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Real House Prices Back To 1999-2000 Levels


By JFP   Follow   Thu, 27 Dec 2012, 12:37am PST   5,491 views   91 comments   Watch (1)   Share   Quote   Permalink   Like (1)   Dislike  

According to Calculated Risk, real house prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels. Does anyone seriously expect a drop below these levels? See http://www.calculatedriskblog.com/2012/12/comment-on-house-prices-real-house.html

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Buster   befriend   ignore   Mon, 31 Dec 2012, 2:00am PST   Share   Quote   Like   Dislike     Comment 52

How can people afford these rent increases? Same question....

http://finance.yahoo.com/news/cities-with-the-highest-rent-spikes-in-2012-201103748.html?page=1

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 2:42am PST   Share   Quote   Like (1)   Dislike     Comment 53

Call it Crazy says

Exactly!! Which is why this "housing recovery" this year can't sustain itself.....

What some people call a recovery, others call a bull trap.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 2:46am PST   Share   Quote   Like (2)   Dislike     Comment 54

Buster says

But I really don't buy the fact that there is no discretionary spending room left in the average american's budget.

You don't have to buy that as that is not my argument. My argument is that discretionary spending isn't nearly enough to support real estate speculation, which is what drove prices up in the first place, or spending more on a house than what it is really worth.

Furthermore, interest rates cannot stay low indefinitely. Such low rates have many cumulative negative effects including deterring investment. When interest rates rise, expect housing prices to plummet simply because people can only afford such and such monthly payments.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 2:47am PST   Share   Quote   Like   Dislike     Comment 55

Buster says

How can people afford these rent increases? Same question....

http://finance.yahoo.com/news/cities-with-the-highest-rent-spikes-in-2012-201103748.html?page=1

People do one of four things:
1. Relocate to somewhere less expensive.
2. Move back in with parents.
3. Move into a smaller apartment.
4. Apply for Section 8 housing assistance.

All four of these things are happening.

lostand confused   befriend   ignore   Mon, 31 Dec 2012, 2:48am PST   Share   Quote   Like (1)   Dislike     Comment 56

Even if you have discretionary spending, people will be wary of spending-when you don't know if you will still have your job or will be able to get one if you lose your job-you are not going to spend as much.

Buster   befriend   ignore   Mon, 31 Dec 2012, 3:06am PST   Share   Quote   Like   Dislike     Comment 57

Dan8267 says

How can people afford these rent increases? Same question....

http://finance.yahoo.com/news/cities-with-the-highest-rent-spikes-in-2012-201103748.html?page=1

People do one of four things:

1. Relocate to somewhere less expensive.

2. Move back in with parents.

3. Move into a smaller apartment.

4. Apply for Section 8 housing assistance.

All four of these things are happening.

Yea, I agree. Number 5 is happening as well; 5. Rent increases.

Buster   befriend   ignore   Mon, 31 Dec 2012, 3:11am PST   Share   Quote   Like   Dislike     Comment 58

Look, I am not arguing Don or Dan. My point is this. The educated and the top 10% are making plenty of money and more of it every year. The bottom 90, not so much. So in areas where the 90% live, my prediction is you will continue to see flat or falling prices if housing stock grows at the same pace of population increases. In areas that attract the top 10%, there is plenty of room for price increases and my prediction is that in these areas you will continue to see price appreciation. Both however will have appreciation regardless of income level if housing starts remain anemic or less as they have been over the last 6 years. Population continues to increase, recession or not. Supply and demand kicks in here.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 3:14am PST   Share   Quote   Like   Dislike     Comment 59

Buster says

Yea, I agree. Number 5 is happening as well; 5. Rent increases.

Rents always fluctuate. I haven't seen any market rent increases in the south Florida area over the past four or five years. I haven't personally had a single dollar rent increase in over five years and there's no way my land lord is going to. He's damn glad to have me a a tenant as there are far more properties for rent than there are renters and I'm a much better tenant than most of what's out there.

South Florida was way overbuilt during the bubble. Even with foreign investors, there simply are more rental units unoccupied than people considering renting.

Naturally, your area may be completely different. As I said, the bubble correction has completed in areas where the bubble was least blown up. But in the places where the bubble was overblown the most, it's still deflating.

As a side note, places that had the least housing inflation are the places which were the least impacted by the Second Great Depression. So much for bubbles being good for the economy.

