Okay, a couple of things that this chart assumes:
- That from 1975 to 1999 was “normal” enough to indicate a statistical trend. I think the case could be made that it was.
- That we’re going to eventually get back to that trend line. I think a case could be made that we will.
- If both of those assumptions are indeed correct, then we’re heading into a scenario where we have quite an adjustment to go through in terms of a drop in peak housing values until we are back into range with that statistical trend.
What do you think? Tell me why you think he’s wrong……
Tom Vanderwell
Values Have Dropped Only 25% of the Fall Needed to Reach Trend «
PRICE TRENDS / WAR OF THE WORLDS (Part 4): Property owners nationwide have lost only one dollar for every four dollars they can ultimately expect to lose on their home.
The good news according to the leading data series issued by the United States government is that prices have only fallen 6 percent. If you are a homeowner, you are wealthier than you knew. The bad news is you still have three dollars to lose for every one dollar which has already been lost.
The total projected fall from the Federal Housing Finance Agency (FHFA) “All Transactions Index”, which begins in 1975, shows a peak-to-trend fall of 27%. Since prices are 6% lower by this measure, prices must still fall an additional 23% from today for prices to revert to trend.
The assumption built into these estimates is that prices in the years 1975 to 1999 advanced at a typical rate. A trend line was generated to the present based upon that 25-year period. The chart depicts the divergence of the trend established from 1975 to 1999 and the actual prices recorded from 2000 to 2009.
The FHFA prediction of a total fall of 27% is far less than the total fall of between 49% to 60% predicted by Case-Shiller. Based upon the four data sets reviewed in the last few weeks (see summary below), we can estimate a total fall of between 27% to 60% from the bubble top to the long-term trend. The average of the four indexes projects a total fall of 41% from the bubble high to the trend bottom.
Looking ahead from today, the average of the four indexes predicts that property values will fall 26% from our current price levels.
Keith Lutz says:
Interesting trend. Can’t imagine it going that far back, imo, but that is all I have, at least you have stats.
November 19, 2009 — 5:00 pm
Benjamin Ficker says:
That graph is great. Now if only I was smart enough to narrow it down to my local market. Hmmm, idea for a new post…
November 19, 2009 — 7:26 pm
Al Lorenz says:
Tom,
I would love to see the statistics for what the pricing for a select group of houses has really done. All the prognostication is based on median or average numbers.
If we’ve really had a slew of new buyers and most of the activity has been at the low end of the market, that has a huge impact on median values.
In my little resort town, the average price of waterfront home sales has dropped over 40%. The number of sales of those waterfront homes is also up over the last two years. How much has the price of a given home changed? I wish I was in a large enough market to have the sales to really generate the statistics. Even in our “boom” of waterfront sales, that is only about 15 for the year!
I can tell you it looks like waterfront homes have dropped well over 6%. We’ve had strong sales of homes under $250k and really poor sales of homes from $500k to $1 million.
At any rate, median and average sale numbers are skewed not just by the value changes of a particular home but also by the demographic shifts in buyers. These type of looks at the data just don’t go into enough depth to really tell the story for individuals trying to figure out what might happen to the value of their home. I’ve certainly seen sales of homes that are well off 27% of what they sold for a few years ago. So, would that mean their value won’t drop anymore? The answer would be no.
I’m all up for doing the math and looking at the issues. As a member of the larger MLS in the area, I could do some pretty good analysis on the Seattle market. However, that doesn’t help me much in my town. To do the math on a national basis, I think one would have go into some pretty good detail of breaking sales down into price and type categories and looking at the trends in each category in a selection of markets across the country. How’s that for a run-on sentence?
