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Bottom In Home Prices, a Decade Away

MKC_Global's picture


are an optimistic breed by nature. There are some pessimists (or “realists” as
they prefer to be called) among us; but on balance humans believe in a better
future. This ensures that investment professionals will continue to track
investor psychology for many years to come. When the naturally optimistic
demographic becomes a group of Doom and Gloomers (or vice versa), we take
notice. The same is true for participants in the real estate as well as stock

general public seems to believe the bottom in housing has arrived; however, I
believe no one will make any money on their real estate investments for the
next decade. There may be an exception or two with a fixer-upper or a
foreclosure, but buying a home for your primary residence under typical
circumstances will be a net loser. The real estate market has absolutely no
sustainable drivers for a price floor, let alone price appreciation. With
taxes, interest, maintenance and insurance, you are guaranteed to lose money,
especially when compared to what you could be paying in rent for comparable

In addition
to the typical rosy outlook for the future, humans have a consistent tendency
to only remember the recent past-consistently forgetting important lessons from
history. Home owners and real estate investors alike were all too accustomed to
consistently rising real estate prices until 2006, when the subprime mortgage
issues and real estate bubble began to take hold.

people realize that home prices in the United States have only risen in a
sustained manner twice in the last
116 years. Edward Kim, hedge fund manager of 2GTT, LLC, brought this fact to my
attention and I know very few other people who are aware of this reality. This
data can be found below in the American House Price Index created by Robert Shiller.
Other than the two aforementioned periods, all others have either seen
declining home values or periods of stagnant or volatile prices with a net zero
change. In 116 years, only twice have home values appreciated in any rolling 8-year
period, adjusted for inflation. The chart below shows data to 2006, the index
now stands at about 146 for Oct. 2009.

Shiller House Price Index

determining what the next decade will bring in terms of real estate prices, one
must look at a number of fundamental factors to determine when a major bottom
will occur. In addition to watching the price levels of real estate, we should
also observe the mortgage markets, interest rates, home affordability, housing
inventory, new construction, mortgage applications and the rate of home sales.
Also, following the stock prices of home building companies may shed further
light into the state of the industry, as the stock market proves to be an
effective tool at discounting news and can be a leading indicator of major
industry turns. Determining an accurate view of these aspects should clarify
the future of the residential real estate market.

Builder Stocks: The stocks of home builders have been weak and declining since
August of 2009 while the broad stock market has rallied substantially. When these
stocks cannot keep up with the broader market, there could potentially be a
problem for that stock’s immediate future.

The issues now lay with prime mortgages, as standard 30-year fixed loans are
being defaulted on as people lose their jobs. Home values continue to decline putting
more home owners “underwater”, owing more than the home’s value. Also, adjustable
rate mortgages have just begun to hit their reset dates, forcing the owner’s monthly
mortgage payment higher. This number of adjustable rate mortgage resets will
increase each month until they peak in mid-2011.

Rate of
Home Sales: Moderation in the rate of decline in home sales has occurred,
slowing down into Feb. 2009, but has since picked up. 2008 marked the lowest
number of home sales since 1999; but due to stimulus packages, optimistic
thoughts of a housing bottom and home buyer tax credits, this important factor
has reversed for the worse.

Applications: Mortgage purchase applications are declining rapidly; “cliff dive”
was the comment of one analyst. As of January 2010, the MBA Purchase
Applications Index is at the lowest rate since 1997.

Rates: Mortgage rates are currently very low, and it is a great time to acquire
debt; unfortunately the drivers for higher interest rates in the future are quite
strong. Nobody knows when long-term interest rates will rise, because interest
rates move in very long-term cycles. We will have to wait years for rates to raise,
peak and then decline to meet this
component of the real estate bottom model.

Affordability: With all other criteria being equal, declining home prices mean
affordability is rising. The important question to ask is how affordable are homes and will they get even more reasonably
priced? All the other criteria here suggest they will. The National Association
of Realtors releases its NAR Affordability Index every month. According to this
index (the data is available from 1988); we currently have homes that are the most affordable on record. This index
only once, for one month, dipped below 100 (over 100 means affordable and under
100 means unaffordable). It now sits adjusted at 145 and unadjusted at 176, the
highest levels on record. Only once before has the index ever showed that homes
were unaffordable! Barry Ritholtz of The Big Picture points out, if the index
can’t indicate when homes are overvalued, how can we conceivable use it to
determine when homes are affordable?

