September 25, 2007

Ruh-Roh: Time to housing panic. "The Roof Is Caving In On the Housing Market" as housing futures collapse

Wow. Take all the above projected (and traded) expected housing price collapses for these US markets, and then also factor in the ravages of inflation, and this thing is gonna get sick. Like it's not sick enough today. Suzannnnneeeee!!!!! But hey, no surprise for HP'ers.

The housing data don't lie: the sky is falling, and the roof is caving in too.

Earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011.

For all of you who think a 15-25% pullback in the real estate market can't happen, I suggest you take a look at the CME pricing Web site.

Read that chart carefully. Over the next 12 months, traders expect prices to fall in each of these cities by 5-13%. By November 2009, prices will be down more than 10 percent in every city save Chicago. By November 2010, prices will be down 20% in Miami and San Francisco, and 15%+ in San Diego, Las Vegas and Washington, D.C. It gets worse in 2011.

As a point of emphasis, remember that these are priced in actual dollars and do not take into account inflation. Factor in 3% annual inflation and the real value of these homes falls a further 11.5% by 2011, putting prices in Miami and San Francisco down 37% and 36% respectively on a real-dollar basis. Who said house prices never fall...

34 comments:

Econ_E said...

Those futures are a bit optimistic don't you think?

Anonymous said...

I guess the realtor idiot in the post above didn't see the San Francisco numbers here

"No way the San Francisco market will ever crash"

borkafatty said...

Ya but Keith things are different this time..Yup they sure are,,instead of going up they are going down...Yup Different for sure.

GT said...

"Those futures are a bit optimistic don't you think?"

depends on which side you are eating the popcorn from...to an HPer, yes that seems optimistic to me

Anonymous said...

"By November 2009, prices will be down more than 10 percent in every city save Chicago. By November 2010, prices will be down 20% in Miami and San Francisco, and 15%+ in San Diego, Las Vegas and Washington, D.C."

15-20%, sure that sounds about right. So?

I bought a house for $415K in 2002. At the peak in 2006 it was worth $825K. According to CME it will drop to $660K in 2010.

I put $12,500 down and will make a $245K tax free profit. That is a return of 1960% on my investmet, tax free. What else has come close to that? If you bought Google at IPO you're not even close to that kind of return.

My PITI was what rent would have cost for a comparable house. Actually I think rent is more now but thanks to the beauty of the fixed mortgage, my payment is the same.

I also got about $3500 in tax deductions every year, so on top of the $245K add another $28,000 in tax deductions over 8 years. For a grand totdal of $269K profit over 8 years. All this for doing nothing but living in a house.

Yeah indeed I sure am fucked!!

I sure wish I had rented instead.

Darn it if I had only found Keith and his wisdom back in 2002 how much better off I'd be.

Agent #777 said...

I bought a house for $415K in 2002. At the peak in 2006 it was worth $825K. According to CME it will drop to $660K in 2010.

I put $12,500 down and will make a $245K tax free profit.

I sure wish I had rented instead.

Darn it if I had only found Keith and his wisdom back in 2002 how much better off I'd be.


Ummm, Keith wasn't saying this in 2002. I believe his site only started in 2005, which is when I wanted to sell too. Unfortunately, we did not, and I likely lost 25-35k between then and last year, when we finally did sell.

You would do well to note that these are only projections, subject to constant changes. It looks like you have done well and should be OK, but I hope you don't NEED that money, cause until you sell, you can't really count your profit. Many, many people are finding that out right now.

Anonymous said...

GAWWD--Some people just don't get it!! If you bought your house in 2002, obviously, you aren't going to take the bloodbath that all the lemmings who jumped off the cliff from 2004-2006 are going to.

Anyone who bought in those years has real reason for dread...If you sank your money into a rapidly-depreciating asset during THOSE years, yes, my friend, you are F@#$@ed!!

I have co-workers in the Northern VA area that are already under water by $200,000--what a pisser!!

keith said...

Anyone getting the feeling desperate homedebtors, even the ones that bought pre-bubble (2002) are getting a bit irritated that their phantom equity has plummeted and is going back to right where they bought in (if not lower)?

HousingPANIC started in 2005. Anyone who listened to a realtor on commission and bought a home in 2005, 2006 or 2007 is getting slaughtered. Those that bought in 2000 - 2004 will have their equity wiped out.

Anyone who did a cash-out HELOC will find themselves paying back a loan they thought was free money.

Anyone who owns a home outright and didn't count on "equity" to fund their retirement will be fine and dandy, even though they would have been better off selling in 2005, renting, and buying back after the crash.

Anonymous said...

You forgot us folks that bought it 2001 & sold in 2006 & put our 300K in the bank!!

