the decline will be on the more severe side of the estimates I've seen.

It's interesting to see FuckYouAssMonkies talk about "the bottom" in terms of price/sq. ft. I've often thought that that would be a more useful measure than the median prices that we see talked about all the time. Finding price/sq. ft. data isn't easy, however.

2008 Jan 18 02:31 PM

[Pottz:]

"Everything is relative. You overlooked the fact that the population is increasing faster than the supply of homes"

Immigration (both legal & illegal) is far and away the chief contributor to population growth in the United States.

Immigrants generally represent a disproportionate number of the unskilled, under class work force in America. This is hardly the demographic that will be looking to jump into homeownership. In fact, the middle class (typically qualified to purchase a new homes) is shrinking in the US.

Numbers are rational and never lie. The fact is, the number say housing will decline until back in line with inflation. And that represents a hell of a lot bigger decline then 21%.

It is so logical, so simple and for those who were responsible with their money and didn’t give into the greed and idiotic terms – beautiful!

2008 Jan 18 03:08 PM

[User 141940:]

This chart is assuming that people can still afford at 2006 prices. It doesn't factor in the demise of "Creative Financing".

Try again.

2008 Jan 19 10:06 AM

[trackhome:]

The coming recession and housing bubble may actually help curb illegal immigration. When no houses are being built, no construction jobs are available then some of these people might return south across the border. Despite a declining dollar, I believe it still worth a lot more than the peso. If this happens it will leave more houses empty. These people can return to Mexico and live like kings. Please take it easy on me if I am wrong on this assessment as I claim to be no expert. Thanks.

2008 Jan 19 01:24 PM

[Inland_Empi...:]

2010? I don't believe so. The recovery slated for 2010 has to project further out to approx spring of 2012 and 38%, not 21% lower. Increases in take home incomes have not kept up with the ability to pay for huge excessive prices of homes. With an annual appreciation of between 3 and 4% in good locations, this places most of the prime homes out of reach and most prime borrowers have ruined their credit as speculators placing a good 30% of them out of the market. Just my humble opinion doing real estate investments for over 35 years.

2008 Jan 19 11:29 PM

[Reinko:]

To shaun and Yoski:

In the beginning of November I did some estimates and easy calculations around the Case/Shiller index.

Results:

During the last 10 years we had 10% price increase Y on Y.
Median income was only inflation adjusted.
I took a 3% level of consumer inflation (in fact consumer inflation is not the best inflation number to use but anyway...)

Conclusion: There is 50% bubble stuff in the housing values.

And guess what? A few weeks later that Shiller guy did also say that it could be as high as a 50% decline (although he later watered it down and the water down figures were picked up by the always overly positive financial press who will always ague that a glass that is empty for 95% is in fact full for 5% so there is room for growth...)

I go for the 50% decline but I have not a clue about the time needed for that.

2008 Jan 20 05:50 PM

[SlashAndBurn:]

Why would prices only drop to 2004 levels? Not betting my money on that optimistic fantasy.

Absurd:

graphics.nytimes.com/i...

No, we will revert back to normal, which is about 2000.

In short: look for a 30-40% decline in home values by 2011.

2008 Jan 22 12:12 AM