U.S. Housing Market Forecast: 2008-2010

US house prices continued to plunge for April 08 data, reaching an extreme low reading of down 16.3% on a year earlier as measured by the S&P/ Case-Shiller Composite-10 and down more than 19% from the mid 2006 peak. The rate of decline is the worst since the Great Depression and signals further distress in the real estate linked credit markets and therefore a continuing drag on the US economy in the face of the continuing deleveraging of the mortgage backed derivatives markets.

The housing market trend suggests that the annualised rate of house price falls could bottom at minus-18% for the July S&P/Case-Shiller house price data, therefore suggesting a continuation of the weakening trend in US house prices for the next 3 months (May, June, July data), after which the pace at which US house prices are declining 'should' improve as the current momentum is unsustainable beyond July 2008 due to sharp declines from a year earlier factoring into the annualised house price figures.

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By the end of 2008, the annual rate of house price falls should slow to about 13%. Whilst it is not possible to forecast a bottom in the US housing market at this stage of the bear market, it is possible to come to the conclusion that most of the decline in nominal house prices is now behind us on the basis of analysis of the continuing decline in real-term house prices which suggests that a stabilising US housing market during late 2009 and 2010 will mask the continuing real terms inflation adjusted fall in the housing market valuations for several more years that will in effect have the impact of eroding all of the gains since the 1989 peak and reducing the gain from the 1994 low from 131% to just 40% by the end of 2010 as the below graph illustrates.

When to Buy? - The time to start contemplating buying real estate again will be after the US housing market has made a nominal bottom in house prices and at the time US house prices start to increase in real-terms as the BUY / SELL signals above illustrate. As per this analysis, there is no sign of a BUY trigger occurring within the next 2 1/2 years.

Presidential Election - It is unlikely that there will be a significant turnaround in the annualised pace of house price declines by the November 08 election (September data) and therefore the falling housing market will continue to be a major negative factor for the Republican candidate despite the hundreds of billions being thrown at the housing market in an attempt at trying to put a floor under the housing market by reducing the number of foreclosures amongst adjustable rate mortgage holders resetting to higher interest rates.

US House Prices Forecast Summary - Nominal US House Prices are forecast to fall by 30% from the mid 2006 peak by the end of 2010, or a further 11% on the decline of 19% to date. US house prices will continue falling in real-terms even if a low in nominal house prices is made by mid 2010.

For views on the UK housing market see the most recent article UK Housing Bear Market Threatening Economic Deflation

Comments

[BrianD]

A scary reality we've created for ourselves.....

[redriver]

Combine the inflationary impact with the continuation of mortgage rate escalation through 2010 and its quite a one two punch. I won't be looking for a buy signal for quite some time.

[BlueAmerican]

I disagree on it taking at least 2. 5 years before we see a sign of the US housing market seeing a turn around. The US Presidential election will have a strong impact if Senator Obama wins. The first impact will be a draw down in troops in Iraq in a 16 month time period. Pain is still going to be felt on the sellers side but the market will improve. Still BrianD is correct when saying wahat a scary reality we have created for ourselves.

[cfish]

Sounds reasonable to me. It's hard to time any market bottom, so it looks reasonable as a speculation. We know that bad policy will prolong the pain but we don't know what kind of policy will be executed in the future.

The drop not a scary reality to me; I own no home because I saw this coming. The moral hazzard of the modern system, however, is pretty scary.

[Martin21]

I sold my house 2 years ago and I am am proud renter who saw this coming. The only problem is what to do with $ you got from selling your house.
Inflation will kill any gains in bonds. Stockmarket is not safe either. Consumption of gold has declined significantly in India (the biggest market), and in a recesion you can expect further declines. At some point people will start buing realstate because that might seem the safest place once inflation start so spiral out of control, markets continue to decline and comodity buble burst.
Buying and renting houses will become profitable very soon and it will be safer than stock and dividens.

[Blutown]

I would like to share a few observations/opinions.

