How Long Until Housing Prices Stabilize?

Most economists agree that the key to ending the current downturn is for home prices to stop falling. When exactly that'll happen is the great unknown.

Mark Zandi of Moody's Economy.com and Robert Shiller of Yale University and Case-Shiller housing derivatives fame think it will take until at least 2010.

The other half of Case-Shiller, Wellesley's Karl Case, is a bit more optimistic. In a new paper presented Thursday at the Brookings Institution, he lays out his, er, case.

The reasons why we're nowhere near the end are plentiful: There's a backlog of unresolved and under water mortgages, the inventory of unsold properties is high, there could be legal delays associated with the unwinding of credit derivatives that helped fuel the housing boom, inflation or interest rates could march higher, and higher underwriting standards and rate spreads could make it harder for homes to change hands.

But here are some reasons why we may be closer to a bottom than most think. First, Case notes that in almost all areas where foreclosures have dropped, the Case-Shiller Index for that region has gone up.

Certainly for a broad based index to actually turn up while the auction process is running implies that something is happening.

(By "broad based," Case is referring to the fact that Case-Shiller doesn't make a distinction between sales of foreclosed properties and regular sales.)

Second, Case thinks what happens in California will decide how the national housing picture turns out, and signs are turning positive for the Golden State:

Existing home sales in the state are up to over half a million. With foreclosure sales running at about a third of total sales, prices are down and are continuing to fall, but at a much slower pace in June. And of course Californian's have been here before. Most residents were here to see the three previous boom-bust cycles. Every time home prices fall substantially, within a few years they came roaring back.

Third, in previous housing cycles real gross residential investment hit 3.5 percent of GDP at the trough. For the current cycle, this figure was at 3.1 percent as of the second quarter (though Case adds that there is "no sign of rising soon"). Another indicator also points to a bottom:

Since the early seventies, we have had four major housing cycles...In the first three cycles, starts fell by over 60 percent to less than a million. When it gets below a million, it has historically turned upwards. In the most recent cycle, starts hit exactly a million in December 2007, and then bounced up and down for a few months. The lowest point through August has been the July 2008 figure of 965,000.

Case is hesitant to say that we've reached a bottom, but he does predict that we'll eventually get there:

...maybe not today, maybe not tomorrow, but soon....

Comments

[Rhett:]

We're not going to "chart" ourselves out of this housing mess. Cycles or no cycles, fundamentals will control and they're badly out of balance.

2008 Sep 14 09:16 AM

[DCM:]

I have not seen but I would like to see a chart of the number of housing units relative to the number of households. In my simplistic view, as long as the number of housing units exceeds the number of households, it will not be possible to reach a bottom per se. Only when supply equals demand will we bottom.

I would also like to see charts on the number of new jobs being created in relation to the increase in population. And given an increase in both population and jobs, what effect would this have on income levels?

Assuming housing supply stays constant, if housing demand does not significantly increase as the result of any combination of job creation, wage increases, household equity increase, immigration or foreign investment, it does not seem likely that we will reach an equilibrium between housing demand and supply anytime soon.

What seems particularly ludicrous to me is any discussion of building new housing units on the top of the already burgeoning supply of homes on the market. It seems to me that the future for the construction trades will be in rehab and renovation.

2008 Sep 14 10:56 AM

[globetrotte...:]

In my real world experience of real estate downturns over nearly 40 years, they last 2-7 years from peak to trough, and when values do recover do not necessarily ever reach the previous peak when adjusted for inflation. We are now in Year 3 of this downturn.

2008 Sep 14 01:46 PM

[Dr Jones:]

For those who are wondering how long the current real estate downturn will continue... here is a simple explanation. As the foreclosure rate continues to climb, (mostly due to sub-prime loans) additional inventory will be added to a swelling backlog of properties. This is likely to continue for the next 12-18 months. Remember that the greatest number of 'sub-prime' mortgages were written during June, July and August of 2006. Five (5) states; AZ, CA, FL, MI and NV, made up the highest percentages of these types of mortgages. Please keep this in mind if you are considering purchasing real estate in these states. The primary features of these hybrid mortgages included little or no-down payments and an adjustable interest rate, scheduled to increase monthly payments within 2 or 3 years.

This interest re-setting process is now in full swing; evidenced by an acceleration in foreclosures nationally (who knew). This condition tends to dump more real estate on the market, pushing property values continually lower.

The good news is that this cycle will eventually reverse. Before it does, two (2) important things must occur: 1st - foreclosures must slow to a trickle. When that happens, property values will start to level off, encouraging buyers to get back in the game. 2nd - and just as important, the Federal Reserve must make mortgage dollars (liquidity) available to banks and lending institutions, at reasonable rates, providing a critical element to finance these new purchases. Until those two (2) milestones have been reached, it's a good idea to keep your cash in the bank.

The bad news is simple... but the timing is somewhat more difficult to pinpoint. No one really knows how long this downturn will last or when credit standards will start to loosen up. Allot depends on how long this recession lasts and how much of a beating that banks and lending institutions take. One thing is for sure... the market always bounces back... and it will again.

2008 Sep 14 04:24 PM

[San Diego L...:]

Sure, "eventually" the real estate market will bottom. When, is the question! For a good post on the value drops in San Diego California, one should read the 9-10-08 post "The San Diego California Real Estate Great Depression" it can be found at:
www.brokerforyou.com/b.../

2008 Sep 15 02:22 AM

[IAS360 Hous...:]

On Tuesday, September 9 Integrated Asset Services, LLC (IAS, www.iasreo.com/ias360u...), a leader in default management and residential collateral valuation, released its IAS360 House Price Index for July 2008. The monthly report, which includes the most current and granular data available in the industry, showed a 0.9% appreciation in house prices on a national level in July, and a -11.4% decline from July 2007 to July 2008.

2008 Sep 15 05:33 PM

[daytrading:]

Comparing the stock market bubble to the housing bubble might be like comparing apples to oranges but when the stock market bubble bursted in March of 2000, I think it was Sept. of 2001, when the bottom hit, so about a year and a half. Double that for housing at the least but it's probably going to take longer.

2008 Sep 15 11:54 PM