February 01, 2008

Going right back to where we started - BusinessWeek / Yahoo cover story on expected 25% fall in home prices (hello 2002)


How could people read things like this on mainstream sites like BusinessWeek and Yahoo and then go out looking to buy a home, unless they're doing serious 2000-price-level low-ball offers? Actually, it'd be a good thing to copy this article and submit it with every bid.

Along with the math of course. Something about price to rent or price to income perhaps?

It's the P/E stupid. It'll always be about the P/E.

Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's half-percentage-point rate cut on Jan. 30.

While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.

Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply.

23 comments:

Anonymous said...

It amazes me that there are still dumbasses out there saying -

"der Keith you've been predicting a housing crash for years and it still hasn't happened - har har haw haw - keep renting DOPES!!!"

Then they go out and vote for McCain or Clinton. Just incredible.

bleak said...

Prices (way) 'overshot' on the way up. Can't they overshoot on the way down?

happy homeowner in the stix said...

How could people read things like this on mainstream sites BusinessWeek and Yahoo and then go out looking at homes

I'm looking for one of the major newsweeklies to issue a "housing sucks" story soon. That's always been the classic marker of a top or bottom in any market.

The more people dogpiling on the "housing sucks ass" storyline, the more interested I am in possibly looking around.

Anonymous said...

Those numbers don't sound unrealistic, especially for far out exurbs like those in Stockton, CA and crummy urban centers like South Los Angeles.

But in desireable areas with strong local economies, good schools, low crime, etc, there isn't as much downward pressure on sellers. At least not so much that it causes 25% deflation.

Some places in Oregon, Washington, Utah, and Texas gained last year and are expected to continue gaining faster than inflation (5-15% annually).

Anonymous said...

The black line is BusinessWeek's calculation of the long-term trend growth rate: just 0.4% a year after inflation.

Realtards, or anyone else that talks about houses being a good investment, please STFU!

Thanks.

whitetower said...

Great post David. I regularly have conversations with people about housing and I tell them that housing values will revert to roughly 2000 levels. I even later forward to them data and articles indicating this. They don't believe me or any of the analysis. In fact, most believe that their home has gone *up* in value.

So I give up. I'm just going to pop some popcorn and watch the show and have a good laugh.

Anonymous said...

25% if we are lucky!

Will likely be more in some of the more egregious bubble areas.

True Story said...

A few months ago I tried to predict a 40% drop on craigslist... funny thing, they wouldn't let me post. I know, it's sounds too strange to be true. Try it yourself, it wont work.

Anonymous said...

Here in the OC, prices aren't coming down to reality because they can't. Nobody, including the lender, have the money to cover the short sale.

Therefore, nothing sells. All a big scam, I think. The moneys gone, and it ain't coming back.

The bad news press will fade when people get tired of hearing it. Everyone will get used to the idea that you can't buy or sell a house. It'll be a new form of "debtors prison". Life goes on.

Frank@Scottsdale-Sucks.com said...

I'm sure this kind of MSM exposure will really halt the few offers happening today on for-sale houses.

To anon 12:29, I happen to live in one of the most desirable areas of the country (nation's lowest crime rate + top rated schools), and housing is being hit hard here. Really hard. Down over 35% from the peak and continuing to fall. Keep smoking that crack pipe if you think the crash isn't affecting good areas.

Anonymous said...

People who keep predicting that Texas RE prices will shoot up are fools. The property taxes here are ridiculously high. It's 3.25% in most places. A $500,000 home would cost you over $16,000/yr in taxes. Texas also has the 2nd highest home insurance rates. You could rent a nice house or condo on the taxes and insurance alone. Then factor in the $15,000 of foundation work you will have to do, as Texas clay soil tends to shift under the heavy weight of a home.

Anonymous said...

I happen to live in one of the most desirable areas of the country (nation's lowest crime rate + top rated schools)

------------------

You live in Iowa or Minnesota?

Look it up, you 'tard. California is bottom of the barrel for both crime rate and schools.

HarborView said...

Frank, While I enjoy your your -25%
on Newport Coast call, I don't see it. Please give some examples when you can.

I have lived in Newport for 27 years. Have been through the 80s and 90s busts. I am calling for a 50% price drop, the bottom in 2011.

Anonymous said...

still at fool prices even at 50 percent lower

Anonymous said...

they are all "good" school districts...how else can those leeches stick it to the public

stuckinthecity said...