Currently real estate inventories are high. In early 2009, Credit Suisse
estimated that inventories would rally to 11 months worth of supply placing
them at the highest level since at least 1988. This is insignificant compared
to the “shadow inventory”. The shadow inventory is comprised of all
properties/units that will be on the market, but are not yet listed. This
number is estimated to be extremely high and is comprised of several items:
bank owned properties (including Fannie Mae and Freddie Mac) that have not been
put on the market yet and the number is rumored to still be growing,
foreclosures in process, new condos in high-rise towers not yet listed and
current property owners waiting for a rebound in prices to sell. Amherst
Securities Group, LP estimates there are 7 million units in shadow inventory or
135% of a full year of existing home sales.

Starts: Since 1959 (with some exceptions), whenever the number of housing
starts dropped below 1,000,000 it signaled at least a temporary low in housing
prices. As of March 2009 housing starts dipped to 510,000.

the rental market will be necessary as well. Currently, rental vacancies are at
30-year highs, depressing rents. If the real estate market cannot make a bottom
due to the consumer wanting to own their own home, it could make a bottom from
an investment valuation standpoint of income potential. Unfortunately, this also
is changing for the worse. As residential rentals rise in number and their
corresponding rents fall, home values themselves must decline to warrant any

A tiny
part of a large series of needed inputs to the real estate bottoming model is
unfulfilled. Real estate, like long-term stock market cycles, takes many years
to play out. I continue to be shocked, as people comment as to why they should
buy a home (or even worse a condo) now more than ever before. I am convinced
that if this data were for any other industry, people would feel the same way I
do. We are brainwashed with the belief that owning your own home is the
American Dream. However, when people are conditioned into believing a home
should be the cornerstone of their portfolio, they blind themselves to the
overwhelmingly negative data. 




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Sat, 01/30/2010 - 21:03 | Link to Comment Anonymous
Wed, 01/27/2010 - 21:10 | Link to Comment Anonymous
Wed, 01/27/2010 - 14:08 | Link to Comment foldvary
foldvary's picture

he huge increase in the money supply will create high inflation just as in the 1970s. The prices of tangible items will rise, including land. High inflation will bail out real estate. Also, the population is growing faster than the construction of houses, which will add to the demand. 

    Wed, 01/27/2010 - 18:19 | Link to Comment Anonymous
    Wed, 01/27/2010 - 19:38 | Link to Comment Anonymous
    Wed, 01/27/2010 - 18:15 | Link to Comment Anonymous
    Wed, 01/27/2010 - 13:34 | Link to Comment Anonymous
    Wed, 01/27/2010 - 13:14 | Link to Comment Anonymous
    Wed, 01/27/2010 - 11:16 | Link to Comment Anonymous
    Wed, 01/27/2010 - 10:06 | Link to Comment Anonymous
    Tue, 01/26/2010 - 03:14 | Link to Comment -273
    -273's picture

    Since the days of cheap oil seem to be a thing of the past, and expensive oil a thing of the future, the car based suburban model will no longer work, as people can no longer afford the long commutes (if they even have jobs left to commute to), so I see very little possibility of prices recovering (in the suburbs) in 10 years, or for that matter for the following decades either.

    Wed, 01/27/2010 - 10:18 | Link to Comment Blindweb
    Blindweb's picture


    Entire areas are going to be wiped out.  At some point I'm going to buy in an area with a strong train system, strong historic water routes, area for localized food production, and not too close to military targets. 

    The outskirks of the NY Metro area may eventually see a rise in prices as people realize the large number of paper-shuffling office jobs and their service support jobs are unsusaintable and migrate out?

    Tue, 01/26/2010 - 03:07 | Link to Comment Anonymous
    Tue, 01/26/2010 - 02:13 | Link to Comment Anonymous
    Tue, 01/26/2010 - 00:19 | Link to Comment Anonymous
    Tue, 01/26/2010 - 00:06 | Link to Comment Anonymous
    Tue, 01/26/2010 - 00:01 | Link to Comment graspthemarket
    graspthemarket's picture

    I wrote about this topic in an article...Here are two paragraphs from it that connect directly to this conversation.  If you want to read the whole thing it speculates about real estate in the "Greater Depression":

    ...Let’s see what happened in speculative housing areas in the 1920s. Galbraith stated, “In 1925 bank clearings in Miami were $1,066,528,000; by 1928 they were down to $143,364,000.” That is virtually an 85% reduction of value of bank clearings. Henry Blodget in Newsmakers wrote, “Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.”