Damn- now they are screwing that too with the rate & dollar drop -

Oh well, at least I can move anytime to anyplace to get a job or live CHEAP!!

az_mtb said...

S&P/Case-Shiller Home Price Index Falls 3.9% in July

http://tinyurl.com/2y9qh7

Anonymous said...

Keith,

Your 2:03 posting is the best summary of what's happening and your site to date.

In a nutshell.

Anonymous said...

We bought our first home in Seattle in the View Ridge/Hawthorne Hills area in 2005 as a place to settle down for ~10 years and start to raise a family.

We have a home equity loan 2nd mortgage and put 5% down. Unless the economy tanks so bad we both lose our jobs (we realize we're lucky and our household income is $150k+) for an extended period of time and inflation helps wipe out our savings, I don't care if we end up a bit underwater (20% down from peak takes us to around purchase price) as we never could conceive of using the house as an ATM. <-- atypical borrowers apparently. Suckiest part will be getting the damn prop taxes reduced since they've shot up rediculously this last year by 30%

If we start getting "slaughtered" I'll give a mea culpa. Until then: nice generalization!

NOVA said...

"I bought a house for $415K in 2002. At the peak in 2006 it was worth $825K. According to CME it will drop to $660K in 2010."

Too bad you didn't sell at the peak like many HPer's did. Instead of $245K (which could be much less), you could have made $410K. Too bad, so sad.

az_mtb said...

U.S. August Existing Home Sales Fall to Five-Year Low

http://tinyurl.com/283b6x

Anonymous said...

No, its not just the lemmings that bought in 2004-2007. Quite a few fools took out cash from houses they bought 10-20 years ago. Now many are upside down and stuck in a subprime. About 400 Billion in MEW subprime loans.

WaitinginDC said...

"I also got about $3500 in tax deductions every year, so on top of the $245K add another $28,000 in tax deductions over 8 years. For a grand total of $269K profit over 8 years. All this for doing nothing but living in a house."

Hmmm . . . So, you didn't pay any property taxes? Or any insurance? Or any upkeep? Or, big drum roll, interest on that $402,500 loan?

Even at a very low interest rate (5.5) you have paid a whopping $180,000 in interest by 2010!!!

Yeah! You're a genius! All for "just living in a house!" Let's subtract that from your imaginary profit. Now you've made $65K in those 8 years, and you have to pay a broker when you sell your $600K house, so you'll have even less.

Let's estimate your taxes at a low 2,500 a year, with insurance and upkeep altogether 3,500. After 8 years you'd have paid 28K. Leaving you with what? 37K (minus brokers fees) That's less than 5K a year in profit! If values sink just a bit, in your case 40K from your expectations, you actually will have lost money owning a house.

Good on ya!

With the money I have saved renting and and not buying, and I am not exaggerating, I make way more than 5K in interest every year, and these are in extremely conservative investments.

Anonymous said...

Ah, but the prices are already down 20-25% in S. CA. Don't let them kid you.

Anonymous said...

And, condo prices in S. CA are already down 30%+. Numerous new buildings of projects in foreclosure.

Anonymous said...

is 10-15 percent a collapse? They went up almost 100 percent?
I just don't see this crash here in NH, don't buy it. Prices have gone down 5 percent or so but hoems sell. Im still waiting....

Anonymous said...

The Facts: Real house values and asking prices in suburban Northern Virginia and Maryland are steadily reverting to the norm circa 2002, 2003, and early 2004. Which is exactly where they should be to enable individuals to eventually afford house, as well as to be able to take their time to make a prudent decision whether or not to actully purchase a property.

-dcandout

GL said...

Can somebody explain to me why Chicago is expected to rise in price between 2010 and 2011

Anonymous said...

NOVA said...

"I bought a house for $415K in 2002. At the peak in 2006 it was worth $825K. According to CME it will drop to $660K in 2010."

Too bad you didn't sell at the peak like many HPer's did. Instead of $245K (which could be much less), you could have made $410K. Too bad, so sad.

September 25, 2007 3:27 PM

===========

And then what, move into an apartment for 3 years?

Plus add in the selling costs of 8%, costs of moving twice, buying costs of 2-3% and a good chunk of that extra $175K would have been eaten up anyways. Not to mention the pain in the ass of moving twice.

Thanks but no thanks.

Anonymous said...

Hmmm . . . So, you didn't pay any property taxes? Or any insurance? Or any upkeep? Or, big drum roll, interest on that $402,500 loan?

Even at a very low interest rate (5.5) you have paid a whopping $180,000 in interest by 2010!!!


==========

Moron, had I rented I would have paid what I paid rent of about $2000 a month, which over 8 years is $192,000 by 2010!!

Insurance? Sure I paid it, just like I would have paid renter insurance.

