Credit Suisse: Housing Bottom More Than a Year Away

Credit Suisse recently predicted that the housing market won't bottom out until the ratio of median housing prices to family income returns to historical levels:

(From the WSJ):"One of the key comparisons was the NAR median existing-home price (seasonally adjusted by Credit Suisse) to median family income. The ratio maintained a relatively narrow range from 1981 to 2000, when it started to explode. Assuming that trends in prices and incomes remain constant, Credit Suisse forecasts that home price will return to the historical range some time late next year.

“What’s evident is that a substantial down payment on the housing adjustment has already been made, although there still appears to be wood left to chop,” Credit Suisse said in its research report."

Graphic courtesy of the WSJ

After reading many proclamations of a pending (or present) housing bottom based on recent price changes, some may question Credit Suisse's analysis or ask "why do prices have to return to historical affordability levels?". The reason for this is simple: you can't have a stable housing market if people are buying into housing situations that aren't sustainable over the long-haul and/or without using exotic loans, and until we return to historical affordability levels we will continue to have above average rates of default and foreclosure. The housing market bottom is more of a function of a return to sustainability/affordability, than it is a function of a slow down in depreciation rates and price changes.

You can read more here.

Sources:

The WSJ:"Home-Price Bottom May Still Be a Year Away" -- Phil Izzo, September 3, 2008. 

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[fatcat:]

You can certainly see that 9/11 was the beginning of the end for mortgage lending standards,based on that chart!

2008 Sep 04 09:56 AM

[jimmy46:]

until the ratio of median housing prices to family income returns to historical levels:"""""""

I don't believe it,
the gov. keeps giving more tax breaks to homeowners.

That makes homeowning even more valuable.

1994, congress let people take $500k tax free out of a home sale.

2005 Nevada copies Cal and says property tax CANNOT go up more than 3% a year, regardless of inflation or anything else.

These tax breaks add to home value.

2008 Sep 04 01:25 PM

[HARM:]

@jimmy46,

Let's also not forget more recent "incentives" for Wall Street and reckless borrowers & lenders:

2008: Congress & Bushco raises the CLL from $417k to $729k, hands the Fed a blank check to bailout the GSEs, passes "Hope Now", Fed bails out Bear-Stearns, etc.

And yet, despite all the tax breaks, incentives and plain-old taxpayer bailouts, prices are still falling. Guess all the king's men can't put Humpty-Bubble back together again...

2008 Sep 04 04:44 PM

[WAKEUP:]

HARM is correct: "Humpty-Bubble" is a goner. Only a few last-ditch, real estate-profiteering pogues still refuse to see it.

2008 Sep 05 02:02 PM

[Steven Hansen:]

While the credit crisis started this housing death spiral, where the drop in housing values will end has more to do with the oversupply of houses.

2008 Sep 06 02:11 AM

[mallarde:]

How can no one mention our population explosion? Remember that whole supply-demand concept?

And what about dual income families? The newest generation of homebuyers is the first in which most women work and are often professionals earning comparable salaries. Once you have enough such dual income couples, the market has to adjust.

I hope Credit Suisse is correct, because I am renting and am waiting and watching.

2008 Sep 06 03:58 PM