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How far to a bottom in housing?
Monday, January 19, 2009
There's an extraordinary amount of doom and gloom out there with projections of untold trillions of dollars yet to be lost due to declines in home prices, but are we really that far from a bottom? This new home sales data from the Census Bureau indicates that we are not.
A little undershoot would put the botom about 10 or 15 percent below current levels, not the 20 or 25 percent that seems to be the conventional wisdom these days. If similar data for existing home sales can be located, a new chart will be whipped up.
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UPDATE: Jan. 19th, 5:10 PM PST
A log scale version of the chart above - I dared not draw any lines or offer any superficial analysis (lest the natives get restless), but it is just screaming for some commentary.
21 comments:
For anyone who is wondering, that straight red line represents a compounded annual gain of about 5.5 percent.
If the undershoot is as big as the overshoot, it will be another 30 percent down, maybe more.
Here in northern Orange County, we're starting to see 3-4 bedroom houses on full sized lots going for $300,000-$400,000. The neighborhoods I've been looking at are generally lower-to-mid middle class, and occasionally upper-middle-class. Most of them are distress sales (I seem to see about as many REO's as short sales where I'm looking), but those in good shape do seem to move quickly at these prices. If you actually crunch the numbers, a $300,000 loan with 20% down at current interest rates will have its P&I+tax+homeowner's insurance under $2000/month, and probably closer to $1800. That's low enough to start to reach affordability on the median wages and maybe even present an opportunity to purchase and rent out and actually turn a profit. Even if it's not a bottom, it's certainly pressure that may slow the falling of prices. The real questions are whether banks will lend, whether people will have enough savings to make a siazable down payment, and whether the current low interest rates will remain. Other than that, with the helicopters hovering overhead and dropping all this bailout money, we might be poised for massive inflation in the next few months-to-years, and accordingly be lined up in a prime situation to start taking on personal debt.
What does the red line have to do with house prices? House prices are determined by reality, not little red lines. Reality is that owners can afford no more than three times income over the long run.
National median price household income is about $48k (and falling) which puts the median price at $144 max. Given the state of the economy, lending standards, and housing inventories, I would guess that the ratio will drop as low as 2.5. That puts the median price at $120k.
Your chart shows the median price around $220k (which is an old number anyway). The fresh number, as far as I know, is more like $185k and falling. Your chart is already out of date and your prediction wrong. From your chart, the median price has already dropped 15%.
Tell me where the median price will be when unemployment is, using the new methods, above ten percent.
And finally, regarding "a little undershoot", I think it would be wise to calculate the weighted value of the curve above the long term price/income ratio. Price/income ratios went well over 4 for a long period. In order to balance out back below three (2.8 really), the ratio needs to spend a long time a bit below (fifteen, twenty years) or a shorter time much farther below (e.g. 7 years at 2.6).
Of course, you can convince me that there is a new paradigm and the ratio has shifted upwards based on....?
Once again, sloppy creative writing masquerading as journalism. I would also add that tracking back to 1971 simply covers the largest credit bubble in history, so fitting any curve to this is pointless over the long term.
Fifty words and a chart is not intended to be a rigorous analysis - if you mistook it for one, well, that's not my fault. The data is through November 2008, by the way, which is about as current as you can get for new home sales. Geez, bight my head off...
20% down on housing is a common reality in this economic environment????
and expat, do you have a blog or anywhere one could read more of your compelling calculations/musings?
Is there a reason not to use the Case-Shiller chart for the "existing housing" data?
Expat may be a little harsh / abrasive / overly enthusiastic, but I think he's got some reasonable points (reading past the ranting). Prices have a ways to go before they are even in line with 4x average income, even if we use that high multiple (which, interestingly, puts the target price very near the extrapolation line). Median price substantially underestimates the market, though, due to sales mix, so we're probably looking at 25% to get back to "normal".
Then add in the probable over-correction since America is largely "tapped-out" on credit, if people are unable to borrow as much as they have been over the last 10-20 years. You could also probably adjust the loan/income ratio closer to 3 for a more realistic historical approximation of actual affordability.
The real unknown in my mind is inflation and the effects of the government "print money to give to our buddies under the table until the situation improves" approach to "fixing" the problem of too much debt and out-of-control spending. In the short-term it will be a monetary contraction (compared to the enormous private lending which is now being unwound), but the government is going to be flushing literally trillions of taxpayer dollars in the next couple of years under the guise of "helping", and they need to borrow it from some sucker. If other countries ever wise-up to the fact that our debt is never going to be repaid, and financing our ludicrous out-of-control government is a sucker's play, we could see some serious cost increases. It's a big unknown at this point, but I wouldn't bet against the government's ability to take any bad situation and make it incomprehensibly worse, especially when people are desperate.
Oh, and before you ask, yes I do have my own blog of personal musings, although it's generally more ranting than compelling. You are welcome to read more of my idiocy there. :)
Hello Tim,
Thanks for the hard work on the site here.
I think there are a lot of highly localized effects. When I've been talking about the price falling in Los Angeles/Orange county, I'm talking about the beach areas for the most part. Can see another 30% in Redondo Beach, another 50% in Manhatten Beach. Still a long way off.
In other areas, like Inland Empire, Pheonix, Las Vegas and Miami. The over supply is worse and the mismatch on incomes to housing type are much worse. Some are complicated by multi-unit structures. Plenty of that housing stock will have detroit like Zero values.
Also we are staring at excess housing in a lot of areas. In the last bust, it took a long time for the crash to reach the beach. Basically a number of people buy into the beach at first because they see bargins. So, the crash in the beach areas took a lot longer.