In Chicago (a "non-bubble" market) a -25% is not enough to line up prices with incomes. Avg hosue hold income is ~$46,000. Med home price is ~$250,000. We are sitting at a dangerous 5.4x pre-tax income ratio for afforability. Needs come down much more.

Anonymous said...

Well let's see the dollar index in 2000 was 120, now it's 75. Sounds like a 40% correction even if prices stay the same...

Anonymous said...

Financials Cause Slide in S&P 500 Profit

With roughly half the companies in the Standard & Poor's 500 having reported fourth-quarter results, banks and brokerage have proven to be the biggest drag on the overall earnings picture. Profit declined 22 percent from the year-ago period for all the S&P components -- but, stripping out banks and brokerages, earnings for the index's component companies would be up almost 12 percent.

He said the fourth quarter looks to be the worst since the dot-com implosion in 2001, when a plunge in profit from technology companies caused S&P 500 earnings to tumble 24 percent year-over-year. This time around, the collapse of the subprime mortgage market is to blame.


They're pointing towards financials as being a drag on the S&P 500, but as credit tightens and consumers are forced to cut back spending, I can't believe the S&P 500 has anywhere to go but down, down, down. No more tapping the home ATM to consume.

Back in OC in 2012 said...

Frank,

You are the one that needs to get the glass d1ck out of your mouth.

I have trolled in Crystal Cove and admired the $2.2M track houses as well, so I am aware of the neighborhood. First exit off of the 73 once you enter toll road land heading South. As a matter of fact, it is really nice down there, you can see Catalina Island from your master bedroom in those houses. Guess what, $2.2M is what they sold for new a few years back. Of course the price is down 35% in your "hood." The current asking price is over $4.0M. Hell, when I was out there looking, they still had undeveloped lots for people to buy in the $2.0M+ range. And guess what . . . in the same subdivision people were trying to sell their "used" houses for over $4.0M back then during construction. So for your most desired neighborhood to take a 35% hit is no surprise, it was overpriced back then. If you question the time frame, you got me . . it was in 04 or 05, cannot remember, I go back every year to visit. My only wish is when I return for good in 2012, your arrogant ass is still priced out. Who knows, I might even be your landlord one day.

gadfly said...

This housing crash reminds me of the story about the courtiers of a medieval King, who went round telling everybody that the King is so divine that he never farts. However the more they spread the propaganda the louder the King farted! Same thing with the housing cheerleaders and vested interests: The more they deny the crash the worse it becomes. It is as if the market is hell bent on exposing them as a bunch of liars, crooks and con men. As the old saying goes, a good name is always better than gold and silver.

Clotpoll said...

A primary residence is a place to live. Period. There is a financial element, but anyone who treats it as an aggressive investment runs the risk of having his head handed to him.

If you want to buy a property that generates a regular return on investment, buy an investment property.

I've told buyers this in good, bad and sideways markets. It is always true, it's a simple statement that is easy for anyone to understand, and it helps an agent like me immediately identify flippers and separate them from those needing a place to live.

Nothing wrong with flipping...it just gets proved time and time again that it's best not to try to turn your potential flip into home sweet home. Something usually goes awry.

Let the market continue to crater. Keep posting your paranoid drivel. You're killing my competition, and I don't even have to lift a finger. Thanks for your help!

Anybody here need help with a short sale?

Bradhart said...

The mainstream media coverage of the housing crash is not a contrary indicator of a bottom imho. The Nasdaq bubble reached bottom in 2003(4 years - 2000-2003), the greater stock market bubble ditto. At that time stock prices were still largely unattractive, we could see a repeat. Markets do not always correct below the mean. My guess is the bottom is not in until the 'investors' are cleaned out. Right now we are watching the second wave of 'investors' jumping into the housing fryer, under the impression that housing is 'cheap' because it is down 15-35%. The investors who got CREAMED at the end of the dot.con bubble were the fools who thought tech stocks down 30% were a bargain. They lost everything.

Anonymous said...

"You live in Iowa or Minnesota?

Look it up, you 'tard. California is bottom of the barrel for both crime rate and schools."

Don't burst Frank's bubble. He, like all Caifornians think their shit smells like roses. In reality, as you very well know, California is a massive cesspool or illegals, gangs, crime, taxes. Take away the nice weather and you're nothing but Detroit.