A market that has even Karl Case stumped

At this point, Karl Case is about as credible as the NAR.

Every time he opened his mouth in 2008, he was calling a bottom.

May 9, 2008
According to Wellesley University professor and housing market guru Karl Case, that may very well be the situation we are seeing. The historical trends and demographics of new home starts and sales data are showing what has in the past 40 years show the bottom of the housing market.

July 16, 2008
"I'm beginning to hope that there are going to be some surprises in the next few months that would indicate we are at or near a bottom in probably a third to half the country," Case said.

Sept. 15, 2008
Wellesley College economist Karl Case, the “Case” in the widely followed S&P/Case-Shiller index of U.S. housing prices, says he thinks that the housing market may be near a bottom.

“…the relationship between incomes and home prices has neared a level seen at the end of past housing slumps.”

I guess he figures if he keeps calling a bottom one of these times he’ll be right.

where is the evidence that the median income/home price ratio is back to historical levels? In Massachusetts? What is that level?

Anyone with links?

my thoughts exactly antigravity, Case denied there was a bubble until it became too obvious. He along with the NAR are perennial bottom-callers, and his argument that we are levels representative of historical, cyclical bottoms is ridiculous. We have had zero wage growth, tightest credit guidlines in 15 years, OCEANS of inventory, as well as a consistent month over month increase in foreclosures,and subsidies out the wazoo. Again, I implore any one here (including Mr. Case) to tell me what the engine will be for higher housing prices in the US in the next ten years.

I saw that, and found the stuff on affordability a bit conclusory. What is the evidence for affordability?

The other indicators suffer from classic selection bias - they all took place during the long post 1970 bull market. This is discussed rather extensively these days in general securities analysis, I'm surprised Case didn't refer to it. I'd be more convinced by longer data sets, that don't assume this is a normal recession - granted it might be, but the evidence points the other way

Over the past year and a half, I got the impression that Case was playing good cop to Schiller's bad cop. One handled the optimistic PR (too tempting to employ a double entendre using "bull") while the other took ownership of the bear PR. This way, the Case - Schiller organization doesn't risk its influence and expertise by going all the way out on a limb.

Home prices are going up on average $500 in 2009. Thanks to the stimulus package ; )..Seriously, does anyone like the idea of a $500 tax rebate check? Will that stimulate anything? Couldn't the US create thousand of jobs with the $B's tagged for this rebate? Add some optimisim to the job market so that not every living worker in the US is not fearful of losing their job? Isn't a one time rebate very short sited?

The Annual Demographia International Housing Affordability Surveys (www.demographia.com) illustrate clearly the degree of housing bubble value within each major urban market of the English speaking world.

Housing markets restore affordability, when they are at or below three times annual household income. It is clrar by this measure that there are many United States urban markets that have some considerable way to go before reaching bottom.

Hugh- Build a house for 3x median income and then come talk to me...also in modern time, houses have grown in size by 50%...so of course house prices would rise on average, because they are bigger...people live in too big of homes today...it is not just simple 3x median income...if houses got smaller and with lesser improvements/upgrades (granite, HW, stainless etc...) then prices would have been on average less...if homes could only be 3x income, then no more houses would ever be built...then when population rises, demand would surpus supply....and you can take it from there...there is the very simple fact of what a house is worth in regardto material and labor, and land...it is simple accounting...not everything is macroeconomics...

Bill - simple accounting? Did material and labor go up 80% in MA from 2000 to 2005? Or 170% in CA in the same period? Or was it something else? What's all this talk about the bubble then if it is all a simple function of material and labor going up? I wonder why people stopped buying so abruptly in 2005?

bill - exactly, houses should be smaller and with lesser lesser improvements/upgrades. 3-4x median income ratio will bring us to cheaper "average" house. material and labor will eventually be cheaper too - otherwise all industries related to building should stop their activity - will never happen. land could be cheaper too, as well as other assets. microeconomics is a part of macroeconomics...

bill - exactly, houses should be smaller and with lesser lesser improvements/upgrades. 3-4x median income ratio will bring us to cheaper "average" house. material and labor will eventually be cheaper too - otherwise all industries related to building should stop their activity - will never happen. land could be cheaper too, as well as other assets. microeconomics is a part of macroeconomics...

Um bill, that's simply and utterly wrong. Everything actually is economics - certainly everything economic is!, and yours make no sense (micro, btw, not macro in that usage).

Or look at history - you can find a gazillion examples of things selling for less than there build cost.

It doesn't matter if houses are bigger, and have granite countertops, if people can't afford them. People must be able to pay for a price to exist. True, the thing must also exist for people to be able to pay (ie supply). Economics is simply the description of how that process arrives at a price.

I'm not even going to get into the distinction you made between economics and accounting, but I certainly find your usage equally curious.

Case-Shiller uses same-house sales and accounts for upgrades and "granite countertops."

To bill's point--to the extent I can figure out what it is--the building trades in MA have been overpriced, because their pay came from the same cheap and loose credit that bid up housing. That's over now. The small remodeler has purchased his last Lexus.

once again, the folks attacking me are with the wrong examples...I did not say (EVER) that the cost to build a home went up 80% since 2000...I have 100% agreed that prices went up too high over the last 8 years...let's end that discussion…it does cost $50K more in labor costs to build a modest home in MA than most other states...that is a fact...I am all for cutting labor costs in MA for construction workers...please show me figures that say otherwise...the sources that I have googled, have all concluded that....

what I am saying is that price of a home should not drop below the reasonable cost of building a similar home…at least for any real length of time...how many stocks sell for below ‘book value’ for very long?

