A silver lining in some brutal Case-Shiller numbers?

The first wave of problems in the housing market to affect prices in the Boston (and surrounding) area were the sub-prime markets or not so affluent neighborhoods. Now the next wave of problems in the housing market is going to be hitting in the jumbo markets. Think that isn't going to continue to have a dramatic affect on the local RE?

Couple of interesting things:

I was looking at the Case-Shiller numbers and did some acalculatin' (always an adventure). Calculated Risk (as always) took the index and posted a wonderful chart showing the rise and (ongoing) fall of the bubble. It clearly shows that 1997 was about when prices started taking off. I have to assume this is at least partly why Hung keeps saying we'll revert to that point, and who's to say he's wrong? But unless I'm miscalculating, according Case-Shiller that would mean another 49% drop in prices from April (CS of 75.73 in April 1997; current is 147.61). A 49% drop from here is a big, big number, and I can't help but have my doubts about that. For one thing, even at historically normal rates (i.e. just over inflation) prices would have gone up since 1997, so it would definitely be north of there. I'd say though, if you think of 1997 then add historically normal appreciation, you might end up somewhere 30% south of here. Here's how I broke it down:

A 49% decrease would bring us to April 1997 (75.73)
A 30% decrease would bring us to March-April 2000 (103.33)
A 20% decrease would bring us to January 2001 (118.09)
A 10% decrease would bring us to March 2002 (132.95)

Also, there's a Deutche Bank analysis put out in June that examines the housing market and makes some predictions. The short story here is that they see Boston-Quincy area dropping another 10.4% from here, with a total peak-to-trough of 34.4%. Regardless of whether you believe that, the entire thing is worth reading. The thought is nice (only 10% lower, yay!), but I'm cautious. This crisis has been thusfar paved with authoritative-sounding predictions that have missed the mark.

Is that really good news? From where I stand (buyer side) I'd like to see my graduate degree be capable of paying for a decent house rather than a dump (without requiring hours commuting each day). I'm a fan of the Boston area as much as the next guy, but c'mon, we ought to have some expectation of getting into the market as a young professional! If I were on the sellers side, I wouldn't necessarily want to see slow and steady declines either. I'd want the bottom to fall out, then see sustainable (real) growth in the market. The uncertainty of where we are even GOING is a big costly drain. All of these stimulus packages are just delaying the U.S. from operating in an open and free market, and are giving a false hope of turn-around. Cash hand-outs, or credits, are just a parachute to slow the fall and can't be permanent. I think it's unrealistic for Uncle Sam to cough up $15K for every home purchase, as one Senator is proposing. I don't even want the current $8K back as a tax credit. I want to see un-propped fair market value. Low interest loans are one thing, but subsidies to give the illusion of "business as usual" cannot be long-lived.
Thanks for Hung, Charles, Lance, and others for cheering for traditional pricing. I look forward to a starter home available at a starting salary. As soon as this is possible, I'll hand over some of my cash.

Obsessing about price fluctuations on a 1% scale seems kind of silly. A house that sold for $500k a year ago would now go for $415k instead of $410k? This is good news? Seems like it still means "housing prices are in freefall" either way.

In Boston, most of the middle-to-high end places aren't selling (or even on the market at all) right now, which C-S does a good job of correcting for. But it doesn't take into account the built-up inventory of unsold (or unmarketed) homes. Between "lost job" foreclosures, "lost 401(k)" downsizing, and the normal "I need to move" forces, those places will come back on the market at some point. When they do, don't be surprised if C-S numbers keep falling while median sale prices rise.

yeah, it was funny how even the financial press looked so hard for a silver lining by focusing on monthly numbers in what is EXPLICITLY a year over year metric.

And of course, as Scott said, a difference of one percent is meaningless. The market is still dropping steadily. Yes, it is dropping less in Boston.

But too much attention is paid to the speed of the drop, rather than where real estate prices will end up, which is where they reflect fundamentals - ie employment and peoples incomes.

Put simply, no matter what sellers want, prices will continue to drop until people can afford to pay them with "regular" loans. The premium that was attached to the funky credit practices of recent history will never be returning.