First, it appears that this article is addressed to the real estate investor. An investor looks for buy opportunities not when prices have hit bottom but when it appears there is a reasonable chance for appreciation. Until that time, investors will put their money to work in other investment vehicles that will provide the returns they are seeking.

Second, the individual home buyer doesn't necessarily need to wait for the absolute bottom because their motivation can be very different such as life changes (household formation, retirement, job relocation, etc.)

Third, the data presented appears to be the US overall. Remember that real estate is location sensitive and the "bottom" will occur in different places at different times.

Finally, if the bottom is in 2011 and I have every reason to believe the data presented, it means huge additional losses in equity. Can you say massive bankruptcies for homeowners and the businesses and governments that rely on the revenues?

[zoilo]

With a bigger dollar devaluation,building materials price growing it will be possible a shorter bottom time for the house price.

[Dragon Master]

In a high inflation eco, owning a house is much better than keeping paper money.

[Umm, yeah]

@Dragon Master

Could you explain your statement further, plz? I remember reading that debt becomes worth less during inflationary periods, but if the value of the house is decreasing against paper money, doesn't that cancel it out?

[Umm, yeah]

...and @ zolio

Even if it costs more to make a new house, how will it shorten the time for the housing market to bottom? Are you merely predicting that the home builders will make fewer new houses and so additions to supply will slow down more? I'd think the inability for Joe Average to get a mortgage nowadays compared to the Go-Go-Subprime/Exotic-... days is going to impact the market more than the home builders?

[tcornelison]

The housing industry as a whole has been overbuilding and I don't mean just volume of homes. Due to the exotic mortgages (your term, not mine) of recent years buyers have been buying more home than they can afford. This has caused the builders to build larger & larger homes. Many of these homes will eventually lose 50% or more of their value, possibly including my own.

Today's reality is that you must build homes which real people can actually afford to buy and keep. In my NE Georgia Market this is homes ranging from 1200 - 3000 square feet, priced from $100,000 to $300,000 yet for the last 5 years the typical home being built was 2,500-6,000 square feet and the price was $275,000- $750,000 and these homes make up the majority of our current unsold inventory. More affordable homes (under $200,000) are selling at a brisk pace to local purchasers, first time buyers and investors, not commuters.

The reality is different in every market. We were attracting lots of Atlanta commuters but a $15-20 per day cost to commute has changed that dynamic. Our County is not unique. We were one of the top 10 fastest growing counties in the nation but I don't see that pace of growth returning, ever without significant changes in transportation. Our future growth will be jobs and transit driven and urban centers will have significant advantages in that realm due to rail transit and shorter driving commutes.

[Tom Lindmark]

I think that the situation is becoming more complex as commercial real estate begins to catch the residential flu. The banking industry is going to have a struggle getting through any meaningful downturn in commercial real estate and those problems could impede residential recovery. Here are some thoughts from a conference I attended last week-blog.metro-real-estate...

[boomsavant]

numbers, numbers, numbers....... how easy it seems for some prognosticators to consistently try to deduce the future by reducing very "human" factors into "scientific" statistical analysis. As if their trying to be "scientific" makes their analysis all that more acceptable and valuable.

Look to the "human" factors that make their numbers most always skewed improperly.

Take the home situation now.

Homes are much more than cash or gold or silver. They are a way of life. They are an "attainment" and satisfaction of worth. They are the "nesting" instinct of women. and the security of men.

It's not a home crisis, its a banking lending crises. And that crises has had a more pronounced impact on homes than most other "things"

The banks and lending institutions will be the sufferers. Homes have a very definite and intrinsic value. Their value is what it costs to build and the relative scarcity of the dirt underneath them.

The scarcity of the dirt continues upward. Regardless of the prices of home units. Now materials are affected upwards. The value is the value. The value of money is much more relative than the value of a commodity. a house being a really special kind of commodity.

Home values have already fallen below where they "should" be.
That doesnt mean they wont fall down further tho. In crises people react more rabidly than what is normal.

So I predict that homes have already bottomed. And will rise fairly slow to start and then have a rather nice "spurt" and then level off.