Latest Case-Schiller Report Shows the Sky is Falling

By Matthew Hougan

When I said last year that the real estate market was going south, Jim Wiandt was quick to label me ‘Chicken Little.'

Well, let me crow a bit. If you haven't seen the latest numbers from Case-Shiller, they are a doozy. Heather Bell is writing up the story right now, but I'll give you the gist: the real estate market is bad and it's getting worse.

Home prices nationwide fell 8.9% in the fourth quarter compared to year-ago levels, while eight of 20 metro markets posted double-digit declines. Miami led the way with a startling 17.5% drop. On a one-year basis, only three cities were up: Portland, Seattle and Charlotte, and none of them kept pace with inflation.

Are we past the worst of it? I have my doubts. Markets tend to overreact on the downside just like they overreact on the upside, and I certainly don't think we're overreacting on the downside yet.

Right now, home prices are back where they were in mid-2006. According to numbers from the National Association of Realtors, prices would have to fall another 10% nationwide to bring prices back down to the 2004 average. They'd have to fall another 28% to get back to 2001 prices, when the real estate market started to get crazy.

More Chicken Little? Maybe. But consider this: The FDIC - you know, the guys that insure bank deposits - is currently calling back retirees from the Savings & Loan era because they have experience handling bank defaults. As this WSJ article pointed out, they have a job posting on their Web site with the following description:

[Looking for people with] skill in performing duties associated with a financial-institution closing, such as receivership management, resolutions and/or asset disposition; knowledge of the resolutions process as it relates to complex financial institutions.

The job pays up to $180,770/year. With that kind of salary, you could probably pick up a very nice home on the cheap in a few years...

Comments

[tomyris]

HB's are up 7 % today (2/26 mid-day) what downside are you referring to exactly ??

Can you please expalin why bubble burster Shiller's index shows a 8.9 % decline in house prices for 2007 and the Ofheo index shows only 0.7% - no doubt the truth lies in between and equally no doubt that Shiller & co will try to exaggerate the down side to inflate their importance,but Mr Market is not fooled .

[jcrash]

All real estate is local. Or so they say. Seems to be true though, since prices aren't going down here and never "bubbled" in the first place.

[sjdiii]

Home prices are way down in the Tampa Bay , FL area. For example a 2500 sq ft home in a gated golf course community on a lake sold new in 2005 for $650,000. Today it is priced at $425,000. My town home in St Petersburg has been on the market since Feb. 2006. Originally listed at $299,900 and currently listed at $239,900. All the national home buildings in this area are continually cutting prices. Shiller gets it right.

[Pent updemand]

Schiller is the only one to properly account for sales mix. The numbers that the realtors like to kick around are no better than noise because they reflect the median of an ever-changing basket. The "don't worry be happy" bulls also like to play stupid games with month over month numbers in a cyclical business. Look at the year-over-year numbers. It's not a pretty picture. We're going to see former realtors selling apples in the street if this keeps up.

[Expat]

I don't think the estimates make much sense when they are given in a vacuum. "Down 28% from the peak" "Another 10% to go" Blah, blah, blah.

The reality is that the US housing market is massively overpriced as measured against the only thing that matters, affordability. Ignore the wealthy who rarely buy as much as they afford (otherwise, Bill Gates would live in a one hundred million square foot sold silver home).

Median house price is now at $201k (I don't know why this measurement is used, by the way). Median income is about $49k. The long-term affordability ratio for house prices is about 2.8 times income. Consequently, the median house price should revert to about $137k, implying another 30% drop.

What does this 2.8 times income ratio mean? It's not a fantasy number pulled out thin air. It represents the ability of the income to service the loan at typical interest rates and lending conditions. It means you pay one-third of your income on your housing (ALL costs included) in order to remain solvent and save for retirement. It also assumes typical wage growth.

This ratio does not take into account 100% mortgages or option ARMS with teaser rates. It does not take into account the lending backlash as prices collapse (what was loose and easy on the way up becomes tight and restricted on the way down). It is also likely to be a mean-reverting ratio which implies that it needs to go BELOW the long-term average in order to balance out with the insanity on the upside.