Ironman   befriend   ignore   Mon, 31 Dec 2012, 3:24am PST   Share   Quote   Like   Dislike (2)     Comment 60

donjumpsuit says

It is this graph we should be most concerned about. It is ticking upwards into the 160's.

Not sustainable by any stretch of the imagination.

I believe that chart is based on "seasonal adjustments". As you'll see by the chart below, the "not seasonally adjusted" growth numbers tell a different story.

*

Buster   befriend   ignore   Mon, 31 Dec 2012, 3:25am PST   Share   Quote   Like   Dislike     Comment 61

Dan8267 says

Naturally, your area may be completely different. As I said, the bubble correction has completed in areas where the bubble was least blown up. But in the places where the bubble was overblown the most, it's still deflating.

People often state that the most bubblicious part of the country was SFBA and I agree. Problem is two fold; Many of the top 10% income earners live here & two, new construction has remained flat at best. Both factors = rent and housing price increases.

Naturally, places that did not have huge increases in housing costs are experiencing less pain in this depression.

Buster   befriend   ignore   Mon, 31 Dec 2012, 3:30am PST   Share   Quote   Like   Dislike     Comment 62

Per callitcrazy's graphic above, two areas (Las Vegas & Phoenix) that had the highest bubble, it appears also have the highest price increases this past fall. This is opposite of what you have stated. "But in the places where the bubble was overblown the most, it's still deflating."

I'm not sure how to account for this other than perhaps these two area's actually 'over corrected'.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 3:38am PST   Share   Quote   Like (1)   Dislike     Comment 63

Buster says

Per callitcrazy's graphic above, two areas (Las Vegas & Phoenix) that had the highest bubble, it appears also have the highest price increases this past fall. This is opposite of what you have stated. "But in the places where the bubble was overblown the most, it's still deflating."

The greater the bubble, the greater the bull trap. Over the next few years, the bubble will still deflate in those regions.

Ask yourself one simple question: why the hell are houses worth 40% more in those areas now than they were when the houses were 12 years younger and in better shape? What has fundamentally changed about the economy that justifies historically high prices?

Buster   befriend   ignore   Mon, 31 Dec 2012, 3:45am PST   Share   Quote   Like   Dislike     Comment 64

Dan8267 says

Ask yourself one simple question: why the hell are houses worth 40% more in those areas now than they were when the houses were 12 years younger and in better shape? What has fundamentally changed about the economy that justifies historically high prices?

My point is, I don't believe that they are 40% more than the prebubble nominal trend.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 3:58am PST   Share   Quote   Like   Dislike     Comment 65

Buster says

My point is, I don't believe that they are 40% more than the prebubble nominal trend.

I, on the other hand, don't buy those graphs. I stick to the proven, canonical Case-Shiller Index, and by that index the long term trend is, by mathematical definition, a flat line with a slope exactly equal to zero. Any deviation above the norm represents an overpriced market. Any deviation below the norm represents an underpriced market.

Ironman   befriend   ignore   Mon, 31 Dec 2012, 4:08am PST   Share   Quote   Like   Dislike (2)     Comment 66

Buster says

I'm not sure how to account for this other than perhaps these two area's actually 'over corrected'.

Good point, I don't think anyone knows at this time until we see if those trends continue. Remember, Phoenix fell like 75% from the top of the bubble. It has recently come back about 20%. So overall net, it is still below many other areas.

JFP   befriend   ignore   Mon, 31 Dec 2012, 4:11am PST   Share   Quote   Like   Dislike     Comment 67

Dan8267 says

Buster says

My point is, I don't believe that they are 40% more than the prebubble nominal trend.

I, on the other hand, don't buy those graphs. I stick to the proven, canonical Case-Shiller Index, and by that index the long term trend is, by mathematical definition, a flat line with a slope exactly equal to zero. Any deviation above the norm represents an overpriced market. Any deviation below the norm represents an underpriced market.

The Case-Shiller graph you posted shows 100 as the nominal price level in 1999. What is it that makes 1999 the correct level of pricing for houses?

Ironman   befriend   ignore   Mon, 31 Dec 2012, 4:11am PST   Share   Quote   Like   Dislike (2)     Comment 68

Buster says

Per callitcrazy's graphic above, two areas (Las Vegas & Phoenix) that had the highest bubble, it appears also have the highest price increases this past fall.

Also keep in mind, many of those recent purchases are by speculators/investors chasing a higher rate of return than other investments. There will be a point that these investors will become un-attracted to these markets if the price increases continue.