    According to, “Prices in places like Miami, Las Vegas and Phoenix have roughly halved from the highs in early 2006, according to Case-Shiller.” If speculative properties fall more than prices in the 1920s, prices would still require another 80% off of these levels for a total of 90% reduction. To make other areas worse than the Great Depression, properties could fall 50% or more to “stable” areas. To reach these levels, prices still need to fall another 33% from current levels.

    Mon, 01/25/2010 - 23:53 | Link to Comment economicminor
    economicminor's picture


    There is a disconnect between where the income comes from and real estate prices.  Besides real income from value added endeavors which have been devastated by moving production off shore, prices/values are held up by unemployment insurance and pension distributions. Who is it that bought a lot of those MBS, both residential and commercial? The pension funds? And much of the service economy is supported by same pension fund distribution. The retail economy is also being supported by all those who have quit making payments but are still in residence. Once these people are evicted and have to rent and the UI runs out, the decline in RE prices will accelerate.

    Also as this happens, pension funds and annuities will get hammered. As will retail sales and then the stock market as pension funds sell to maintain distribution.   Declining stock values will further hammer pension funds which will further hammer retail sales... as the cycle of reducing the pyramid of debt continues..

    I don't see real estate prices coming back to these levels in a generation or two.

    People talk about inflation but there is only one way to inflate that will affect this dynamic and that is to send huge payments to all taxpayers.. as in helicopter drops. Otherwise, printing money will just go to the speculative banksters who will drive up commodities and cause even more damage to the rest of us. It will also accelerate the decline.



    Tue, 01/26/2010 - 04:06 | Link to Comment MrPalladium
    MrPalladium's picture

    +1000  Spot on connection of all the relevant dots!

    Mon, 01/25/2010 - 23:47 | Link to Comment trillionaire
    trillionaire's picture

    For those that "saw this coming" and sold their house before prices went down, they are under pressure to buy another house before the 1 year tax penalty occurs.  I'm guessing we will see "pops" in the housing market as people are "forced" to re-enter the housing market thinking it is better to own something physical than to pay tax on any gain they incurred and receive "nothing" for the cost of that tax.

    Tue, 01/26/2010 - 02:30 | Link to Comment i.knoknot
    i.knoknot's picture

    good point, but enough folks are pulling outta their IRAs in spite of the tax hit, i'd bet they're doing the same on CapGains rather than be forced into another big risk.

    interestingly, if you are right, it would an interesting graph seeing the sales and buy-backs a year later... when the talking heads declare 'housing is recovering'... it might be folks rolling back in to avoid taxes, rather than any real confidence.

    Tue, 01/26/2010 - 01:03 | Link to Comment Eternal Student
    Eternal Student's picture

    I wouldn't bet on that. Most people won't owe a single cent. The first $250K is tax-free if you're single; $500K for married couples. That covers more than what most homes go for these days.

    If you sold at the right time, in the right place you can buy outright and not owe any taxes.

    Mon, 01/25/2010 - 23:37 | Link to Comment Mr Lennon Hendrix
    Mr Lennon Hendrix's picture

    When rent bottoms we will know how much the houses are worth.  I say we test the bottom of that 100y graph (above).  the stock market is about to be shocked by the housing market too.  numbers are scary folks, and nobody knows!  fan an fred are worthless, sorry 'Merica.  runtelldat!  

    Mon, 01/25/2010 - 22:19 | Link to Comment BigBagHolder
    BigBagHolder's picture

    So I guess this means there is negative inflation, right?

    Im just saying... housing is 1/3 of the consumption basket.

    Mon, 01/25/2010 - 22:56 | Link to Comment ghostfaceinvestah
    ghostfaceinvestah's picture

    Yup, something 2/3rds of American households already own will go down in value, while things they pay spot price for (food and energy) will increase in price, and Bernanke will claim victory over the inflation monster.

