Thursday, February 23, 2012

Update on the bursting of the housing price bubble


I last posted a version of this chart in early January, citing it as evidence that the housing price bubble had definitely burst. With January data now available, here's an update. According to the National Association of Realtors, and adjusted for inflation, real median home prices of existing single-family homes are now back down to where they were in the mid-1970s. That's a monster correction. Prices could go lower—I'm not saying they won't—but I think investors and potential homebuyers should be looking at this as a sign that the next big thing to happen to the housing market is more likely to be significantly higher prices rather than significantly lower prices.

I received several critical comments about my post yesterday (More progress in the housing market) from readers who assert that data from the NAR is not to be trusted. That could well be true, and is probably good advice, but the same goes for just about any data source that is not based on real-time, liquid market prices (e.g., data on jobs, which can be skewed by faulty seasonal adjustment factors, and are based on surveys and estimates, and which are likely to be revised in the future). Regardless, while the NAR may have a bias to make home sales look stronger than they really are, I doubt that they have an interest in making home prices look weaker than they really are.


In any event, this chart of housing affordability (which shows that a family earning the median income has 195% of the income needed to purchase a median-price resale home using conventional financing) does reinforce my larger point, which is that housing likely has never been more affordable for the average family than it is today, thanks to the combination of sharply lower home prices, record-low mortgage rates, and rising real incomes. (The chart above also comes from the NAR, but affordability is so high that it's doubtful they can be completely fudging the numbers.) This is a time to be excited about buying, not fearful.

23 comments:

  1. If you can, invest in residential real estate. Wow.

    Also, see this:

    S&P 500 Gets 9% Cheaper on Record Profits
    By Inyoung Hwang and Lu Wang - Feb 23, 2012 6:41 AM PT

    Profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year’s peak.
    The S&P 500 fell 0.3 percent to 1,357.66 yesterday, trimming a rally since October that has added more than $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is 0.4 percent below the 2011 high of 1,363.61, expanding earnings have pushed the price-earnings ratio to 14 from 15.4 in April.

    If the Fed wants to accommodate, we could see historic property and equity rallies.

    Maybe after the election.

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  2. Why do you consistently ignore the supply side of this?
    6M homes in the foreclosure pipeline that need to be deal with. Home many homes are on the entire MLS right now? Foreclosure rates are way, way higher than normal times and rising in the last couple months. The settlement with the banks last month has paved the way for a whole flood of foreclosures to hit the market.

    Perhaps we are getting close to a good time to buy in (near) bottomed out markets like AZ, NV or FL. Or even areas that were never too bubbly to begin with(TX). Maybe I am biased because of living in Southern California but there is 2 year of house price declines (minimum) on the horizon in SoCal. My expectations for California are for house prices to be choppy at the low end and slowly decline at the high end over the next few years.
    There was a 5% YoY decline in the median price in Orange County (lower at the low end, higher at the high end). I expect another 5-10% decline in 2012, as these foreclosure get more agressivly pushed to the market.

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  3. "I doubt that they have an interest in making home prices look weaker than they really are."

    Why? Don't you think they are motivated to claim a housing bottom - as they have the last four years in a row in an obvious attempt to motivate buyers and increase sales?

    From 2007 through 2011, prices were too high in most markets to warrant purchasing for cashflow investment purposes, and with falling prices, there was certainly no reason to buy for wealth building from appreciation. Despite these obvious facts, the NAr still urged everyone to buy. It’s a self-serving manipulation designed to generate commissions at the expense of hapless buyers.

    The only reason the NAr collects and reports this information is part of a broader public relations campaign to get people to buy homes. The NAr presentation is designed to fool people who are too busy to really investigate what’s going on for themselves. One could forgive the NAr if they were making an honest effort to be accurate. But, they are not. Their entire philosophy is centered around manipulating the numbers to make market conditions look better than they really are. Have you noticed every mistake they make is on the side of making the market look healthy and stable? That’s no accident. Since we know their motivations are bad, their numbers will always be suspect.

    Most people willing to investigate have concluded the the NAr has zero credibility in its statistics. Unfortunatly I think you do yourself disservice to this wonderful blog by quoting their statistics.

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  4. Northern Nevada (Gardnerville, Minden, Carson, Reno, Sparks) seems to be having more residential sales than I have seen since the crash. Less falling out of escrow. Where prices are distressed they get purchased quickly. Walking my neighborhood last evening (great weather on the SF Peninsula) I came across a small house for sale at $625k. I can’t wait to see what it sells for. In Minden, NV it would sell at $175k. The best prices are what a free market price comes up with. If they are low prices then there is a reason for it. Work on the reason instead of monetary and fiscal pumping the prices. Prices are a symptom, not a cause.

