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Monday, June 20, 2011 12:32 PM

When was the Housing Peak and How Far to the Bottom?

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Have housing prices bottomed? If not, when will they?

Barry Ritholtz at the Big Picture Blog has recently chimed in on that question, and in response Calculated Risk chimed in.

Barry posted this projection in Case Shiller 100 Year Chart

click on chart for sharper image

Based on the Upward Slope of Real House Prices Calculated Risk does not think home prices will fall as Barry suggests.

I've argued that "In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices."

Sure - house prices could overshoot to the downside. But the projection on the first graph of close to 25% in further real price declines is probably excessive. Right now the real CoreLogic HPI is less than 5% above the trend line (it could overshoot), and the Case-Shiller national index will probably decline sharply in Q1 too and not be far above the trend line.
Japan Nationwide Land Prices

I have been following a different kind of model.

Flashback March 26, 2005: It's a Totally New Paradigm

Here are some excerpts from that post.

  • Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

  • "I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."

  • Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

I called the top of the housing bubble in summer of 2005 based on the Time Magazine Cover "Why We're Going Gaga Over Real Estate" and have been updating the chart ever since, in real time.

When was the US Housing Peak?

Case-Shiller has the peak in summer of 2006. I have it in summer of 2005.

Case-Shiller is a lagging indicator. It uses a three-month moving average published with a two month lag. Moreover, Case-Shiller only looks at home resales, not condos.

Resales did not catch the action in cash back schemes, incentives, and fraud.

In summer of 2005 the condo market bit the dust in many places. Also home builders started discounting heavily. Those discounts did not show up in prices for many months, but rather in incentives such as "free" three-car garages, free granite counter-tops, free cars, etc.

Finally, there were massive fraudulent schemes starting in 2005 that overstated home prices, notably cash back to buyers at closing.

Thus, contract prices did not reflect real costs to buyers for numerous reasons, and Case-Shiller did not pick up on that immediately.

Where Are We Now?

I think housing in some areas is very close to a bottom. Others areas have more to drop.

Based on inventory, shadow inventory, and boomer demographics, home prices are not going up significantly for a long time yet, perhaps a decade, even if they have already bottomed.

There is certainly no reason to rush. Finally, anyone with any uncertainties regarding their employment has no business even thinking about buying now.

Flashback October 27, 2007: When Will Housing Bottom?
The following charts are from a friend who goes by the name "BC".

click on chart for a much sharper image

Housing Starts 1959 - Present

click on chart for a much sharper image

Those looking for a housing bottom anytime soon are likely to be disappointed.

Note that the current boom has lasted well over twice as long as any other. If the bust lasts twice as long as any other, 2012 just might be a rather optimistic target for a bottom.
Please compare the above projections with recent charts by Calculated Risk.

New Home Sales

Housing Starts

Humorous Look at 2008 Bottom Calls

While searching for my housing bottom link from 2007, I stumbled across Rebuttal To SmartMoney Housing Bottom Call from May 2008.
Donald Luskin at SmartMoney is making a case that Housing Prices Near or at Bottom
Today home prices have fallen so much, mortgage rates are so low, and personal income is so high — that homes are more affordable today than at any other time, ever — with mortgage payments on the average home eating up about 40% of income.

With houses more affordable than ever before, why should we expect prices to fall much further from here?

Let's put it in concrete terms — jobs. Since the housing market started coming apart two years ago, jobs in the housing sector — broadly construed, to include everything from bricklayers to mortgage brokers — have already declined by over 1.5 million. That's about 1% of the whole national labor force, and it takes housing employment back to where it was in 2000 before the so-called "housing bubble" even got started. Which begs the question: How many more jobs are there to lose in this sector?
Click on above link for my rebuttal.

When I proposed 2012 as a possible bottom way back in 2007, many people thought I was out of my mind. Certainly Luskin must have felt that way.

Well, here we are, six months away, prices falling fast, and the economy likely headed for another recession.

2012 may still be an optimistic target for a bottom but we are certainly closer to the bottom now than we were than we were in 2007 or 2008.

Mike "Mish" Shedlock
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