The New Observations quarterly forecast of property values estimates a loss in values this year of 13 percent – a slight uptick from the 12% loss forecast at the beginning of the year.
The average of four major nationwide indexes measuring prices also continues to suggest we hover right around a middle point of the total loss expected. Our current loss by the average of four indexes from the peak in 2006/2007 is 20 percent. The total loss forecast by the blend of indexes is 33 percent.
The losses for this year projected in the four indexes vary widely and range between 3 percent and 24 percent. The indexes predicting large losses this year are biased by quicker and deeper losses which they registered following the peak. The variance between the indexes is demonstrated by a tally of current losses: It is only nine percent according to the Federal Housing Finance Agency (FHFA), but it is 30 percent at Case Shiller.
A chart of all four data sets follows.
PRINT new observations forecast of property values
Please forward your questions, comments, and corrections below or send me an email — mike@mynewmortgage.com
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This comment is about your article about mortgage applicants who lied about their income. I don’t think most mortgage defaultees know enough about the ratios to lie appropriately about their income. However, I did talk to a former Countrywide mortgage broker who told me that once when a couple was leaving his office, his manager stopped him to ask if he sold them a mortgage. When my friend answered “no, they didn’t qualify”, his manager told him “make them qualify”. So, I think the blame rests almost entirely on the mortgage originators. And, most of the people who defaulted were too innocent to understand what went wrong.
Hello Susan, there is a lot of fault to go around. thanks for your comment. mdw
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To PhilBest:
I hate to burst your bubble, just had to say that, the reality in Arizona is that there was and is a vast expanse of available land with very limited government intervention in the building process.
My observation on how and why the real estate bubble had different effects in different markets could be traced to the size and moral attitude of a community. The smaller the community or market, the less “special and creative financing” was utilized. Whether it is a moral issue or the local knowledge of wages which restricted the use of “special or creative” financing is up to your individual interpretation. I would submit that in a smaller market the prospect of a convenience store clerk making $6,000 per month would be rejected, this was not the case in larger markets.
With over 85,000 vacant living units in the greater Phoenix market, the Arizona bubble has yet to meet the supply/demand or the income/value level necessary to stabilize the real estate market. In normal markets wages and investment dictate the value of real estate.
When the focus is on producing homeownership for everyone and not insuring the repayment of loans, artificial bubbles will be the result.
Analysis of local income levels and the availability of capital will dictate the value of real estate.
Hello John, you have my vote. the loss of a tie between income and access to debt is the definition of a credit bubble. we are in a credit bubble and it hit high-regulation and low-regulation geographies. thanks for your comment. mdw
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It is very, very important to run this sort of analysis for your own area. USA-wide aggregates obscure the wide variety of local conditions. A lot of the USA did not have much of a bubble in the first place, therefore there is not much of a fall needing to occur in those areas.
But the worst bubble areas are actually much worse than the USA Aggregate, which is actually smoothed out by the many stable markets.
I recall that the “New Geography” web site occasionally posts Case Shiller Index graphs covering selected individual States so as to illustrate this.
The factor that explains the difference is extremely basic. Any city with weak development restrictions and weak or non-existent “Urban Limits”, did NOT have a housing price bubble. House prices simply cannot go up much when there is plenty of land allowed to be built on, at prices of $5000 per lot for the raw land, and about $25,000 for developed lots. This is because this IS the going rate for farmland. But where there is an urban limit, the price of the land will go “bubble” inside the urban limit, and the rest is history.
Hi Phil, there’s no question that local analysis of price trends is critical and that areas where development is difficult have higher housing costs. thanks for your comment. mdw
Hey Mike, I really like your commentary.
I know someone who worked at Freddie Mac in the early 1990’s. She said that they had a mountain of data going back over 100 years on what the sustainable mortgage payment to income was. It was 28% , which leads to the old rule-of-thumb that a person should only buy (be allowed to buy?) a house that costs approximately 2.5-3.0 times income.
During the early-mid 2000’s, these Alt-A and Option ARM loans, plus all the underwriting fraud ( no documentation of income, etc ), allowed some people to “pay” 4X-6X income for a home. Of course, we now know that they can’t pay off a loan of that size. Some of us knew it then too..
So, my opinion is that over time, prices will fall back to 2.5-3.0 times income. This will be a difficult wake-up for many people.
RE: inflation the Gov calculation has been manipulated over the last 30 years, but this fellow publishes CPI as if it were calculated the same as in 1980. Very thought-provoking…
http://www.shadowstats.com/alternate_data/inflation-charts
Hi Chuck, I have been meaning to look at income and price. You have just given me a good start. thanks for your comment. mdw
Why wouldn’t the bubble popping continue downward past the historical trendline much like a sine wave? A kind of pendulum-esque move with the prices then moving back upwards towards the mean. With a deflationary spiral you would expect some sort of ‘over-correction’ wouldn’t you? Looking at the values line it seems that’s exactly what it’s done previously – just not as dramatically peak to peak.
Hello Guy, i haven’t studied bubbles but i have seen a lot of pictures of them. it is typical for them to fall further than the “normal” value. so we have to assume that will be the case here as well. Thanks for your comment.
If the cost is 1990 prices plus inflation — what is the % of inflation since 1990 based on a house of say $500,000?
Best, Phil
Hi Phil i don’t know how to calculate that one. Thanks for your comment. mdw
Aren’t these figures quite skewed by the singular gross variations in areas such as Phoenix, Orlando, Riverside, Las Vegas, Detroit, etc.? For example, I don’t see this degree of damage to property values having already occurred – or eminently occurring – in either the Pacific Northwest or some areas of the midwest (Kansas, Nebraska, Texas, and Oklahoma), where prices have only come down by small percentages and are now inching upward. Do you agree? I would love to hear your comments on this.
Hi Carol, All politics and real estate prices are local. There are national trends. They are magnified by markets which went crazier than the others. My personal bias assumes that we will have losses which take us back to @ 1990 plus inflation. That’s my rule of thumb. It is based on the work of Case Shiller and their comments about a 120-year trend in property prices. If values where you are buying or selling are close to 1990 plus inflation, then history says that prices are stable. If that doesn’t answer it, please forward another question. Thanks Michael