    Just sayin’, there is nothing wrong with houses being affordable, why make them less affordable artificially. Leave well enough alone with the existing mortgage rates. In time, the inventory will clear. NAR or no NAR.

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  5. Money, money everywhere, and no inflation in sight.

    Today:


    (Reuters) - U.S. Treasuries prices rose on Thursday as intense bidding at a $29 billion seven-year debt auction spurred buying in the broader bond market, pushing benchmark yields below 2 percent.

    Treasuries reversed earlier losses following the debt sale, the last part of this week's $99 billion in coupon supply. The seven-year auction drew the highest demand from investors and direct bidders since the maturity was reintroduced three years ago.

    "When you had such good demand, people sat up and took notice," said Brian Rehling, chief fixed-income strategist at Wells Fargo Advisors in St. Louis, Missouri.


    Jeez, money has no place to go---equities and property set for secular rally, maybe the biggest of all time.

    The Fed just needs to give some gas.....

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  6. @Benjamin, America is determined to take a detour through deflation and depression -- Europe is already there -- best not to fight economic trends -- better to exploit economic trends -- deflation and depression are just another money-making opportunity -- the inflation will come soon enough -- probably after 2020 or 2025, which is no time at all.

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  7. Dr. McKibben--

    I do not think the Fed will allow deflation (although they have courted it).

    We see the BoJ, ECB and Fed taking bullish measures of late. Timid, feeble, but in the right direction.

    However, some contend the US money supply is actually contracting, as we improperly measure it.

    Still, the Chicken Inflation Littles have been somewhat routed. They keep getting hysterical about inflation, and we keep seeing sub-2 percent and even deflation. And we know deflation is a catastrophe, see Japan.

    Inflation is deader than Phyliss Diller's chances of marrying Tebow.

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  9. Meet with a real estate agent today (St Paul & Mpls) who told us, that the properties he is listing and selling, are priced at the 1997 or 1998 levels..

    I can tell you, unequivocally, that nothing in my metro is selling at prices in the mid 1970's, unless the NAR is sampling from the slums...

    Thanks to the meddling of the Bank Bernank, Mr Grannis, is correct that housing is more affordable than in the past ten years..

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  11. Hans: note that when I say that prices are the same today as mid-1970s levels, I am referring to the inflation-adjusted price, not the nominal price. Big difference. On a nominal basis, prices are back to 2001-2002 levels, and this refers to a nationwide average, so there are probably many areas such as you refer to that have dropped by more, while other have dropped by less.

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  12. Who wants to sign a 30 or even a 15-year mortgage contract when they have no job security and need to plan for the next layoff?

    It's the down side and unintended consequence of offshoring and union busting. This is the new normal.

    House prices (especially mid-range) will continue to fall until business decides to change its ethics and realize, as Henry Ford did, that "if you don't pay the people enough money, they cant buy the cars."

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  13. deflation? are you joking me? gas, food, college tuition, basically STUFF is sig more expensive now than 5 yrs ago. there IS inflation except in wages. FEAR is why treasuries are trading where they are today.

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  14. @Steve, evidence of depression along Main Street include the ongoing stagnation in real working wages, the persistent declines in home values, and the decade-long decline in the US employment to population ratio -- prices may be going up for commodities, yes, but real incomes, property values, and employment opportunities are down sharply over the past 3-4 years -- this evidenced is indisputable.

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  15. Steve-

    Many items are cheaper today than five or even 20 years ago.

    In 1990 I bought a used 1986 Isuzu Trooper for $8k. I still drive the vehicle, despite having four cylinders it gets about 15 mpg.

    A friend just bought a used Prius, for $8k. It gets 45 mpg, and has so many gizmos inside...GPS, stereos, motorized mirrors etc.

    Cars are cheaper and better than they used to be, as are all manufactured goods.

    Seems to me restaurants have not raised their prices in years, at the low end. Dollar burgers, and $5 meals from Chinese take-out.

    As we know, real estate is selling at half price.

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  16. We may have reached bottom in some areas but not all of them. Here in the foothill communities of the central Sierra we certainly are not at the bottom and we won't be until renting is a bad choice. I've looked hard at buying some investment properties but unless I can buy them, even the foreclosures, at 15% lower prices than are currently moving my ROI would be less than 3%. Maybe good compared to short term treasuries but not worth the time, effort, and illiquid nature of real property. And we rent our home. All my analysis there shows that buying our home, even at a good discount to the market, would still take 13 years to break even, assuming historical housing appreciation.

    Now, rents may rise and change this... but will they considering the gov't is looking to unleash foreclosures as rental units? I'm doubtful. No, hard as it is to believe after the awful last few years, many areas still have 15-20% to go... and that assumes mortgage rates do not rise.

