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[Suresh]

The following replies relate to historical housing data in the United States.

[Suresh]

In come the waves
Jun 16th 2005
From The Economist print edition

Robert Shiller, a Yale economist, who has just updated his book “Irrational Exuberance” (first published on the eve of the stockmarket collapse in 2000), disagrees. He estimates that house prices in America rose by an annual average of only 0.4% in real terms between 1890 and 2004. And if the current boom is stripped out of the figures, along with the period after the second world war when the government offered subsidies for returning soldiers, artificially inflating prices, real house prices have been flat or falling most of the time.

http://www.economist.com/finance/displayStory.cfm?story_id=4079027
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Suresh

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[Suresh]

The FDIC published an article entitled "U.S. Home Prices: Does Bust Always Follow Boom?" in February 10, 2005 (revised April 8, 2005). http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi.html

http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf is a table of various regions in the U.S. that have experienced booms and busts over the past 25 years.
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Suresh

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[Suresh]

The Run-Up in Home Prices: Is It Real or Is It Another Bubble?
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Housing Share of Consumption and Relative Price

................Housing Share.........Rental Price.............Overall Price
................of Consumption.......Index.......................Index

1951........13.9%......................100.0.......................100.0

1961........16.6%......................126.9.......................114.8

1971-72...17.4%......................160.4.......................154.6

1982-84...25.2%......................323.6.......................349.6

1993-95...26.8%......................498.4.......................501.8

Source: Bureau of Labor Statistics and Baker 1996, see appendix.

Taking the period as a whole, there is no clear tendency for housing prices to move at a different rate than other prices. The average annual increase in the rental cost index from 1951 to 1994 was 3.27 percent, virtually identical to the 3.29 percent average annual increase for the CPI as a whole.
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http://www.cepr.net/publications/housing_2002_08.htm
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[Suresh]

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Suresh

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[Suresh]

Case Shiller Housing Composite Flips Negative
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"January data released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices in the United States, shows home price composites plummeting into negative terrain.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”


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Suresh

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[Suresh]

The Long Life Span of a Housing Downturn
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[T]he Standard & Poor’s/Case-Shiller home price index, which measures house prices by comparing the price of a house with what it sold for before[,] ... shows that in March prices were, on average, down 1.9 percent from a year earlier, and 3 percent from the peak reached last June.



As the accompanying chart shows, that index also hit a peak in October 1989, and went into a decline that lasted a long time. It was not until January 1998 — 99 months later — that the index climbed above the 1989 peak.

That index may be more volatile than national indexes because of its heavy concentration on the two coasts. It includes three broad regions in California — Los Angeles, San Diego and San Francisco — as well as Boston, New York, Miami and Washington in the East. The other areas included are Las Vegas, Denver and Chicago. The areas are very broad, with the New York region stretching from New Haven to Trenton.

The charts show the pattern of home prices and national home sales, both for new single-family homes and for existing homes, after the two peaks. Prices are falling more rapidly this time, just as they rose more rapidly coming into the 2006 peak than they had a generation earlier, in 1989.

The trends in home sale numbers are similar, however. In the first couple of months after the peak, sales did not slip as much in 1989, but by the ninth month they were off about as much as they are now, with new-home sales particularly hard hit.

One thing that was very different at the 1989 peak from the one in 2006 was the trend in the number of homes being offered for sale. When prices peaked in 1989, the number of homes for sale was already declining, and it continued to fall for some months, perhaps reflecting decisions by homeowners to hold on and wait for prices to come back.

In 2006, however, the number of homes for sale rose as the peak neared, and the latest report shows that more than 4.1 million homes were for sale at the end of April, the largest number ever. That included almost 3.6 million existing homes, also a record high.
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Check out the Home Prices chart, the Sales Rate of New Homes, and the Sales Rate of Existing Homes for the period October 1989 through June 2006. The Home Prices chart bottomed around 42 months after the peak, whereas the the Sales Rate of New Homes and the Sales Rate of Existing Homes charts bottomed around 15 months after the peak. Perhaps, would-be sellers had held out for 15 months before carrying costs and sheer fear of larger losses overcame them, whereupon they became willing to sell at lower and lower prices.

If the current national averages track the the period October 1989 through June 2006, and assuming that the housing peak occurred in September 2005, then a price trough 42 months afterward would occur around February 2010. That target year sounds within the realm of plausibility. Consider another way of looking at price peaks and troughs.