Property tax? Yep, offset by my federal tax deduction on my interest alone. My state tax deduction on interest and property tax was a bonus.

Think McFly, think.

Anonymous said...

you renters crack me up, you really do, especially 5:28 who may well be the dumbest person alive

stuckinthecity said...

ok, that they admit there will be price deperication is a first good step. Now double those numbers!

stuckinthecity said...

Anonymous said...
"By November 2009, prices will be down more than 10 percent in every city save Chicago.
----

This just kills me. Why is Chicago so special?? Chicago has the same fundamental problems all the major markets do.

The median household income is $46,000. But the median home price is $270,000! The average family is spending 5.87x their income for an average house.

To get those numbers in line the avg income has to grow quickly to $90,000/year or the avg home price will have to drop to $138,000! That is a 50% hair cut!!

And finally, let me tell you buying an average priced home in Chicago will but you in runned down un-updated roach in a neighborhood that could get you robbed, raped or killed (or "kilt" as the local dialect has it).

My blog: SCB

waitingindc said...

Ohmygod, you are so scary.

1) Renters insurance costs at most a few hundred dollars a year. Homeowners? Well, for a 400K, pardon me 800K, house, it's just a bit more.

2) Are you saying your PITI is 2K a month? Cuz that would put your rate at less than 4.5.

Since you didn't take issue with the 5.5 I assigned you let's take a another look at those numbers. Renting at 2K would cost you $285 less a month than your PITI. Over 8 years that's close to 28K.

Is that chump change to you? I don't think so cuz you couldn't even scrape that together for your down payment!

Add what you would have spent on upkeep (you didn't bother to mock that number) and you're looking at a serious chunk of change to invest. (Investors, feel free to run some numbers).

Note: Your deductions can't both offset your property tax AND count as a future profit!

You also didn't mention your PMI, cuz you didn't put 20% down did you? Let's add that to your bill, or subtract it from your "grand totdal" (sic).

3) You never even bothered to address the crux of my post: your fuzzy math of "for a grand totdal (sic)of $269K profit over 8 years."

Do you need to re-read my post one more time, maybe out loud to yourself? So you can appreciate how you will NOT be making a grand total of $269K profit?

Far from being the dumbest person alive, I am a thrifty and savvy renter who will buy a house with more than 3% down, pay no PMI, pay very little in interest rates thanks to my large down payment AND unlike you, not be susceptible to economic ebbing and flowing b/c I will actually have equity in my house!

Cheers, you moron.

mayor mcmansion said...

Now I get it, Ben saw these numbers and came up with a plan to inflate the overall economy as housing prices go down which will give the illusion that:
a) homedebtors haven't really lost that much
b) housing is becoming more affordable relative to other goods and services

Better yet, this plan works with or without a recession.

It's the perfect compromise for a perfectly screwed up situation.

Anonymous said...

so for all of us normal people, who's house went up 180% since the mid-90's, you're saying we might lose 25% of our peak value? and we get to keep the rest of that equity? um, why am i supposed to be upset?

me in OC said...

"Factor in 3% annual inflation and..."
Three percent you say??? (to get real prices).
3% inflation is a joke. I'm getting 5.4% interest from my Credit Union (certificates), and they lend money at less than the rate of inflation, because they are making money. I think Greenspan just might be right about the future. He predicts hyper-inflation (he says 8%).

Anonymous said...

Anon 1:19 talks about his tax deductions over 8 years.
Does he believe that it's better to pay tax and get a deduction, rather than not pay tax?

Anonymous said...

The guy that bought my house a year ago, has been trying to sell it since May ’07 (after 8 months). He first listed it for $110,000 more than he paid for it. He has dropped the price several tines, but he is now asking for $70,000 over his purchase price.
To be fair, I should mention that he fixed up the place. It looks like he spent about $20,000 in upgrades. I bet he wonders why no one is looking at the house.

Anonymous said...

There’s a homeowner in here (and you know who you are) that likes to think his tax saving are very versatile. He sees the tax deduction as money in the bank, and as offsetting his Federal taxes, and as paying his State tax, too. Very versatile, that tax deduction. He did have a point, though, about moving (not being fun). But I’m glad we sold the old house. We were in it for 10 years and it went up in price (in real dollars) 250%. In dollars, I think I remember it’s about 350%.

Osman said...

Keith, you have to add back a discount rate to get an actual expected decline/appreciation. There's a time value component to future pricing.

In other words, you won't pay $1 today for $1 return in 5 years. You will pay LESS. Traders present value (PV) prices by the appropriate rate. So you have to estimate and add it back to get the actual value.

What's the right rate? Given the volatility and risk in housing at the moment, I would suggest something significantly higher than risk-free.