Given the insolvency of our major lending institutions, the eradication of irresponsible lending, negative savings rates, widespread debt, record housing inventory, and the recession, we are likely to see the affordability ratio head down towards and below 2.5 times income.

Look out below. The median home price needs to drop to about $120k to signal a bottom.

[JohnnyBitchdog]

I think the Shiller estimates are more likely underestimating the magnitude of the decline....at least on the medium and high priced homes.

I haven't explored the precise methodology but the changing sales mix isn't the only problem with the NAR trumpeted statistics. There is no adjustment for capital improvements and its quite obvious that people have poured massive amounts of money into improvements over the last few years.....Even the foolish flippers probably put alot more money into the flip houses than was required to simply maintain its livability......

Does anybody know if Shiller has a way for adjusting for capital improvements ?

jbd.

[coyoteyogi]

Once a chicken begins to crow the end is nigh...

[Mr Pasadena]

According to a recent article, the median homes price in Arcadia, CA is actually up over 4 percent. Does the Case-Shiller Index follow this City? I'm curious if it is because the lower end, which cost nearly $700K for 1,000 square feet, has not been selling and only the homes worth over a million is selling.

[Pent updemand]

One of the criticisms of Case-Schiller is that it only follows the 30 major markets. So Arcadia, CA is lumped in with LA if it is included at all.

That recent number about an increase just shows the uselessness of the NAR's median number. The median jumps around based on the mix of homes sold in a given period. So if only the high-end is moving, then woo hoo, we're all rich.

[PDXOutsider]

I'd love to know where jcrash lives as even in the NW, which most said did not experience a bubble, we have in fact seen a bubble which is now popping.

THe only reason Portland and Seattle still show positive growth is that this areas always seems to be 6-12 months behind the rest of the market. A look at the S&P data shows the impending losses in Portland. portlandrealestateouts...

[BelvedereResearch]

Take a look here:

www.housingtracker.net...

For a good (albeit 5 months out of date) set of affordability stats on 50+ markets. It's pretty clear that some markets are working thru a short term pricing reset, while others have a huge headwind of fundamentals that'll likely be blowing for 5+ years.

Even if you believe that LA/SF have fundamentally changed so that now paying 50 or 60% of income for mortgage payments is going to continue to be the new reality (I highly doubt that, by the way) that means the real estate market would only grow at the rate of wages going forward (i.e., no 10-15% per year upside anymore!).

[WAKEUP]

The "bottom" keeps falling out. None of our comments changes the fact that it's getting worse, all along. Talk is cheap, and, as hard as it seems to imagine, it may well be that when the dust clears, houses will be cheap, too (if you can find a mortgage loan.)

[Johns]

The prices have just started to come down and there is a long and painful road ahead. Even though the demand for housing slowed down in 2006 and 2007 the actual prices have only started coming down in late 2007 as the sellers were unwilling to lower the prices earlier. The housing market is way overpriced due to years of speculative buying and inflation. The current price environment is hardly affordable to most of the population and the buyers are unlikely to enter the market until they are absolutely sure that the prices are more affordable and the prices have bottomed out. The existing credit crunch and rising mortgage rates only make matters worse. I expect that the housing market will go through a painful and rapid correction process in 2008 where prices continue to trend considerably lower and likely to bottom out in 2009. I also expect that we might see a brief and slight upside interest in home buying this spring. However, I do not believe that this will continue into the summer as housing corrections typically last many years.

[Dave theBrave]

Remember - the band decided to keep playing as the titanic went down. The housing market it just starting feel the effects of the numbing water. Realtors like most sales people - can and will continue to espouse an improving situations – while they are running toward the stern.

[buyerwannabee]

Me thinks the moonshine is better in E. Tennessee than
elsewhere according to contractor pricing.Should I sign a new one year lease rather than buy at this time?

[Tom the Bomb]

I'm with the guy from Arcadia, CA in noticing differences in towns experiences with the bubble. Hinsdale IL went up 12% in 2007 (to $1.2 M), and neighboring Western Springs IL went up 8%, but are part of the Chicago region that appears to have gone down around 4%. There are always local exceptions, especially exceptions in well located desireable areas in metro areas.

[RealtorBOB]

When the major builders go belly up, the problem will be solved. Supply and demand always prevails in the end.