JFP   befriend   ignore   Mon, 31 Dec 2012, 4:15am PST   Share   Quote   Like   Dislike     Comment 69

Dan8267 says

Buster says

But I really don't buy the fact that there is no discretionary spending room left in the average american's budget.

You don't have to buy that as that is not my argument. My argument is that discretionary spending isn't nearly enough to support real estate speculation, which is what drove prices up in the first place, or spending more on a house than what it is really worth.

Furthermore, interest rates cannot stay low indefinitely. Such low rates have many cumulative negative effects including deterring investment. When interest rates rise, expect housing prices to plummet simply because people can only afford such and such monthly payments.

How long do you think it will take for interest rates to rise? The Japanese have kept interest rates close to zero for 30 years now. If the Fed does the same, I will be retired by the time interest rates rise.

Kevin   befriend   ignore   Mon, 31 Dec 2012, 4:20am PST   Share   Quote   Like   Dislike     Comment 70

Prediction: People insisting that housing is "more expensive" today despite all evidence to the contrary will always find some justification for never buying a home.

Which is fine. If you think buying a house is never a good idea, don't. Just don't ignore all the people who are doing just fine having made a different choice.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 4:30am PST   Share   Quote   Like (2)   Dislike     Comment 71

JFP says

The Case-Shiller graph you posted shows 100 as the nominal price level in 1999. What is it that makes 1999 the correct level of pricing for houses?

Here's the full Case-Shiller graph from 1890 to 2010. Unfortunately, our dumb as rocks press doesn't have the basic intelligence to continue plotting along this graph and instead looks at a mere 10-15 year history. I've always detested such short-sighted views.

Anyway, the value 100 in the index is defined as the arbitrary valuation point of the year 1890 which is the earliest data in the index. 100 is not defined as the norm, but simply as what real (not nominal) prices adjusted for quality in the year 1890.

The historical average is actually below 100, but that is due to an unusual and long period where demand was low between WWI and WWII. If we start with the modern, post-WWII period, we can get a sense of what the real fair market level is. It really stands out. The 1960s, 1970s, and 1990s were dominated with relatively flat periods centered around the 110 mark. This mark is also about average for the period from 1945 to 2000, before the incredibly obvious bubble on the graph. The previous buyers and sellers market didn't move much away from 110 and the average always returned to 110.

This is why it is my assessment that 110, not 140, represents the historical norm for housing in modern America. If someone wants to make the case that 140 should be a new historic norm, then there better be a damn good reason for it. If anything, I'd expect a new historic norm to be lower, not higher, as houses are getting cheaper to build (or to print out in the near future) and America's population isn't expanding like it used to and that we've reached Peak Baby.

As such, there is no reason for housing prices to now be 30% higher priced today than during the past two generations. There are certainly reasons for them to be priced lower:

1. Lack of expected population growth.
2. Baby Boomers retiring and downsizing.
3. Millennials moving back in with parents.
4. Women delaying motherhood and having fewer children.
5. Construction costs decreasing.
6. Technology improving.
7. Overbuilding during the bubble.
8. Expectation of higher interest rates and thus lower prices.
9. Massive debt in the Millennial generation.

Goran_K   befriend   ignore   Mon, 31 Dec 2012, 4:42am PST   Share   Quote   Like   Dislike     Comment 72

Depends on the market. Phoenix, Atlanta, some places in Florida, Vegas, I don't see homes crashing much more than they did already.

SoCal, SFBA, and other metro areas where people are buying homes at prices 5 to 10x the median income... look out below.

Buster   befriend   ignore   Mon, 31 Dec 2012, 4:53am PST   Share   Quote   Like   Dislike     Comment 73

Nice graph but it is old. The dotted line is where we are today and is 'solid'. San Francisco's current CS index sits at 141. It bottomed at 128 in 2011. Prices today are still below what they were in 2003.

http://www.mortgagenewsdaily.com/12262012_home_prices_case_shiller.asp

http://ycharts.com/indicators/case_shiller_home_price_index_san_francisco/chart#series=type%3Aindicator%2Cid%3Acase_shiller_home_price_index_san_francisco%2Ccalc%3A&format=real&recessions=false&zoom=10&startDate=&endDate=

JFP   befriend   ignore   Mon, 31 Dec 2012, 5:00am PST   Share   Quote   Like (1)   Dislike     Comment 74

