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Property Values: The Numbers Still Say 30% Down 30% Left To Fall

December 30, 2009

It’s very nice that values achieved a gain of .013% in October, but we still have a 30% fall ahead of us and, as you know, we have a 30% fall behind us. Better send in your mortgage payment.

The S&P/Case-Shiller Home Price Index released Tuesday is up 5.6% from April. Besides the movement up since April, the severity of the annual decline has steadily decreased in the last nine months.

October prices of real estate were down 6.4% from the previous year. January prices this year were down more than 19% from the year-earlier period.

“All in all, this report should be described as flat.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, the publisher of the index.

Average home prices are now equal to prices in Fall 2003. The headline estimate of a 30% fall still to come is based upon a trend line derived from data between 1987 and 2000. The presumption is that the values after 2000 are bubble values and that they should be excluded.

If you think this can’t happen, consider Las Vegas. They have naked dancing girls and values which are still up from January 2000. The gain is all of 5% from that time. Now that 5% up isn’t as good as it used to be over there. At one time our desert community swam in real estate appreciation of 135% from January 2000. Most professionals refer to the Vegas real-estate investment environment as whiplashy.

Some reality does break through the clouds of the economics profession. “Foreclosure and delinquency rates, which hit a record high at the end of the third quarter, are likely to continue to rise, perhaps sharply,” said Patrick Newport, US economist at HIS Global Insight, quoted in TimesOnline. “In addition to this, the inventory of homes for sale remains near record highs.”

Others think the bottom is done and we are moving up from here. “We would not be surprised to see some weakening in prices through the winter months, when demand is generally low and as distressed properties continue to get dumped onto the market,” wrote Michelle Girard, economist at RBS PLC, and quoted in the Wall Street Journal. “However, with every passing month it looks like the bottom in home prices has been put in.”

We are in a Goliath versus Goliath match. The multi-prong attack against falling prices by the United States government includes radical intervention via Fannie Mae, Freddie Mac, FHA, the home-buyer tax credit, the purchase of mortgage-backed securities, the purchase of treasury bonds, and the provision of an equity credit line at Fannie and Freddie — the mortgage monsters who will lose more money than any institution in the aftermath of the financial crisis.

Well, somebody might lose more in some version of an infinite loss in the derivatives market. Maybe Fannie and Freddie can come out ahead – of somebody? We may have even hit a bottom in real estate prices.

With interest rates at zero percent, the people who can borrow borrow for free. If major banks can borrow and it costs nothing, that’s a darn nice way to try to make money by borrowing and buying. Does anybody remember the word “leverage”? Our government policies have replicated the method of creating a credit bubble.

If real estate values don’t return to a norm, which predicts a huge fall, it means that a new breakable bubble is gathering strength. Fraud begets fraud. Only failure will end the fraud. Given the heroic effort required to quiet the current-crisis fear, the failure we are building up cannot be measured. It’s too big to count. Numbers don’t go that high.

Michael David White is a mortgage broker in Chicago.

18 Comments
  1. Jon Kap permalink
    January 1, 2010 6:55 pm

    Excellent website. I agree 100% with your calculations. In my area of Sarasota-Bradenton sellers in the $500,000-800,000 range are still in total denial.

    • January 1, 2010 10:51 pm

      The scariest world in real estate right now is the jumbo-mortgage world. Maybe that’s the new Las Vegas. Thanks for your comment. mdw

  2. JIM permalink
    January 1, 2010 1:08 pm

    Wishful thinking . I believe another 25-40% depending on the area in california ! Ive been investing successfully for 30 yrs . The Obama regime/government has only slowed down the inevitable ! the more they interfer the longer it’s going to take to correct the housing market / economy! Only a real estate agent and or broker would think otherwise ! Oh yes , the NAR too !

    • January 1, 2010 10:48 pm

      It seems impossible that market values can emerge from the world war being fought by Fed and Treasury, but maybe the weight of 129 million housing units is stronger than their machine. Thanks for your comment. mdw

  3. Former owner, Currently a renter permalink
    January 1, 2010 9:38 am

    Since 60 or 70% of the adult population owns a home, falling prices are perceived as bad. For those of us who were lucky or smart enough to sell at the top, or were simply waiting for prices to become reasonable, falling prices are good. All the news focuses on the bad. The housing bust is merely a redistribution of housing wealth from those who got caught up in the bubblicious skyrocketing prices to those who were smart, patient, or lucky. There’s actually no loss at all. It’s just a redistribution from those covered by the media to those not covered. All will be fine!

    • January 1, 2010 10:50 pm

      The more I think about it, the better falling values look. The one-sided coverage saying falling values are a problem is unfair and incompetent. Thanks for your comment. mdw

  4. December 31, 2009 11:37 pm

    Interesting work. Thanks for your comment. mdw

  5. jimperm permalink
    December 31, 2009 11:59 am

    We just experienced the biggest housing bubble in the history of the world. Most people think we will stop at the median. Sorry. We won’t stop until prices end up the same amount BELOW the median that they got above the median. At the bottom, no one will want to buy a house which is the exact opposite of the top. The whole nation will look like Detroit does now. Nature has a way of evening out our ups and downs. Since we just experienced a 70 year bull market in stocks, we will even it out with a very sharp short crash or a 20 year bear market. The jobless rate will go above 25%. (The high in the 30’s) As this bear market is one degree higher than 29-32. If you want to see how this depression is going to be, go into your history books and study the Mississippi Trading Scheme and the South Sea Bubble in 1720 and 1721. Stocks dropped 99%!

    • December 31, 2009 11:47 pm

      People are lying to themselves about the massive nature of our property bubble. I have the long-range Case Shiller numbers elsewhere on this site at http://newobservations.net/property-price-index/
      and you can see that our bubble is far bigger than any bubble in the last 120 years. The one good thing I have started to think about lately, which has taken away my fear of a great fall, is that our country will be much more competitive if home prices fall like a rock. Thanks for your comment. mdw

  6. cogo permalink
    December 31, 2009 10:07 am

    The author is going to be bitterly disappointed as home values flatline (and sawtooth up and down in seasonal swings) for years, all the while that Z line creeps closer and closer til suddenly homes arent overvalued anymore – no drop necessary.

    • December 31, 2009 11:42 pm

      The numbers do talk about where values would be today based upon trends. It may be that the trend is achieved through time and inflation. In real terms (adjusted for inflation), the fall in values should be the same. Thanks for your comment.

  7. zorland permalink
    December 31, 2009 6:05 am

    Your assessment seems fairly honest. I find that refreshing. So used to sales numbers and figures that I can’t tell you how much just a plain statement of facts. Makes it worth reading this. I will bookmark you.

    • December 31, 2009 11:40 pm

      I try to follow what the numbers say and not what I say. Thanks for your comment. mdw

  8. Liam Palmer permalink
    December 31, 2009 4:17 am

    Michael,

    Nice article..except the basis for the trend. Sorry…don’t get it. There were two housing bubbles during the time you chose to use as “normal”…1989 and by 2000 there was a second bubble. In such a cyclical market you need a hypothesis to work off rather than just time series “eye balling” – try taking out inflation then trending gdp, earnings and leaving in the time series eyeball. Having done this for the UK I think you will find that illuminating, as well as giving a very clear view of what cheap looks like.

    Liam

    • December 31, 2009 11:39 pm

      I would have used more data if I had a longer historical series. I have been working with the four leading data providers on house prices. The trend shown here is very similar to what is shown by the other three number sets. Check it out if you like at: http://newobservations.net/property-price-index/
      thanks for your comment. mdw

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