Home Prices Are Still Too High- must drop another 20% to reach historical trend line.

Discussion in 'Economy' started by Trajan, Dec 30, 2010.

  1. Trajan
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    Trajan conscientia mille testes

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    wow. 20%...lets say 15% even. tough sledding to be sure....will it?


    Home Prices Are Still Too High

    They would have to decline another 20% just to get back to the historical trend line.


    Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.

    Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.

    Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.

    By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that mandated loans to marginal borrowers, and set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

    If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the nearby chart), a sobering picture emerges. In his book "Irrational Exuberance," Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and '60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late '90s.

    more at-
    Peter Schiff: Home Prices Are Still Too High - WSJ.com
     

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    Last edited: Dec 30, 2010
  2. loosecannon
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    loosecannon Senior Member

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    his argument sounds reasonable.
     
  3. uscitizen
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    uscitizen Senior Member

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    Considering if the economy ie jobs does not rebound home prices may well drop even further than that.
     
  4. loosecannon
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    loosecannon Senior Member

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    The thing about housing costs is that they don't really have to be pegged to purchasing power or even a % of income. They can be driven by speculation, easy money lending policies and general exuberance. Just ask China.

    I dunno if there is concensus on the long term trendline since a departure from the old norm that began 12 years ago kinda sets it's own new trend.

    But I do know that if prices stay as high as they still are we will never be a nation of homeowners after this generation. The older folks are doing a good job of holding onto their jobs leaving little for the young to build on.

    We may see a rental industry crop up to serve the needs of a generation who can not afford to buy but still need shelter.
     
  5. Toro
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    I don't know if there will be another significant leg down. The Shiller index has been bouncing along what looks like a bottom for about a year.

    Based on affordability, homes are cheap. Based on price to income or rent, homes are 5%-10% over-valued.

    For another 20% decline, there probably needs to be a cataclysmic shock. That shock may be a currency crisis. However, I expect that rather than another big leg down, home prices will stay flat for a decade as incomes and rents grow into the valuation.

    But I could be wrong.
     
  6. Revere
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    If banks simply liquidated their REO inventories, instead of holding on to them to artificially inflate the market further and keep the value of their loan portfolios higer, this would take care of itself.
     
  7. Trajan
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    Trajan conscientia mille testes

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    I would agree but..this is what made me think that there is another leg down aside from his other remarks. Even if for some reason there was a valid calculus for us running ahead of the trend-line by say, 5% above the 98-2010 time frame that still leaves 15%...

    In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.
     
  8. uscitizen
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    the older ones need to hold on to their jobs. Try looking for a job after you turn 50.
    And for the last 20 years or so the youngins (family) have been bleeding us dry.
    50+ year olds raising grandchildren and such.
     
    Last edited: Dec 30, 2010
  9. loosecannon
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    trend lines are just trend lines. We may just grow into the current prices. But interest rates are rising. Foreclosures still on record pace.

    Anybody know anything about the history of housing inventory rates?
     
  10. Pepe
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    Based on the plethora of economic problems on the near horizon, I would dare say that depending on Market, home prices will fall another 10%-50% with the average being 30% down to go.

    The European Economic Union (Euro) is in disarray and on the edge of collapse.

    China's bubble is about to "pop."

    India's bubble is about to "pop."

    Canada's "Housing Bubble" is about to "pop."

    [ame]http://www.youtube.com/watch?v=sevM5IstFFY&feature=player_embedded[/ame]

    Fast forward to 13:52

    Interview Snips

    Canadian banks are not as "bulletproof" as everyone thinks.

    When the housing bubble bursts there will be tremendous consequences to Canadian banking system.

    We are in a massive bubble and there will be an enormous comeuppance.

    Canada housing bubble currently peaking.

    When you are in a bubble, the psychology is such that you cannot see it for what it is.

    Talking to Canadians about the housing bubble is like talking to Americans in 2006. There is a tremendous sense of denial.

    People pay 50-70% of their income for mortgage costs in places like Vancouver, but it's not just Vancouver. Such things are absolutely characteristic of a bubble.

    Canada will play catch-up to the downside in the fairly near future.

    Ireland-like dynamics absolutely coming to Canada.

    There is also a tremendous commercial real estate problem that will affect Canadian banks.

    Canadian banks have also acted as reinsurers in the derivatives market for a number of extremely risky things. So in a number of cases "the bucks stops with the Canadian banks".

    Real estate prices will fall about 90% on average.

    Deflationary credit collapse coming.


    Meredith Whitley was spot on when she announced on 60 minutes that over the next year 1,000,000 Public Employees will be permanantly let go from their positions.

    Muni Defaults on the horizon and it is a race to the bottom between IL & CA to see who Defaults on some or all of their Oblligations first.

    Ad infintium
     

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