Will Housing Bottom in 2010 or 2012? 11 comments
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The April S&P/Case-Shiller Home Price Indices are now out.
The index shows show annual declines in the prices of existing single family homes across the United States continued to worsen in April 2008, with all 20 MSAs now posting annual declines, 13 of which are posting record low annual declines, and 10 of which are in double-digits.Calculated Risk has charts of Los Angeles and Minneapolis in his report Case-Shiller: Tiered Home Price Indices.
The 10-City Composite posted a new record low of -16.3%, and the 20-City Composite recorded a record low of -15.3%. All 20 MSAs are now showing declines with Charlotte, the last holdout during the 2007/early 2008 period, now reporting an annual decline of 0.1%.
The following chart was produced by "TC" who has been monitoring C.A.R. data, DQNews data, and Case-Shiller Data. Let's take a look.
click on chart for sharper image
"TC" writes:
Mish, it's TC here and it's now been 2 months since I last provided you with a Case-Shiller update. Here is the latest data based upon the today's futures market and today's Case-Shiller data release.Click here for the previous chart from TC, from two months ago. That chart is suggesting a November 2012 bottom.
As you've now seen in the media press releases, prices have continued lower and we're now back to late 2003/early 2004 prices in many areas. What you may not hear in the media however is the pure dollar amounts of the losses (e.g. $270k in LA) and that the futures market is increasingly making a bet that mid to late 2010 will mark the housing bottom.
This is in stark contrast to the bets of just 4 months ago when a bottom forecast for 2013. An interesting fact about this market timing change is that projected percentage decline has not changed. In other words the futures market is pricing in an identical magnitude loss, but just for it to happen much faster.
The futures might be suggesting a 2010 bottom but I am doubting it. This recession will be much longer and much more severe than most thinks. See Case for an "L" Shaped Recession.
Unemployment is going to soar and unemployment will keep climbing for as long as a year after the recession ends. Unemployment is typically a lagging indicator. And unemployed people are not going to be buying many houses.
There is a strong possibility of a multi-dip recession as well. In other words, in and out of recession for a number of years. This is what happened in Japan. That is my forecast actually, but for lack of a better word I am calling that an "L".
I am sticking with 2012 for reasons outlined in When Will Housing Bottom? and Housing Bottom Nowhere in Sight.
However, much will depend on how fast banks can unload REOs, how fast rising unemployment adds news REOs, whether Congress does something insane like nationalize Fannie Mae, and many other factors that can change the nature and shape of the housing bottom.
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This article has 11 comments:
The faster the declines, the sooner the Bottom.
In Zip Codes that are going down 5% per Month, they will reach their Bottom sooner than those at -1% per Month.
How do you measure the Bottom in any given market is also important. The formula I use is based on Supportable Demand, which is a function of the interest rate on fixed rate loans.
Take the average house price minus the Supportable Demand price and subtract. The difference is then divided by the Change Rate. If it is -5% per Month, the Bottom might be reached this year.
What is true by virtue of how the Case/Shiller charts are done, is that this phenom will not start showing up until 2010. By then many markets will be well past their Bottom.
In my mind, it would depend on the median mortgage loan supportable by the median household income for that locale. And I agree with you that interest rates provide one of the variables, but I would also include availability of mortgage loan financing and prevailing unemployment rates.
If the United States enters a prolonged and severe recession, the housing market will (probably) not recover until the economy recovers.
In addition, there are irrational factors which are impossible to predict or control.
It isn't easy to compare prices from different times but it is still instructive and suggestive: A house (in the San Francisco Bay Area) that cost 35 thousand dollars in 1975 cost 25 thousand, fifteen years earlier, in 1960.
Five years later, in 1980, this same house cost three times as much, or 100 thousand dollars.
In 2005 the same house cost 900 thousand dollars or about thirty times as much as its 1960 price. (Gasoline was 30 cents a gallon in 1960. Thirty times that value would put gasoline at 9 dollars a gallon.)
In 1935 the same house cost 7 thousand dollars.