November 19, 2009 — 8:09 pm
Timothy G Theiss says:
I agree with the concept. In the Metro Phoenix area, the 20 year average for annual appreciation between 1985 – 2005 was just under 6% per year. During the run-up toward the peak of the bubble irrational exuberance pushed values up at a rate of about 4% per MONTH! Right after the market peaked, our 10 year average was then at 19% per year because of the severe skew created by market exuberance from Oct 2003 – May 2005. Values are currently leveled off to the values of 2001 which means essentially that our market flatten out from 2001 to 2009, eight years of no growth. Therefore, one might assume that we are on the verge of restarting the appreciation train, and in fact, some neighborhoods are registering a 2% increase in values. This data might be cause for a sigh of relief EXCEPT – we are just now at the tip of the foreclosure ice berg unless lenders start allowing principal reductions – or at the very least – allow owners to pay principal only payments until the mortgage balance is in line with market values at which time owners could resume paying interest based on the new principal balance (suggested by Shelia Bair, FDIC CEO).
November 19, 2009 — 8:42 pm
Jeff Brown says:
I’d still like to see that trend line if it began in 1950 instead of 1975. It’s my humble opinion that though I’m in the minority who think prices aren’t done dropping, (in most areas, not all) 25% is probably a bit much.
The wild card? Washington D.C.
November 20, 2009 — 7:45 am
Vance Shutes says:
Tom,
As you know, here in cold, desolate Michigan, we’ve already experienced a 40% drop in values. So another 25% is like kicking us while we’re down.
I’m reminded of the old cliche – There are lies, there are da**ed lies, and then there are statistics. We’ll leave it at that.
November 20, 2009 — 10:54 am
Tom Vanderwell says:
Al,
Well said, I’ve often argued that the statistics in terms of median prices are skewed based on the buyer mix at that moment. But, if we’re looking at a trend line, does that mitigate that someone?
Timothy – principle only payments – I like that concept. Can you point me to more details on where she talked about that?
Jeff – Two thoughts – I’ve got a post going up over on my site tomorrow that actually offers a trend line since 1899 (sorry for the self promotion). It’s an intriguing story and I wonder what sort of ramifications it’s going to have for home ownership rates going forward.
Second thought – even if you apply the Vanderwell rule of 50% (what if they are wrong by 50%), an additional 12.5% drop in prices isn’t going to be pretty. Also, what are the chain reactions from that property value drop in terms of: Homeowners who can’t sell, increased foreclosures, “jingle mail,” increased losses with Fannie and Freddie…….
Vance – Michigan has gotten kicked many times already while we’re down – seems to me some of the bruises left have our governor’s high heel marks on them. But you bring up a good point about using national statistics in a discussion of local real estate. Your mileage may vary.
Tom
November 20, 2009 — 11:13 pm
Joe says:
I think everyone would agree that national averages do not necessarily tell the story for each market. However, national averages can offer guidance into what the future will hold for your local market.
Example (Quick and Dirty): Let’s take the average household income from the last census in 2007(http://en.wikipedia.org/wiki/Household_income_in_the_United_States). The average amout is $50,233 or roughly $4100 per month pre tax.
If I read the chart from the post correctly, the average median price is roughly 350k.
Assuming 20% down and 5% interest rate the average person buying the average priced home would have an average dti of 36%. Not bad, seems reasonable and sustainable. The problem with my quick and dirty example is that this scenario exists in fantasy land.
This example leaves out many things, among them.
*How many people can put 20% down?
*Taxes and Insurance
*Car payments, credit card debt, etc.
*Rising Unemployment over 10% or higher(www.shadowstats.com)
*Have wages risen since 2007?
*etc. etc.
After factoring in the realites it’s clear that debt ratios are well north of 50% for the average American.
Unless you believe that New Century and their ilk will rise from the ashes or that the FHA will continue to insure 97% purchases in a declining market, the realites of basic math will eventually take over. The average American family making the average family income can’t afford the average priced home. I think this is clearly demonstrated where most of the activity has been taking place as of late. Homes priced BELOW 350k.
Again all markets are local but by taking a step back and looking at the averages, I think it is clear there is still more pain to come. IMHO.
Joe.
November 21, 2009 — 12:21 pm