If you’ve been listening to the Street, you will have no doubt heard more talk of a real estate bottom again. Admittedly, there have been a few encouraging signs emerge in the last month. They include an improvement in the rate at which the S&P Case-Shiller 10 and 20-city composite home price indexes have been dropping and signs from a number of regions that prices are actually increasing month-over-month in a few cities (see chart).
In some areas hardest hit, buying foreclosures has become the latest fad and sales figures in areas of California, for example, have experienced impressive increases. How long this continues, however, remains to be seen.
But before breaking out the champagne and doing the bottom dance, here are some rather sobering charts (and numbers) to consider.
click to enlarge
Figure 1 – Quarterly chart showing changes in the price-to-rent ratio over the last two decades. The bubble beginning in 2002 and ending in 2005 is clearly visible on the right-hand side. It also shows that we have a long way to go to get back to the historic norm in mean (average) prices to average incomes over different periods. Chart – Northern Trust
As we see from Figure 1, although the price-to-rent ratio has fallen dramatically since peaking in 2005, the correction still has a way to go to return to any of the historic norms. To return to the average (mean) prices, either home prices still have to fall approximately 12% more nationwide or rents would have to increase roughly 15%. This is possible, but given the history of bubble aftermaths and the fact that our economy is deteriorating and already in recession (don't believe another GDP or CPI report until you read http://tradesystemguru.com/content/view/206/58/#Mass ), prices have a greater probability of falling well below trend before finally leveling off.
Next, we see a chart of the ratio of the value of the family home as a percentage of household income.
Figure 2 – Value of the family home as a percentage of median income showing that the correction still has a long way to go. Chart – Northern Trust
This chart bodes even more ominously for a bottom or recovery in home prices anytime soon. Historically, home prices have increased roughly in line with real income growth that is until 2001. Fueled by historically low interest rates and a flow of capital out of stocks and into housing, prices were propelled far above the level incomes could support. According to this chart, home prices must fall another 27% to get back to the normal ratio of average incomes to the mean price of the family home from 1968 through 2007.
Figure 3 shows another view of this relationship – median home prices to median household income for the US and a number of major cities. As we see, US home prices still have to drop another 20% or more to return to the historic ratio of home prices/income of 3.5. For places like Los Angeles (10 x income), Miami (7.25 x income) and even Chicago (5 x income), prices still have a long way to fall to return to the historic norm.
Figure 3 – Relationship between median home prices and median household income for the US (blue dashed line) and a number of major US cities. Data – RealtyTrac
No one, not even eternal property bull and head cheerleader for the National Association of Realtors Lawrence Yun, will dispute the fact that stubbornly high unsold housing inventories remain a serious challenge. As of the latest figures (July), inventories continue to grow and are above 11 month supplies for both existing and new homes. Increasing foreclosures are a major source of the problem. Where foreclosures go, the housing market is sure to follow, at least for the foreseeable future.
As we see from Figure 4, there are no signs of foreclosures slowing. Just the opposite is true, as this chart clearly demonstrates. Even if foreclosures level off at their Q2-08 rate, it means another nearly 3 million foreclosed homes will be added to unsold inventories by Q2-09.
Figure 4 – Increases in homes foreclosed between Q1-05 and Q2-08. Chart: ForeclosurePulse.com
Optimism is a good thing most times. But it can be a very costly emotion to traders and investors, especially when it’s misplaced. And judging by this data, it is certainly too soon to break out the housing bottom party shoes and start buying homes again just yet.
Disclosure: None
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This article has 21 comments:
- The Hammer
- 28 Comments
Sep 05 09:28 AMOwning a house is very expensive. the upkeep alone can be crushing along with escalating property taxes and insurance.
For now many of the dolts that were buying houses at any prices are locked out of the market because they are either being foreclosed on or can't find a lender to hand them over the loot. Thank god this has come to an end. the country was on the verge or near going bellyup.
- Reinko
- 328 Comments
Sep 05 09:31 AMIt is nonsense to look at month on month figures and say 'hey it is improving' because you are only looking at a seasonal component while the trend simply goes down further...
For the rest: Nice article.
- The Hammer
- 28 Comments
Sep 05 09:31 AMI think many people may be surprised at how long house prices go down and how far they drop.
- ReEconomist
- 17 Comments
My Website
Sep 05 10:25 AMThere is another phenomenon of the downturn that is becoming more pervasive. That being the decline in people's enthusiasm for home ownership. One of the value propositions for buying a house has been the expectation of steady appreciation. (not with everyone, but it does exist in varying degrees in many home buyers)
With prices falling and not likely to appreciate anytime soon, a lot of people will be asking themselves why are they paying such a high premium for ownership over the cost of renting a comparable property? Up until the bust, most people would justify a premium for ownership cause they were getting a healthy amount for appreciation.
With no appreciation and even depreciation, more people are asking themselves, why are we paying such an exorbitant amount for ownership? And when some answer that question, they will walk away from their mortgages and give the keys back adding to the inventory.
It's more expensive to rent assets that depreciate. Houses have been cheaper to rent than purchase because of the appreciation component.
What happens to prices when the appreciation component buyers assign to a purchase is zero?
Below is a link to a couple of home pricing tools you can check home values for specific areas. The idea is you want to sell the Ceiling and buy the Floor. The Ceiling is the top end, or highest level home prices can be supported based on income levels to house price ratios. The Floor is the bottom end of prices where the income generating ability becomes attractive to investors. Market prices tend to move up and down between the Ceiling and Floor.
www.ushousingmeltdown....