The time constant seems to be about three to four years for the prices to propegate all the way here.
Demographics and the flight of the illegals will also help to depress prices as more vacancies occur.
On a hopeful note. Everything we are seeing indicates pricing problems. We are not having shortages and if we get all motivated; seems like we can build a load of cars, houses and plastic toys. We are just trying to cope with the pricing phenomena. Like medical care. We are able to provide it, for the most part, but the prices are unaffordable. it doesn't look like we are having any starvation issues.
The biggest problem is oil use and the continual outflow of money that causes. I'd also argue that is mostly a pricing phenomena as well but we have only scratched the surface of reducing oil consumption. And the price crashed. If we really go nuts with incentives to get SUVs off the roads, make more hybrids, improve highways, incentivize city living for shorter commutes. Wow, we could probably cut our consumption by 80%, over say a 30yr period.
You might argue that we have food issues but I'd disagree there as well. we have excesses of food.
Anyhow, I feel you are on the right track to figuring stuff out. These are monitary problems.
Case-Shiller data only goes back to 1987. I specifically went back to 1971 because that's when the monetary system changed rather dramatically (Nixon closed the gold window). The Census Bureau data actually goes back to 1963 and the curve is much flatter in the very beginning.
Hey Tim,
I like the idea as well. However, since monetary growth is nonlinear, and inflation is compounding, you might even draw the 5.5% growth as a log scale to make the "straight line" work right. Otherwise, it actually undervalues housing, something that it would be rare to hear me say.
Anywho, I enjoy the chart.
Chuck
I added a log-scale chart above that is well worth a close look.
I think the other thing to think about is Price to income ratios. A good bit of data showed that incomes were flat since 2001. Now, I think it was your data back in 2006 and I also think you might have said inflation adjusted.
Not sure how good my recollection is. It would be a good idea to have an idea about income trends over the last decade sans construction in the boom.
Also the potential for undershoot is substantial considering the disruption to the banking system. Also will take a while for peoples credit to heal up.
Figure some additional stupidity by the government will potentially make things worse.
Again, I'm sitting in a good, mostly secure job but the LA Southbay is mostly a resale market so its going to lag for a long while.
James
my take is tim is right about half the bubble is gone,
but, the problem is we are now seeing
about 6 years of Bush mania coming in
with the credit crunch and unemployment
and people with so little savings,
the undershoot will be bad
Ok, ok, I ranted a bit, but it's fairly annoying to see this kind of facile analysis of the housing market so far into the collapse of the bubble. For the past two years I have read and heard hundreds of "in-depth" analyses of the market based on magical percentages: "prices will stop dropping because they dropped X percent which seems about right."
We know that the statements of Lereah and Yun are lies and urban legends so we need to fall back on rational thinking and not wild guesses or feelings about prices.
I certainly don't wish to insult the authors. If I comment here it's because I read the blog. If I read it, it's because I find it interesting, useful, and enjoyable.
p.s. Try Dr Housing Bubble for plenty of good information and links to informative housing websites.
Tim... I enjoy your column. I have a comment or two regarding how we got here. In the 60's
(yes I am old !!) ... I remember that banks would only accept 'earnings' to qualify for a mortgage ... from the wife ... IF she was either a nurse or she was a school teacher. And then ... they would ONLY accept 50% of her earnings to help qualify.
Another point: In most of the 60's ... middle class households had a 'stay at home mom/wife'. Beginning in the 70's ... wives began to enter more fields ... and more wives were working. My wife was a nurse and worked ... but that was 'unusual' at the time.
Next point: In the US ... we have really gone
'upscale' in our minimum housing expectations. 1500 sq feet... 3 small bedrooms ... 1 and 1/2 baths ... no walk in closet.. that was the norm then. Now
'starter homes' are enormous by comparison.
Last point: Credit cards... for the most part did not exist. Our parents had lived thru the depression ... so they remembered: if you don't have the money to buy it ... don't.
expat: thanks for pointing out http://www.doctorhousingbubble.com/
it will be days of back reading
Tim,
The problem I see is your straight red line takes into account the 18 years of Greenspan. If you make a straight red line based on the trend pre-Greenspan, the line should end up around 50,000 lower than your current line does.
The perma-bears are going to look just as stupid at the bottom as the perma-bulls did at the top. If the shoe fits, get ready to wear it.
I am surprised that in such a mathematical and analytic group no one has commented on the widening difference between average and median income multipliers. What this means (pardon the pun) is that the rich are buying homes that are MUCH more costly than the homes bought by typical buyers. That is because the rich HAVE all the money. This is the reason that our economy is collapsing. There is no metric that indicates the overall ecomony will improve in even two years. Layoffs tend to remain permanent as businesses adjust to fewer workers. The middle class has been robbed of its 401Ks wiping out investments for the last 10 years or more. Unless and until a more equitable distribution of income is created by Obama's policies, we will not avoid an extended period of economic decline. We are now in a downward spiral. I would point out that homes are still being flipped in L.A. and more homes are ending up in the rental stock as investors buy and sell trying to recoup some of their losses. As more people lose their jobs, more home sharing will result pushing the demand for homes and rental units lower. Illegals and legal Mexican immigrants unable to find work will leave, creating another drop in demand. The duration of the last California bubble was about about 3 years. Prices did not recover (go back to the prices people paid during the bubble) for 10 years after the bottom was reached. Here is the grapic that tells the tale. http://mysite.verizon.net/vodkajim/housingbubble/ - scroll down and look at Los Angeles for example. Since times are much worse now than before, and there is no tech or housing bubble on the horizon, expect much worse times ahead.
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