Tuesday, April 7, 2009
We got back home from Argentina a little after noon today. We had left the hotel in Buenos Aires, the LoiSuites Recoleta (very nice), almost 24 hours earlier for the Ezeiza airport. I still have to post some pictures and more reflections on Argentina, but in the meantime the housing price issue has stirred some controversy.
I plugged in the Case Shiller data for January released a few days ago (bear in mind that the January data is actually the average of prices during Aug.-Nov. '08). I've posted this chart several times before, and each time I've tried to guess where the data were going over the next several months, in order to get an idea of where prices might actually be today. The red dotted line is my projection. What it means is that as of today, housing prices in the markets covered by this index, in real terms, have probably fallen about 40% from their highs. That's pretty significant, and especially so in the context of mortgage rates that now are as low as they have ever been in modern history. Just a quick glance at the chart tells you that this bubble has just about completely popped.
Prices might well fall further, but likely not everywhere. The big markets, that had the biggest price runups, have already had significant declines. Smaller markets (not included in the Case Shiller data, which cover only the top 20 markets) are likely to see prices drifting lower for awhile, but that's because they didn't rise nearly as much as the bigger, more liquid markets, and they haven't fallen much so far. All real estate is local as they say, so results may very well vary depending on where you live.
But broadly speaking, major markets have now experienced a fairly spectacular decline in price and an astounding improvement in housing affordability. This next chart has data through Feb. '09. Using today's prices and mortgage rates, the line would probably be "off the chart."
Predictions of continued major declines in home prices overlook two important things, in my view. For one, they assume that buyers will remain frozen like deer in the headlights given the drumbeat of negative news, increasing layoffs, and wealth losses. I think instead that people are already responding to what is essentially the biggest drop in home prices to ever happen in our lifetimes, and that is why the pace of home sales has picked up dramatically. Price declines like this can't go on much further, unless you believe that unemployment will quickly rise to 20-25% and the money supply will shrink as it did in the Depression. And that brings up the second factor the bears overlook, which is that the Fed has never ever before done so much to ensure that prices don't fall. Money is simply in abundant supply, and banks are still making plenty of loans.
I just keep thinking that we have seen the worst of the housing market by now, and astute buyers and investors should be looking to take advantage of these prices.
Posted by Scott Grannis at 6:59 PM