A Year Or Two?
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[Suresh]

S&P Report Says U.S. Home Prices Fell in August for the Eighth Month in a Row

U.S. home prices fell nationwide in August for the eighth consecutive month, offering little hope of a turnaround anytime soon, according to the S&P/Case-Shiller index released Tuesday.
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Home prices as measured by the index have fallen by more every month since the beginning of the year. August is the 21st month of decelerating returns.

An index of 10 U.S. metropolitan areas fell 5 percent in August from a year ago. That was the biggest drop since June 1991. The lowest ever was a decline of 6.3 percent in April 1991.

A broader index of 20 metropolitan areas fell 4.4 percent in August over last year, with 15 of 20 of them reporting that prices fell.
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Notably, eight of the 20 metropolitan areas in the Case-Shiller index showed their lowest annual returns ever recorded in August. The report showed drops in Cleveland of 4.1 percent; Las Vegas, 7.6 percent; Miami, 7.8 percent; Minneapolis, 4 percent; Phoenix, 8 percent; San Diego, 8.3 percent; Tampa, Fla., 10.1 percent; and Washington, D.C., 7.2 percent.

Tampa surpassed Detroit as the worst performing city. Detroit had a 9.3 percent drop over last year.
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[Suresh]

McClatchy Newspapers: Home prices may not rebound till 2010
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Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market.

Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent.

"I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades.
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The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president.

What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers. A fall in home starts helps reduce the supply of unsold new and existing homes. By late this year or early next year, life should be returning to the national housing market, but prices won't see significant recovery until 2010, Nothaft said.
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[emphasis added]
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Suresh

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[Suresh]

Thoughts from the Frontline: Where is the Bottom in Housing?
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Let me acknowledge up front that much of what you will read is from two main sources. The first is John Burns of John Burns Real Estate Consulting, which he founded in 1989.
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The second source is T2 Partners, a well-known value investing advisory firm in New York. They have a massive 76-page PowerPoint that you can review at your leisure at www.valueinvestingcongress.com, crammed with facts on the true extent of the problems in the subprime mortgage markets.
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So, the question we seek to answer today: Have we seen the bottom of the housing market? Was last month's small rise a sign of the bottom, as many on CNBC and elsewhere opined?

First, let's look at five graphs from John Burns (out of several hundred that he graciously allowed me to review!). Starting with conclusions first, John predicted a 15% decline in home prices early last year and has recently raised it to 16%.
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The reasons for the declines are many. Let's look at a few. First, we simply built more homes than the nation could absorb. In 2005 alone, there were 48% more housing-related transaction than there should have been. Note in the graph below the large rise since 2000 of transactions above the expected sales trend line. Sales are now back to that trend line, but are expected to fall further. Burns projects that sales activity will drop another 30%, to 1995 levels, and that will happen relatively soon.

This is going to mean that homebuilding is going to be forced to slow even more. Burns projects that permits to build new homes will fall anywhere from 32% to as much as 70% in the top 20 markets. The large majority of those markets have not seen permits fall even half as far as Burns think they will. Reality has not yet kicked in for many homebuilders. New and existing home inventories are hovering in the 10-month range and are likely to rise further as foreclosures put more homes on the market. This will likely mean that a buyer's market for at least another 3-4 years is the most likely scenario.
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What all this speculation did was create 3.5 million excess homes that need to be filled. There are about 2,000,000 more homeowners than long-term trends would indicate, and many of these are buyers who used questionable mortgages to buy a home and are now in the foreclosure process. And as we will see later, it is going to get worse before it gets better.



But with the dramatic drop in the availability of subprime mortgages, we have reduced the number of potential home buyers. In many markets, the affordability of housing simply prices out many potential middle-class buyers. And potential buyers of rental properties have not seen prices drop to where they can make a profit by buying and renting the homes. The following graph shows that nationwide it costs almost twice as much to buy a home as to rent. ...



Let's look at a few more facts. Due to falling interest rates, a typical adjustable-rate mortgage (ARM) buyer saw his buying power rise 55% from 2000 to 2004. Since then there has been a 21% deterioration. That has helped lower sales traffic for new homes to the lowest level since they began collecting statistics in 1985.