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  17. @Chris, I agree that real estate prices are still marked too high -- however, I have seen some cash offers with side kickers accepted in the past six months that would shock everyone -- owners are under real stress, and offers of 50% off offerings with a cash kicker to "get out" are being accepted by the desperate -- and I mean high quality properties by the way -- sellers are desperate, and now is the time to make 50% offers before the owners jump of the roofs of their buildings -- deals are everywhere and cash commands the deal right now -- good luck!

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  18. Chris-

    Forst let me say how envious I am of your place of residence!

    But go ahead and buy. The tax breaks are generous, and your house will appreciate in the next 20 years (I assume you plan to stay put). Maybe you can buy on 15-year mortgage, and stop paying rent or mortgages in that time frame. Forever.

    No mortgage is a great part of any retirement plan.

    Meanwhile, enjoy the fresh air, skiing, hiking, hot pools, bike rides etc.

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  19. 20% more to go and the 10 year cycle has 2-4 more years to workout. I said this 2-3 years ago on this blog. There is no reason to jump into residnetial real estate until prices in your area start consistently increasing on a YOY basis.

    Everyone now knows real estate is not the golden goose so unless Ben starts driopping dollar bills from helicopters, your best trade continues to be do nothing because you are not missing out on anything...

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  20. I love the foothills on the western side of the Sierras; planning to explore the budding Calaveras Valley wines centered in Murphys. I could live in the foothills but I would only rent. It is still California.

    I am looking in Northern Nevada to make my second purchase there; looking for 40 acres.

    Today, it is exciting that we are finally at the major resistance point of S&P500 1370.58 set on 5/2/11. If the market goes much beyond his point I expect first thousands, then millions of dollars to start layering into equities.

    The Federal Reserve Bank, the Treasury Department, and the big 5 banks, I have to believe, see it in their best interest to support a major rally from this major pivotal point. There are trading risks and negative shocks are always possible.

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  21. uNKNOWN, your second post is brilliant!

    I would like to add, that the NAR and their local clients, have for decades co-opt the system by their governmental alliance, with as many laws and regulations erected to make entry difficult and costly.

    Back in the early 90's, the industry fought tooth and nails to destroy the "discounters" and the "sell it yourself" realtors...

    Commission price fixing was the standard norm, even in a brisk market..

    The only time I would consider NAR's data as fact, would be in a strong market, wherein the services of Penn and Teller would not be required...

    Mr Grannis, thank you for the explanation on back dating inflation...I suspect there is some merit, however, I would prefer the use of the cost of housing vs gross income ratio, as a guide of not only affordability but also value..

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  22. Squire--

    Yeah, tell me how buying a home in Nevada has worked out. Or Phoenix. Or Florida.

    Odd thing about real estate. Manhattan and West LA house prices still go to the moon. When supply is crimped....

    Our nation is becoming wealthier. Ergo, home prices go up, and way, way up at the high end.

    Where do rich people want to live? West Los Angeles, Manhattan, certain wealthy enclaves in Utah etc.

    Maybe Nevada---I hear about Incline Village.

    Don't get me wrong--I find it repugnant that wealthy enclaves erect barriers to entry, such as those of Newport Beach. Try building a sky-rise condo in Newport Beach.

    But the barriers, and wealth, to create top-dollar for real estate.

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  23. Ben, you sure about that?
    Read the articular I posted about foreclosures in Beverly Hills - the high end just takes more time to correct as the wealthy have more ability to hold out longer.

    Here is the Price Per Square Foot ($PPSFT) drop in West LA from 2007 to 2011 and 2010 to 2011. High end is getting beat hard if you ask me.

    West LA
    90025 (-22.6)(-14.1)

    Malibu
    90265 (-37.3)(-17.9)

    Westwood
    90024 (-22.2) (-7.6)

    Beverlywood
    90034 (-18.4) (-6.4)

    Santa Monica
    90404 (-27.9) (-10.7)
    90405 (-19.0) (-5.7)
    90403 (-18.4) (0.0)
    90402 (-13.9) (4.5)

    Culver City
    90232 (-16.1) (-9.8)
    90230 (-14.3) (-8.1)

    Rancho Park
    90064 (-19.8) (-5.0)

    Venice
    90291 (-24.2) (-4.7)

    Beverly Hills
    90210 (-11.7) (-4.8)
    90212 (-14.2) (0.0)
    90211 (-17.5) (1.0)

    Pacific Palisades
    90272 (-20.8)(-3.7)

    Mar Vista
    90066 (-14.5) (-2.3)

    Marina del Rey
    90292 (-24.0) (-1.3)

    Brentwood
    90049 (-17.6) (-1.2)

    Bel Air
    90077 (-18.3) (0.1)

    West Hollywood
    90046 (-13.8) (-1.4)
    90038 (-33.5) (-1.0)
    90069 (-20.8) (-0.3)
    90048 (-8.9) (7.9)

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