    Mon, 01/25/2010 - 23:34 | Link to Comment Mr Lennon Hendrix
    Mr Lennon Hendrix's picture


    Mon, 01/25/2010 - 22:20 | Link to Comment Bruce Krasting
    Bruce Krasting's picture

    I saw one of those rental investment opportunities this weekend down in West Palm. 2 brm main house, two bedroom cottage in the back plus a pool. 1920's vintage. The last guy paid 625k. He put a bundle in it and did a nice job. It is 4 sale at 425k. Looking for a bid.

    At 10 times expected rent it comes to a $300k value. That is something like a cash on cash yield of 5% when all is said and done. So I am a buyer of that nice property should it get down to that level. About a 1/3 of what it was a few years ago.

    This is somebody's nightmare.

    Tue, 01/26/2010 - 02:26 | Link to Comment i.knoknot
    i.knoknot's picture

    calculated risk keeps posting about dropping rents...

    move with your multipliers :^)

    Mon, 01/25/2010 - 22:40 | Link to Comment Daedal
    Daedal's picture

    Bruce Krasting is capitalizin' on a trend that's negatively rising.

    Mon, 01/25/2010 - 22:08 | Link to Comment Quantitative Wh...
    Quantitative Wheezing's picture

    I would venture to guess that real estate prices will never again reach such overinflated levels.  Let's assume that prices will drop 80% from their long will it take to reach 2007 levels again??

    Tue, 01/26/2010 - 02:24 | Link to Comment i.knoknot
    i.knoknot's picture

    never is a strong word. maybe in terms of hours (or gold, etc.) spent vs dollars spent, given the probability of inflation sometime down the line.

    close friend watched his folks sell their home in weimar germany for unheard of high marks only to be buying the proverbial "loaves of bread" with the take a few months later.

    tie your pricing to value, and your point stands.


    Mon, 01/25/2010 - 21:50 | Link to Comment Anonymous
    Mon, 01/25/2010 - 21:27 | Link to Comment digalert
    digalert's picture

    I sold a house last October and got just a little over what I paid in 88'.

    Mon, 01/25/2010 - 21:25 | Link to Comment Eternal Student
    Eternal Student's picture

    10 years? Maybe. I'd say it's at least 5 years. Have a look at this update of the well-known Credit-Suisse chart:

    Notice that we're in the eye of the hurricane. And add 6-12 months to the end of it, since that's typically how long it takes between the Notice of Default, and when the house is on the market.


    Tue, 01/26/2010 - 17:21 | Link to Comment aaronvelasquez
    aaronvelasquez's picture

    The graph indicates no defaults after 2012.  Maybe Credit Suisse believes the world will end with the Mayan Calendar, but it would seem prudent to anticipate more resets and foreclosures through 2015.

    Mon, 01/25/2010 - 21:46 | Link to Comment Anonymous
    Mon, 01/25/2010 - 23:17 | Link to Comment Eternal Student
    Eternal Student's picture

    This is quite true, but it apparently depends on where you live. I've been keeping track of foreclosures in some of my areas, and it's been 6-12 months.

    But, as you point out, the name of the game for the Banks is to keep things off of the books, in  general. This is what the Stuy town foreclosure was all about recently. And there was an identical situation in the SF Bay Area. In both cases, the banks were "working" with the company, just to keep the loss off of their books.

    Thanks for mentioning that.

    Mon, 01/25/2010 - 22:58 | Link to Comment ghostfaceinvestah
    ghostfaceinvestah's picture

    I was gonna say, it is at least two years if you defaulted anytime in the past few years.

    Anyone getting booted after 6-12 months is damn unlucky.

    Tue, 01/26/2010 - 00:03 | Link to Comment Anonymous
    Mon, 01/25/2010 - 21:15 | Link to Comment Gimp
    Gimp's picture


    You are correct, the real estate market is moving like a snail going up a slide. I have been trying to sell two pieces of real estate for two years and am currently asking 1996 prices which has generated some interest. Carrying cost alone has eaten up any potential profit. If all goes well and I sell both properties this year it will be at least a decade before I venture back into the RE market.

    Mon, 01/25/2010 - 21:08 | Link to Comment lawton
    lawton's picture

    There will be about another 20% drop so I could see it being another decade also before prices are as high as today and if we go into a depression it may be another 15 years or more...

    Tue, 01/26/2010 - 00:00 | Link to Comment Anonymous
    Mon, 01/25/2010 - 21:06 | Link to Comment Madcow
    Madcow's picture



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