But on a note of optimism, Burns notes the housing market is extremely cyclical. We have had times of extreme distress before, which typically last 3-5 years, and this one too shall pass. Burns projects that sales should be higher than current levels by 2012. Median resale prices will bottom out in 2010, only about 16% below the top.
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This means that home ownership will fall to 66% of the population in 2009 from the recent high of 69%. He thinks that may overcorrect to 65% in 2010. When I asked him why the overcorrection, he said it has to do with psychology. Housing will go from the greatest investment in 2006 to a bad one by 2009.
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As T2 notes:

"Loans with teaser rates were never supposed to reset. Reinforced by many years of experience, both lenders and borrowers assumed that home prices would keep rising and easy credit would keep flowing, allowing borrowers to refinance before the reset. Now that home prices are falling and the mortgage market has frozen up, very few borrowers can refinance, which, as shown later in this presentation, is leading to a surge in defaults -in many cases, even before the interest rate resets!"


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Look at the following chart, which shows the serious plummet in lending standards. How could a rating agency look at the statistics, which they surely had, and suggest that the probability of repayment would be the same as for loans made prior to this period? ...


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In a series of slides, T2 Partners graphically shows how lending standards plummeted in 2005-7. Default rates for June 2005 no-documentation loans (so-called liar's loans) are already over 30% in some categories. T2 projects that for no-doc loans from late 2005 and on, default rates could climb to over 70%!
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Go back to the second chart from T2. The combined loan-to-value of the loans made in 2006 was 89%. That means the average loan from 2006 is already underwater. 33% were made with 100% financing. With home values down in some areas by 40%, the temptation to simply walk away is going to be large. It will take many years for a homeowner to have any equity.
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With more and more experts calling for a housing bottom in 2010, perhaps White House officials are assuming a sharp V-shaped rebound, wherein federal mortgage aid proposals won't be needed for more than a couple years before home prices rebound. I don't see a sharp V-shaped rebound in home prices for the very reason that John Burns cited: "Housing will go from the greatest investment in 2006 to a bad one by 2009. The market typically overcorrects at the end of every cycle. It will take rising prices to lure the marginal homebuyer back into the market." It's going to take a long time to encourage masses of free-spending home buyers back into the market.
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Suresh

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[Suresh]

Hussman Funds: Round Two - Home Price Erosion
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The following chart, presenting the ratio of median home prices to median household income, is courtesy of Ned Davis Research. Note that the decline in home prices even through the first quarter is a fraction of what we can expect to observe over time. While the “mean” in this chart is biased higher by the elevated ratios we saw in recent years, the lower ratios observed prior to 1987 are also unlikely because they were associated with very high interest rates. Given those considerations, it appears that median home values as of 3/31/08 were probably 15%-20% above sustainable norms, though we may not observe the full adjustment in just one cycle. The relatively low level of short-term interest rates (though only partially translating to low rates on adjustable mortgages) will probably help to buffer the full extent of the potential decline, but there's little doubt that we'll observe further serious defaults, foreclosures, and credit losses.


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Low interest rates may not stabilize home prices if homes are no longer viewed as lottery tickets.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The Weekly Standard: It's Only Going to Get Worse

America has not had a nationwide housing crash since the 1930s. At one point during that calamity, an estimated 60 percent of all mortgages were in technical default. The rather primitive housing credit system of the time, which relied on five-year balloon mortgages, certainly exacerbated the problem, but the bulk of the problem was related to the general economic downturn.
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[Whereas more recent housing corrections were short, mild, and regional, the current housing correction will not].

America has not had a nationwide housing crash since the 1930s. At one point during that calamity, an estimated 60 percent of all mortgages were in technical default. The rather primitive housing credit system of the time, which relied on five-year balloon mortgages, certainly exacerbated the problem, but the bulk of the problem was related to the general economic downturn.
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Some basic facts about supply and demand offer a good, if sobering, place to start.

SOME FACTS ABOUT THE HOUSING MARKET

There are 129 million housing units in the United States, comprising owner-occupied, rented, and vacant units. Of these, 18.5 million are empty. This vacancy rate is 2.5 percentage points higher than it has been at any point in the half century the data have been tracked, translating into at least 3 million too many empty housing units in the country. This number, moreover, is rising. This is the most intractable part of the real estate bubble, for we cannot find a true bottom to home prices until this inventory of empty units starts to clear, and we cannot find a bottom to the mortgage finance market until home prices bottom out.
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Each year roughly half a million homes are destroyed to make better use of the land on which they sit. Population growth also helps whittle down inventory. The household formation years--ages 25 to 34--have 39.5 million people in them forming 19 million households, a group that creates demand for 1.8 to 1.9 million units each year. On the other hand, households pass from the scene later in life, and the homes they used to live in go onto the market. There are 11.6 million households of 65- to 74-year-olds and 9 million households of 75- to 84-year-olds. Their departure increases supply by around 1.1 million units per year. On net, therefore, demographic realities add about 850,000 units to demand on top of the half-million homes that are destroyed and removed from supply.

