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Values Have Dropped Only 25% of the Fall Needed to Reach Trend

November 11, 2009

property price index FHFA 1975 to 2009 by NewObservations.netPRICE 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.

Please click here to see charts for each of four data sets at “Property Price Index”.

property price index summary of 4 data sets by NewObservations.net

Michael David White is a mortgage broker in Chicago.

Thanks for carrying the story to:

Automatic Earth

Jesse’s American Cafe

Phil’s Stock World

Reddit

17 Comments
  1. November 19, 2009 11:02 am

    I agree but the only other thing I would add is that I would imagine there was a pretty big shift at some point from 1 income earner per household to > 1. Only a few of my mom’s friends worked when they were young but all the women I know work today. That vast increase in household wealth, even though salaries have not kept up with inflation, has been a large part of the increase in the housing market price bubble…I think.

    • November 19, 2009 4:00 pm

      Sounds reasonable, but the number of defaults suggests debt was issued which could not be repaid. Thanks for your note. mdw

  2. William permalink
    November 18, 2009 7:16 pm

    http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/

    Mo-o-o-om! Jesse is depressing me again! Read: Have Home Prices Only Fallen 1/4 of the Way to Trend?

  3. November 18, 2009 4:05 pm

    Dear Mike,

    It’s actually a lot worse than you’re suggesting, because you haven’t taken into account the Law of Mean Reversion.

    If you apply the Law of Mean Reversion to the above graph, you conclude that property prices will fall to approximately the 1990 level, or about 2-3 times the amount that you’re suggesting. Ishmael makes the same point.

    John J. Xenakis
    GenerationalDynamics.com

    • November 18, 2009 5:37 pm

      The mortgage performance stats are indicative of a fall much more serious than what we have known at this point in the cycle. Thanks for your note. mdw

  4. Daniel permalink
    November 18, 2009 2:17 pm

    Hmmm… Not that I’m trying to be a cheerleader or anything, but this FHFA data doesn’t quite smell right to me. The Shiller 118 yr series makes more sense and fits what I’m seeing in my own market at least (SF Bay Area).

    • November 18, 2009 5:35 pm

      The FHFA is much less inclusive of different properties than Case-Shiller and First American. And the prices in your region or city or neighborhood are much more important than the national trend. Thanks for your note. mdw

  5. Ishmael permalink
    November 18, 2009 11:45 am

    Your analysis seems to predict a drop only to trend line. Ultimately, prices under shoot the trend line as much as they previously over shoot.

  6. Craig M permalink
    November 18, 2009 10:13 am

    Would suggest you rerun your analysis using adjusted CPI data from shadowstats.com or nowandthefuture.com. The implicit assumption in your analyis is the use of the BLS data series, which significatnly understates true inflation.

    • November 18, 2009 5:29 pm

      I would like to do that, but I don’t think i have the brain power. Thanks for the note. mdw

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