What is that price? Probably 1996 prices compounded by the intervening inflation rate plus the real rate of return on residential real estate - around half a percent. THough possibly less - look at income growth since 2000, thats a hideous number. To the extent real estate tracks income growth the real rate of return may actually have decreased lately.

The optimistic view is that the rate of decline in US house prices has reached an inflection point. From this point forward, news will still be bad but will be increasingly less bad. This is good news because it means we are roughly half way through the correction... So if we are at the half way point-- and prices have so far dropped 33%-- how much farther do prices need to drop before the correction is finished? (Rhetorical question... No need to answer).

The more pessimistic view is as follows. When interpreting these so-called positive data points, keep in mind they are occurring within the context of the largest economic stimulus in history. It is entirely possible that the deterioration in housing actually accelerated, but that the effects of the stimulus spending masked the data. Consider this... The US taxpayer injected around $4 trillion dollars into the economy over the past 8 months while the Fed effectively dropped rates to 0%. In a normal market, this would cause asset prices to skyrocket. But this is not a normal market. Current conditions are so bad that the net result was that prices “only” fell by 18% instead of 19%. While this fact is by itself astonishing, the really interesting question is what happens now that the bailout money has mostly been spent? Price declines may very well begin to accelerate once again.

In terms of the national housing market, I lean more toward the optimistic view. But for the local Boston market I believe the worst is yet to come. The correction in Boston is happening very late. Therefore, we will probably miss out on most of the stimulus efforts (artificially low rates, easy access to agency backed credit, first time home buyer tax subsidies, etc.) that are propping up other markets around the country to some extent. When the Boston market crashes there will be fewer safety nets. That said, I don't believe Boston will see the same 60-70% drops for which certain parts of CA, AZ, FL are now on track. But I would not be at all surprised to see a peak-to-trough price drop of 50% or more.

Regardless of which view you take, the correction is no where near finished. Further substantial price declines are inevitable.

Like most things in the highly segregated Boston area, the averages don't tell the true story. Yes, the average declines in the Boston metro area are relatively low, due to the abundance of affluent neighborhoods where people simply refuse to sell when the prices get too low.

Look at some of the less affluent areas (Chelsea, Revere, Lynn, East Boston, Dorchester, etc.), and you'll see a completely different story. These are also the areas where people can least afford to be burdened with an underwater mortgage, so please don't mislead people with disingenuous stories indicating that "we in MA are immune".

Yes, It's the affluent areas that are showing to be immune. That would include downtown areas like the Back Bay, South End, etc. Maybe this is the case in areas/cities outside of Boston, too.

As many have mentioned before, though, intuition and an understanding of basic economics would lead one to believe that in the long term the affluent areas may be more "buffered" than "immune". If this downturn still has a few years left in it, even the affluent areas will eventually succumb to the basic laws of economics. Prices in those areas just don't respond as quickly.

It could also be the case (as others have mentioned), that the more foreclosure-prone areas may already be fairly well corrected, whereas affluent areas may continue to correct slowly for a while longer.

Lance, only a small percentage of the stimulus money has been spent. It will only start kicking in for real about now and continue through the second half of the year. I'll give you, other things like intentional lowering of mortgage rates have been happening for awhile, but not the stimulus package.

accidental landlord: I think the Case-Shiller numbers are NOT adjusted for inflation, so a C-S value equivalent to 1997 would be a bit higher than the 1997 value itself.

accidental landlord (#10): Most of the stimulus money to which I was referring was not the "official" stimulus. Rather, I was referring to the much more substantial sums of money spent on indirect/implicit subsidies which include backstopping large banks and bank creditors, taking Fannie and Freddie into conservatorship, bailouts of AIG and major banks, and 0% interest rates. (I admit I didn't do the math myself but the estimates I've seen for these numbers have been in the $3-5 trillion range). As is often the case in the game of politics, the amount that is said to have been spent is MUCH less than what has actually been spent. Additionally, I forgot to mention the foreclosure moratorium. Just wait until the backlog of distressed properties hits the market... Look out below!!!

#11: Thanks Nick, but I'm not sure I understand what you mean. Are you saying that you need to start at the 1997 number and then account for the 1997-2009 inflation to get the right number? If so ok, but that's no one's made that clear.