However we factor in "hedonic" indexes, these very big swings in prices, which occur relatively quickly and are often very persistent, point to markets which are not always predictable or "efficient."
Demand for housing is dependent on many factors which are both rational and irrational. (Location, location and location.)
Stated in other terms, a housing bust can be just as irrational and persistent as a housing boom.
When it's all over, an economic cycle can be explained, very easily, by most economic and financial pundits but while it's occurring, it's a mystery to everyone.
(The secret of every financial guru: Claim to have predicted the most important market moves while walking and talking backwards into the future.)
Built into current prices was the expectation of price appreciation of 10% or 15% a year. Strip that out and it's uncertain what a "rational" consumer would pay for a house in any given area. It's also uncertain whether the average consumer will in fact be rational. Most consumers certainly weren't rational for the past eight years. They bet the farm tying themselves down with speculative debt and essentially betting years of future freedom in exchange for the chance to make a bunch of money. It's not unusual for a few people to do that, but for the majority to enter into that sort of speculative behavior is deeply disturbing.
In short, nobody knows where this is going to go because we aren't merely talking about homes returning to "affordable" levels. We're talking about at what price people will want to buy them, which may have only a little to do with whether they are affordable.
Finally, it is very difficult to say how this banking crisis will play out, how the absence of a new bubble to drive economic growth will play out, how the absence of an asset against which to borrow wheelbarrows full of money plays out. There's simply nothing hopeful on the horizon. The three big trends that drove speculative activity and the larger economy since the 1980s was the stock/investment bubble of the 80s, the tech bubble of the 90s and the housing bubble of the 00s. There's a small possibility that we're all out of bubbles.
Pundits have called for a purposeful energy investment bubble because the US economy simply can't operate without bubbles anymore. Sustainable growth is impossible without financial mania. Whether we get an energy investment bubble remains to be seen, but if we don't, what drives the economy from here forward?
If we have low or no growth for a long time, it will make stocks look overvalued by maybe 50%, maybe more. What about the huge unemployment that will likely flow from this?
The way I see it is housing may have started this, but housing is the least of our problems.
Housing is going to flatline for 20-25 years.
Why? Because 78% of high end real estate is owned by baby-boomers. They will be retiring and dying over the next two to three decades -- and their homes will be sold for downsizing, or liquidated by their progeny (No, the kids won't keep the house. They never do). This constitutes a return to the market of the majority of high-end real estate. Who's going to buy it? You heard the population was going up? Wrong. The population is going up at the lowest income levels -- they can't and won't rescue housing.
One doesn't remove the largest US population, and the largest population of homeowners from the market and expect to see a rebound in two or four years. That's just silly. What we have here is an unprecedented shift in population dynamics -- it will (and must) be accompanied by an unprecedented shift in the price of their most valued assets.
Housing will recover in 2030 to 2035.
The largest bubble in the history of the world is bursting, and you want a turnaround in two years? Take off the tinfoil hat.
The end of all sequential, easy money bubbles is inflation...no more assets to put your cash in so you find hard assets (commodities) which causes prices to increase for all. Welcome to the world of stagflation until the excesses (cash) are driven out of the system via widescale devaluation of assets...
For super overpriced state like CA...the bottom of property should have been
1) 3x to 5x medium income for medium home price
or
2) would have been 100x to 150x of rental
or
3) Rental that give 8% return
What is likely to happen...Rental goes up to meet the high property prices.
CA is way way way overpriced...
Ota101
On Jun 27 02:37 PM samo wrote:
> Correct...boomers retiring will aggravate situation. Residential
> eal estate won't be a play for a least a decade...
>
> The end of all sequential, easy money bubbles is inflation...no more
> assets to put your cash in so you find hard assets (commodities)
> which causes prices to increase for all. Welcome to the world of
> stagflation until the excesses (cash) are driven out of the system
> via widescale devaluation of assets...
Been waiting for the collapse for some time. Now that it's here, it's natural that people will go too far in the other direction. When thoughts like that articulated in this article become mainstream, I will be buying if I can. 2012 is pretty ridiculous IMO. 2010 maybe. Maybe bottom in 2009. But we'll see.