The home building industry is in a deep recession, with additional yearly new home supply cut in half since 2006. But homebuilders are still adding nearly a million units per year. The math is simple: Build a million, tear down half a million, form 850,000 households, and the country only whittles down its excess inventory by 350,000 units per year. This is one reason to expect a further drop in new home construction, but it will still take years to get our housing inventory back to normal. The economic, social, and financial damage over that time could be staggering.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

AP: US foreclosure filings surge 48 percent in May

About 50 to 60 percent of borrowers who receive foreclosure filings are likely to lose their homes, Sharga said. The rest are likely to be able to sell or refinance.

The number of U.S. homeowners swept up in the housing crisis rose further last month, with foreclosure filings up nearly 50 percent compared with a year earlier, a foreclosure listing company said Friday.

One in every 483 U.S. households received a foreclosure filing in May, the highest number since RealtyTrac started the report in 2005 and the second-straight monthly record.

The combination of weak housing sales, falling home values, tighter mortgage lending criteria and a slowing U.S. economy has left financially strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't get refinanced into an affordable loan.

Efforts by government and the mortgage industry to stem the tide of foreclosures aren't keeping up with the rising number of troubled homeowners, and critics say a Bush administration-backed mortgage industry coalition, dubbed Hope Now, is falling far short.

In some neighborhoods, lenders are slashing prices dramatically to rid themselves of an unprecedented number of foreclosed properties, sparking bidding wars and multiple offers. While that's a positive for the real estate market, buyers in other parts of the country are still holding back.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Reuters: Home prices extend record slide in April: S&P

U.S. home prices extended their record slide in April, with every top metropolitan area now posting annual losses and many showing double-digit declines, according to the Standard & Poor's/Case Shiller home price index report on Tuesday.

The S&P/Case Shiller composite index of 20 metro areas fell 1.4 percent in April from March and slumped by a record 15.3 percent over the year....

S&P said its composite index of 10 metro areas slid 1.6 percent in April for a record 16.3 percent annual drop.

Home prices in a dozen of the metro areas have fallen for eight straight months.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

You may have noticed that home affordability has fallen as price cuts have failed to keep up with rising mortgage rates. An interest rate increase from 5% to 6% corresponds to a 20% increase in mortgage amount; meaning that a 1% increase in mortgage rates would require a 20% decrease in mortgage amount in order to maintain the same monthly payment. -Dave

Bloomberg: Homes Less Affordable as Prices Fall, Rates Rise, Zillow Says

Rising mortgage rates are driving up the cost of buying a house even as prices fall, making property more expensive across the U.S., according to a new study by Zillow.com, an online provider of home valuations.

Monthly payments on 30-year fixed mortgages are 6 percent to 10 percent higher in 41 of the top U.S. housing markets than they were two months ago. First-quarter prices have declined from a year earlier in 88 percent of those areas, Zillow said.

``We're going to need about a 30 percent decline in house prices if you are going to keep payments stable,'' said Morris Davis, a former senior economist with the Federal Reserve and now a real estate professor at the University of Wisconsin-Madison's School of Business.

Seven Federal Reserve benchmark cuts since September have failed to lower mortgage rates as banks have curtailed lending after taking writedowns or credit losses of more than $400 billion from investments in mortgages. Rates for 30-year fixed-rate home loans were about 6.3 percent when the Fed first reduced its target federal funds rate nine months ago. They're now just under 6.45 percent, data from Bankrate.com show.
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The average monthly mortgage payment rose $131, or $1,572 a year, since the beginning of April in the 41 areas surveyed, Zillow said. The figure is controlled for population.

``The story here is not so much how much more it will cost you over the life of the loan, but how much less house you can buy,'' said Greg Rand, managing partner of Prudential Rand Realty in Westchester County, New York. ``It's an unfortunate pickle that we're in.''
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.