What I meant by simple accounting, is the simplistic view of looking at an asset at its book value…what an “accountant” might do….which is almost never higher than its true economic value…accountants and economists are like night and day on a lot of things…

I think my friend Stephen Entin describes it best:

Definition: Accountant (n.); a manipulator of business statistics whose robotic behavior leads impartial observers to assume that he lacks the imagination and personality to be an economist.

Definition: Economist (n.); a personality whose manipulation of business statistics and imaginative observations about human behavior reveal a lack of impartiality and accountability.

And I will reiterate that 4 to 1 ratio has been the average for most of my life time...and most of that time interest rates 50-100% higher than today...it was 3.61 in 2000, which is closer to 4 than 3…and that was after 10 years of almost no inflation of housing prices…
The word economics can be used very loosely to describe a lot of things…I took a class in high school called ‘Home Economics’…Was I surprised when I found out that is was a cooking class and not a class on the valuation of a home? 2 guys and 20 girls in that class ; ) Hmmmm. Who was the genius?

ps- BS Economics, Minor in accounting. MBA. I am pretty sure I know what micro and macro economics mean...as well as accounting...Thanks though ; )

thank you for defending me Marcus...I think...; )

Bill,

In an effort to clarify, I'll quote.

what I am saying is that price of a home should not drop below the reasonable cost of building a similar home…at least for any real length of time...how many stocks sell for below ‘book value’ for very long?

I think you are making some assumptions about book value that are questionable (ie asset prices can't ever go down, so they can never go down) But I completely disagree with you that the cost to make something sets a floor under its price. Neither theory or history holds that up.

Under that theory, a 2 month old used computer is worth the same as a used computer, as the cost of construction has not gone down. Or a 2 month old used car. Clearly not the case.

As for your Economics BS, Accounting Minor, and MBA, I congratulate you. I don't really think I can say much more and keep in the reasonable spirit of this blog. Clearly I was wrong in thinking you were an English major, specializing in the works of Faulkner and Joyce. I wasn't aware from your usage that you knew the difference between macro and micro, I apologize.

I'd certainly agree on Mass building trades being overpaid, though to add to Marcus' usual excellent analysis of the demand side I'd throw in the supply constraint of the big dig.

there is plenty of inventory selling well below replacement cost in FL, CA, AZ, and NV right now....

With regard to the build cost....................Houses depreciate just like any other asset. Just because it costs 250k to build a 3 bedroom colonial doesn't meant that every 3 bedroom colonial is selling for over 250k.

Charles-I don't believe I said all assets...in your example theory, then houses should never have gone up in history...real or not...the Victorian built in 1865 should be free....

If Economics was such a pure science, then why does every professional economist have a different opinion on the state of the economy?

I don’t believe that there is some magic math formula that computes the answer for the market....unfortunately, there is too much manipulation...government and otherwise…
I am very curious how America and the rest of world are going to address the costs…I know Obama will not create any policy to lower the American’s wage…at least not intentionally…

In the past we had…the 1990’s had cheap labor from China…turn of the century brought us the inventions like the assembly line…Industrial revolution brought on child labor…slavery etc…

You can call me ignorant, but all I see are signs of governments printing money…and I am guessing there are a lot of practicing economists that must be of lesser intelligence…

thanks for backhanded congratulations...I thought this was a blog and not a writing forum…

Lets just revert back to the gold standard and call it a day

Bill - most Victorian built in 1865 are actually free, they do not exist anymore. We still have land which does not depreciate, and new houses, if built. Many of still existing Victorian have a really small value, their maintenance is very expensive what affects value too. However, price for such houses can be high since most of them have an excellent location.

So, house value eventually goes down, faster or slower, while actual price might go up or down.

Bill, I'm sure the ways in which economics is valid and useful, and the ways in which it is not, were covered in your economics degree.

Economics is of course neither completely perfect, no completely imperfect. Its in the gray area like most things in life.

Printing money is of course the standard approach to a deflationary environment, as you recall.

I'm not clear on the relation of the Industrial revolution bringing on child labor and slavery to this blog. (In fact, the pretty much universally accepted take is that the industrial revolution undermined slavery, but I still don't see the relevance to real estate)

no sense debating single minded views...I didn't realize the real estate was the only thing that has gone up in price...and there are no other products associated with contructing homes...my bad...

You have thouroughly convinced folks that a well maintained still standing victorian is worthless...good job...

There is a color between black and white. I call it grey. Just saying...

You seem fascinated by home construction. I like it too, having built some. And in fact have some of those products. But I can't for the life of me figure out what you are saying - is it that my nailguns are built by child labor? I certainly hope not, and don't think so.

For the rest, I fail to get your point I fear. Could you explain more clearly?

using the "cost to build approach" is seriously flawed at this juncture. All of the components of "cost" lumber, copper, labor, etc. have plummeted in price over the last twelve months. The real value of any pice of real estate has always been in the land, not the structure.

Some homes within the 128 belt are updated and some are tired. This skews the numbers and for the case of buying a tired home the hourly wage of contractors matters as well as building materials. If you want to find cheaper house lots you need to find land near newly constructed or proposed commuter rail lines. A smaller home with a poorly insulated envelope performs worse than a much larger home with a properly built envelope.