Dan8267 says

As such, there is no reason for housing prices to now be 30% higher priced today than during the past two generations. There are certainly reasons for them to be priced lower:

1. Lack of expected population growth.

2. Baby Boomers retiring and downsizing.

3. Millennials moving back in with parents.

4. Women delaying motherhood and having fewer children.

5. Construction costs decreasing.

6. Technology improving.

7. Overbuilding during the bubble.

8. Expectation of higher interest rates and thus lower prices.

9. Massive debt in the Millennial generation.

You could make the same arguments about healthcare and college expenses, but they keep increasing also. I think we are in an unprecedented era of monetary manipulation, so I'm not sure we can expect things to ever revert to the "norm."

Goran_K   befriend   ignore   Mon, 31 Dec 2012, 5:03am PST   Share   Quote   Like (2)   Dislike     Comment 75

JFP says

You could make the same arguments about healthcare and college expenses, but they keep increasing also. I think we are in an unprecedented era of monetary manipulation, so I'm not sure we can expect things to ever revert to the "norm."

I think like Dan, many of us are betting on the fact that the FED can only manipulate so far. Seeing as each round of QE has had less effect each successive round, it seems like a safe bet for many of us.

Buster   befriend   ignore   Mon, 31 Dec 2012, 5:04am PST   Share   Quote   Like   Dislike     Comment 76

JFP says

You could make the same arguments about healthcare and college expenses, but they keep increasing also.

My original point except I used food and clothing as lessor examples of what you are pointing out.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 5:08am PST   Share   Quote   Like (1)   Dislike     Comment 77

Buster says

The dotted line is where we are today and is 'solid'.

You, of course, are welcomed to believe that. Based on the evidence, I do not. As you stated, prices today in San Francisco are what they were in 2003. As I stated, the same is true in south Florida. The thing is, 2003 was already way into the bubble and way above every previous peak in the Case-Shiller Index. So why would anyone believe that this is the bottom?

Again, for this to be true, there would have to be some incredibly significant reason why we are in "a new norm" of high housing prices. Every time someone says we are in a new norm of high X prices, they are shown to be wrong or lying. What reason do we have to believe that this time is different? What has changed that makes a house worth vastly more than what it was ten years ago? What has changed that makes old houses worth much more than it costs to build a shiny new house?

I've given plenty of reasons why I think housing prices are going to drop in a few "high bubble" areas, particularly south Florida, which I'll go on the record as stating is the area I know best by far.

Buster   befriend   ignore   Mon, 31 Dec 2012, 5:08am PST   Share   Quote   Like   Dislike     Comment 78

In late 2003, the Consumer Price Index was 184. Today it is 230. CPI does not include housing. We now have housing prices at cheaper levels than 10 years ago....all the while everything else has increased substantially.

http://ycharts.com/indicators/case_shiller_home_price_index_san_francisco/chart#series=type%3Aindicator%2Cid%3Acase_shiller_home_price_index_san_francisco%2Ccalc%3A&format=real&recessions=false&zoom=10&startDate=&endDate=

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 5:13am PST   Share   Quote   Like   Dislike     Comment 79

Goran_K says

I think like Dan, many of us are betting on the fact that the FED can only manipulate so far. Seeing as each round of QE has had less effect each successive round, it seems like a safe bet for many of us.

The federal government and the Federal Reserve has certainly delayed the correction, and in doing so caused the Second Great Depression. People like me would have spent hundreds of thousands of dollars each had the correction been allowed to take place. Instead of saving (hording) my cash, I would have bought a house, furniture, etc. and that would have stimulated the economy far more than any ejaculation of currency from the Federal Reserve.

The stupid polices of our government and the Fed have forced millions of potential buyers and economic stimulator like me to go into hibernation mode. This is exactly why unemployment went to high. People like me, who had the money saved up, didn't buy because the government kept prices in the higher ass-fucking range. I refuse to make a mistake on the largest financial decision in my life, and I am not wasting my life earnings bailing out some greedy speculator. I worked too damn hard and made too many sacrifices to do that.

Dan8267   befriend   ignore   Mon, 31 Dec 2012, 5:15am PST   Share   Quote   Like   Dislike     Comment 80

Buster says

In late 2003, the Consumer Price Index was 184. Today it is 230. CPI does not include housing. We now have housing prices at cheaper levels than 10 years ago....all the while everything else has increased substantially.

1. The CPI measures nothing. It