- mangolfer
- 152 Comments
Sep 05 11:52 AM- Greg Weston
- 101 Comments
My Website
Sep 05 01:27 PM- The Hammer
- 28 Comments
Sep 05 02:11 PMIt is quite obvious that renting is absoluting cheaper by wide margin vs buying in my area or even vs an income property. Cap rate at current RIP off asking prices is something like 3%. All that headache for 3% cap rate.
LOL!
It is amazing to me how the whole group collude together to talk up house prices or will be hesitant to mention huse prices are completely out of wack with incomes. Of course incomes and house prices are different across the country so 3-4 times median income vs house price seems to be a good general rule. You'll see in many areas that is 7-8-9-10 times incomes.
It does not compute. We have a bunch of fools in this country who like debt slavery.
- Chris B
- 339 Comments
Sep 05 05:11 PMThe kicker will be if rents rise instead of prices falling, thus locking in high housing costs.
It's interesting that in recent years people have been spending so much higher percentages of their income on housing. How do we explain this economic decision by millions of people? I know that in recent years, trading up to a McMansion has been popular, even with households of 2-3 people. Did disaffection with the stock market losses of 2000-2001 make people determined to invest in tangible things? Did inflationary signals indicate that housing and commodities were the only safe investment, as in the 70's? Did 9/11 really inspire a cocoon effect of this magnitude? How much of the price run-up could be predicted on the basis of mortgage rates at 30 year lows? Did subprime / liar loan lending really create that much demand?
Theories anyone? Or is it still too early for a post-mortem?
- ReEconomist
- 17 Comments
My Website
Sep 05 06:35 PMOpinion as to why people were willing to spend a higher percentage of income on housing in recent years?
Rationalizing this for many people was pretty easy when appreciation was delivering 4-10% a year. Why not get as much house as you can when it's going up every year was the thinking of many buyers. People were buying payments not price. No thought was given to what it would take to actually pay off the mortgage.
In the years ahead, home prices are more likely than not to be stagnant and flat. This will get rid of the "I'm going to make money on this house" mentality. For a while housing may begin to be viewed as just another consumption item we buy without the expectation of making money off of it. Mortgage pay down and equity build up will be back in style.
The generation of people now in their 70's and older aspired to have a paid off mortgage at retirement. This was a goal to work toward and an accomplishment to take pride in.
In recent times, the younger generation viewed the situation of a paid off mortgage as wasteful. The thinking became, why have all that equity in a dormant state? Borrow it out and invest it in more real estate.
I would expect people to become more conservative in the amount of money they spend on housing. Everyone now knows, real estate can go down and leverage can work against you and when it does it can cause severe financial shock. Most people also know now, they need to use other sources than the self-serving real estate industry when it comes to market information. How can it always be a good time to buy? It can't. There is a more optimal time to be selling and buying residential real estate.
Getting rid of or reducing the appreciation component and a return more conservative approach to housing spending will be good for the housing market in the intermediate and long term.
- brettlee
- 3 Comments
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brettlee
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- brettlee
- 3 Comments
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- wildbill
- 7 Comments
Sep 06 10:48 AMPrices dramatically increased starting in 2001 because the Fed opened the floodgates; by reducing short term interest rates and actually encouraging folks to shift to ARMs instead of fixed rate loans, it made it possible for someone to pay much more for a home for the same monthly payment they would pay for a fixed price loan.
ARMs had "teaser" rates of 1-2%. At 6% for a fixed rate 30 year mortgage on a 220k loan your monthly payment was 1,319.00; it did not take a genius to figure out that with a 2% ARM, assuming amortization over the same 30 years, you could buy a 356k home for the same monthly payment. People rode this horse as long as they could sell their appreciated home or refinance into another ARM before their loan reset.
This strategy is no longer viable; but while it was, it enabled a lot of people to grab the brass ring.
- wildbill
- 7 Comments
Sep 06 11:23 AM- X-15
- 49 Comments
Sep 06 11:56 AM- jegan ;-)
- 672 Comments
Sep 06 02:50 PM- RE.porter
- 33 Comments
My Website
Sep 06 04:57 PMMost buyers looked at the bottom line on an after tax basis. The deduction on mortgage interest and other incidentals was the final kicker for greed.
- Kunst
- 589 Comments
Sep 07 01:58 AMDidn't do too well in physics, did you?
32 ft/sec/sec. Wind resistance,120 mph flat, 180 vertical.
What was your point?
- Stanley
- 9 Comments
My Website
Sep 08 02:43 AM- portame
- 1 Comment
Sep 08 11:12 AM- gimmesomecoffee
- 1 Comment
Sep 08 03:24 PMSo, to avoid a cataclysmic economic collapse, the Govt is now officially backing the securitizations of Freddie/Fannie.
And, to let the bubble deflate slowly, the Govt now has direct control over Freddie/Fannie "conforming loan criteria." I think they will slowly tighten this conforming loan spigot, and meanwhile they will keep the fed funds rate low in order to let inflation catch up to the over-inflated house prices.
I think the Fed will be orchestrating a slow recovery (several years yet). With the takeover of Freddie/Fannie, the Fed now has both reins of this runaway horse. (loan criteria and Fed interest rates)
- Angry Appraiser
- 8 Comments
My Website
Sep 10 09:21 PMTHE ATM MACHINE IS CLOSED FOR 3 MORE YEARS
no recovery until 2011