WILL HOUSE PRICES DROP FURTHER?
By Surly Trader
The decline in housing prices seems never ending. Prices have dropped for over 5 years and some still expect the bottom to fall out from here. One simple way to approach housing prices is to compare them against inflation. In this example, we will look at the Case-Shiller Composite-10 Home Price Index and the CPI Urban Consumers Index Seasonally Adjusted Less Food and Energy. The home price index includes the metropolitan areas of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC. With this data, we can go back to Jan 1, 1987 (see below).
From this simple metric measured during this specific time period, we might conclude that housing prices need to drop another 15% to hit the inflation trend. Unfortunately, nothing is ever that simple. Each metro area is vastly different with prices in Las Vegas down a devastating 60%+ while prices in New York are down about 25% from the peak. It is also very important to note that 30 year mortgage rates were well north of 8% in the late ’80′s while the current rate is hovering below 4%. On the flip side, bubbles usually correct further than “fair value”. One easy conclusion: the bottom is a lot closer today than it was 5 years ago…
9 Comments
Can anyone comment on this: In many places homes are selling for significantly less than rebuild cost. I personally think it is more likely prices will increase as opposed to rebuild costs correcting. Does anybody know of another time in history where prices have stayed significantly below rebuild cost in the US, or anywhere (Japan maybe?)?
Rebuild costs will come down when deflation hits; labor costs will continue to decrease, as well as materials costs. Commodities have been in a down trend for about a year. I don’t have specifics on building materials, but have little doubt most are falling or will be soon.
I write Minyanville.com’s Housing Market Report and used to post regularly here. I’ve been the only analyst who has correctly asserted for two years now that there is no housing bottom in sight. BUSINESS INSIDER has posted nearly 30 of my articles which lays out the case in great detail.
What on earth does the inflation rate tell us about where housing markets are headed? Only economists think like this. I’ve spent countless hours digging up hard-to-find stats on the shadow inventory to show readers why it’s very real, enormous and growing. How about what I uncovered 10 days ago: At the end of the first quarter, there were 192,000 delinquent owner-occupied properties in danger of default in NYC. Ever seen that one before? That does not include investor-owned properties, so tack on another roughly 75,000+ to the delinquency figures.
I’ve asserted for almost two years that when the banks finally begin to foreclose or short sell these delinquent properties, prices in the four outer boroughs of NYC will collapse.
Readers … better prepare for what’s coming. It will be ugly in 6-9 months.
“Readers … better prepare for what’s coming. It will be ugly in 6-9 months.”
Interesting comments Keith. Would like to better understand the above statement. Is this specific to NYC or do you expect this to be a national “event”?
Thanks
I realize this is somewhat anecdotal, but the real estate market here in Washington state in the Seattle suburbs is hot, hot, hot. It’s encouraging to see people spending money, not just in real estate, but across the economy.
The biggest threat to house prices is austerity.
isolated islands does not an economy make… there are a few sections of town here in Austin that are doing well too… as i would expect everywhere has their own ‘hot spots”. this is more descriptive of a diverging economy where the high end is fine and the middle and lower class is crushed… which is great news if your goal is serfdom!
No one argued that isolated pockets does an economy make. Did I not note the data was somewhat anecdotal?
For the record, the houses being bought in this area in droves are hardly high-end.
This year’s uptick is an improvement over recent past. Add to this data improved sales in other sectors throughout the economy, and we start to see a picture of minor improvement.
This the fourth year in a row that housing prices have “bottomed!”
The surplus in housing is more than just numbers…it is homes in the wrong places, tear-downs, many, many homes that will be unaffordable when green energy mandates kick in. Investors buying these homes today are truly clueless.
The only reasonable solution is to form housing boards to determine which 2,000,000 homes a year to demolish.
I’ve been posting articles on Minyanville and BUSINESS INSIDER for more than two years. You can check out any of these articles by going to this link and checking out the archives:
http://www.businessinsider.com/author/keith-jurow