A popular measurement of inflation is the "CPI" -- Consumer Price Index

In April 1997, C-S was 75.73, and the CPI-U was 160.2. Current C-S is 147.61, and May 2009 CPI-U is 213.856, so C-S has increased by 95%, while CPI has only increased by 33%, since April 1997.
(search "cpi table" to get these numbers)

For today's C-S to match April 1997 after inflation, we should expect that C-Sold / CPIold = C-Snew / CPInew. To see what today's 1997-equivalent C-S would be, we should insert the other three values into the equation and solve for C-Snew: 75.73 / 160.2 = C-Snew / 213.856 --> C-Snew = 101.1
So this says that for today's C-S to be equivalent to April 1997 after counting for inflation over the last 12 years, we'd need a value of 101.1, which is 36.8% below the current actual value of 147.61.

In fairness, I actually think unadjusted 1997 numbers would be too low, though we might overshoot and hit them. Things have changed in Boston post 97, and there is some real rise in prices attributed to that. I have no real idea of how to calculate it, so I'd start by doing inflation plus .5 as I said above (and accidental landlord had already put in the queue).

Then certain neighborhoods have changed - I was buying in the south end in the 90s, I've certainly noticed the changes. It clearly should price higher than 1997 (even in 1997 I thought it was underpriced)

And of course, as is oft mentioned, the boston market is heterogeneous. I don't follow revere et al, but I wouldn't be surprised if they've mostly corrected. Whereas the south end has not really started to correct. And I'm sure that's true of Newton as well.

But by the end - guesstimates here - I'd expect to see south end one bedrooms in the 250-350 range, and family houses in Newton in the 600-700k range. To give context, in 1999 140k would buy a nice one bed in the south end, and in 2005 it was closer to 500k (and yes I'm thinking specific examples)

What the housing bulls have to realize is that housing has gone through an insane bubble, and the correction will appear "insane" as well for those who see wealth/debt (depending on your leverage position) change. Historically subsidies (of which there are now an amazing number) have failed to influence markets.
We have to keep in perspective that markets have a way of overshooting to levels
(on both the upside and downside) that can seem totally incomprehensible. We have not seen an overshoot to the downside here at all. I implore posters here to ask themselves candidly, what really caused housing in Boston to go up so much
and you will have your answers for why it will drop as well. Did incomes soar? No.
Did the area incur a surge in population creating true demand? No. Did housing become the investment vehicle of choice? Yes. Was a ridiculous amount of easy
credit/leverage involved? Yes. Do houses provide any real investment merit? No.

Brilliant, thanks Nick.

Lance (#6) that's because much of the stimulus/bailout has gone to the government's banking buddies so that they can appear solvent. Commodities have also been a beneficiary of the massive inflation. Oil isn't at $70 a barrel because the economy has healed, it's at $70 a barrel because people that understand that massive inflation is on the way, want to own real assets.

Normally, real estate would benefit from high inflation, but because we just had the biggest real estate bubble in history, and bubbles don't re-inflate, housing will miss out on this round of inflation.

While monetary expansion usually leads to across the board price increases, it's not unusual for an asset class bubble to form. The massive monetary expansion in the mid 90's led to the Dot.com bubble; the massive monetary expansion in the early 2000's led to the housing bubble; the massive monetary expansion currently happening will lead, most likely, to a commodities bubble.

Lou, are you saying inflation, massive or otherwise, would have no affect on house prices?

But just on inflation, lots of big deal brains seem to be weighing in on this. So far the people I generally trust on these things (Krugman for example, or Janet Yellen at the SF Fed, or Bernanke himself) say inflation is not an immediate concern. The reason being that the money flooding the system ain't ending up as purchases. It's sitting in the banks, or in people's savings accounts. It's not going toward investment, and it's certainly not going toward wage increases. I don't see how any of these things will change anytime soon, and it seems to my layman's brain that prices cannot increase unless enough people buy stuff to drive up the prices. Right? Am I crazy?

So the argument goes that inflation is a long-term issue, and we will need to drain the excess money out of the system at some point, but we're not close to that place right now.

Spot on accidental. You're not crazy, however the media and government can't seem to comprehend this...

accidental,
I think it's clear that monies that have flowed into banks are being saved for the next storm in treasuries and being used to pay operating expenses for the thoroughly dead banks.