A chilling prediction on home prices

"To say that we’re only half way through this sounds pessimistic"

To imply that something is wrong because you don't like hearing it sounds like denial.

Another 25% drop in prices (inflation adjusted) is a no-brainer. Higher-end markets will see even worse declines.

"Now that's one scary prediction."

Really? It's scary that prices are correcting and returning to agree with economic fundamentals? Scary that median home prices might just align themselves properly with median household income?

That doesn't sound scary to me. Sounds more like the real estate market coming out of denial.

Since every local market -- and even, to a lesser extent, tiers within local markets -- rose to different peaks and is being corrected at different rates, pinning down a single number for the percentage of future declines for everyone is difficult. But, based on my layman study of the Case Shiller (non-seasonally-adjusted, aggregated tiers) trends to-date, the Boston market appears to be heading for a 29% drop over the next year. Of course, if the buyer-seller stand-off is prolonged or more government intervention is introduced, a lesser correction could be extended to a later date.

Hopefully, the Government will stop interfering with the needed correction with things like the $8K new buyer program.

Zillow seems to say otherwise. Two months ago, my wife and I bought a house and now it's valued 10% higher than we paid for it.

This "gloom and doom" sensationalism in the media has got to stop. The bottom is over.

Meredith Whitney? Who's she? Not like she's the most accurate banking analyst out there... oh, wait a minute. She is.

Of course, I agree with her, which is no surprise - we are all crunching the same numbers with the same tools. The surprise is how many people are still ignoring the data

It comes down to fundamentals:

INCOMES have not kept up with the price of housing over the last 10 yrs, so either incomes rise to meet housing costs, OR housing costs come down to meet incomes. This recession has basically put to rest ANY hope that people had (during the boom) that their incomes would rise substantially.

AND

Supply and Demand: During the boom, buyers were tripping over themselves to buy, because they "knew" that prices were going to go up. Now all those sellers with ARM's/Option ARM's are going to be tripping over themselves to try and sell before their rate re-sets in the next 1-3 yrs.

I would expect that in MA, the drop will be another 10-20%, depending on location, over the next 2-3 yrs.

Ah yes, all of us doom and gloomers should really learn to stick our head in the sand and pretend everything is A-OK.

In other news:

"About 2.5 million Americans slipped below the poverty line as recession and layoffs hammered the economy last year, driving poverty to its highest level since 1998, the U.S. Census Bureau reported Thursday.

The annual survey showed that more than one in eight U.S. residents - 13.2 percent - are living on less than $10,991 for an individual - slightly more than $200 a week - or $22,025 for a family of four."

Whitney was mostly ignored when she predicted the financial disasters of Bank of America, Citibank and Lehman. Merrill's CEO basically ignored her questions about their asset values only weeks before those assets were sold for 22 cents on the dollar. I can certainly see why S&P would want to dismiss her as a pessimistic. She's always digging around in those irrelevant details about how someone can pay for something and stuff.

It really makes no difference to me. Let them fall 50%. The only person that really wants to own my awesome home is me and my family. If prices crash, I'll let it go into foreclosure.. that means one year of no mortgage payments, and then I'll give some money to my extended family.. and we'll win it back at auction. If prices go up, thats good too. If rates go down, thats great. Its a win - win - win.

Over the last 10 years, the US private sector has lost 203,000 jobs. Ten years, ZERO job growth. [In the 1940s, 10 million jobs were created. In the 1990s, 19 million jobs were created. During 1970s (hardly a booming decade), almost 16 million jobs were created.]

Adjusted for inflation median household income went from $51,295 in 1998 to $50,303 in 2008.

So.....ZERO job growth and ZERO income growth in the last 10 years. Yet.....we had the biggest run up in home prices in US history.

Ahhh....who needs fundamentals?

I could not disagree more with her for the greater Boston area. Most people are employed, innovation and new technology will drive new start up businesses that will add positively to the economy and the great majority of residents do not have to sell and will sit tight. A few more percentage points drop in price, but no more. Homes dropped have enough in price that people are already buying again. A greater concern next year will be inflation as low interest rates stoke the economy (the majority of the stimulus $$ are yet to be spent).

I am totally in synch with Whitney's prediction. And I agree with one of the above commenters: what is scary about housing prices coming down to earth so that the average person can actually afford a home?

If you're hoping to buy a home in the near future(read: next 3 years), don't get too excited. The houses that usually come on the market due to "yuppie upgrades" just aren't going to happen - those homeowners are sitting on big mortgages. Folks who are contemplating retiring and selling their homes? They're going to wait as long as they can. That will leave you with a host of greatly discounted distressed properties - some at 50% discounts, giving you a nice rounded 25% drop in prices after factoring in a select few quality homes that basically retain their value.

So what's left? Slim pickin's. Scan the MLS - there ain't much out there.

25% reduction is a very conservative prediction. I live in Boston and the houses on both sides are in the process of foreclosure. The Bank is just waiting for the foreclosure Moratorium to end.

Much of the greater Boston Area were prime borrowers, that is why we have not been hit with the Sub prime collapse as bad as other state.

The Boston bubble was fueled by option Arms and Alt A mortgages. These will reset over the next four years and are much more toxic than sub prime. They may have a default rate of up to 80%.

There will be many waves of foreclosures for years to come.

Inflation will hit, however that does not mean the real estate will rise with the cost of food, gas and energy. Wages will greatly lag living expenses. The irresponsible actions of the Federal Reserve will result in a lower standard of living for all Americans.

Whitney os spot on with her call for another 25%. The fundamentals are horrendous, how anyone can be bullish here just astounds me...

I completely agree with Ms. Whitney. The fact is that we are right smack in the middle of the mother of all liquidity traps. In this past year the Federal Reserve has created $1.0 trillion of new money, and yet during this time consumer credit is shrinking and the auto industry has been decimated. So what happened to all of this money? Well, it is sitting in banks' reserve accounts at the Federal Reserve doing nothing. Add to this an economy with over 9 percent unemployment with every expectation of topping 10 percent come 2010, and who is going to borrow? Moreover, it is much cheaper to rent than to buy. Until the rent versus buy differential narrows substantially, residential real estate has nowhere to go but down.

Bostonrunner,

You say: "the great majority of residents do not have to sell and will sit tight".

This is ALWAYS true. But:

a) The "move up" market is DEAD. I dont know anyone that has decided to "upgrade" to a newer, more expensive home in the past two years, UNLIKE the previous 8 yrs. This means LESS demand, meaning lower prices.

b) There are THOUSANDS/TENS OF THOUSANDS of homes that WILL need to sell, because they were bought by educated/employed people who wanted to "stretch" themselves on their home purchase, and so bought using a Alt-A/Option-ARM loan. THESE are the homes that will be selling, and they will set the "comps" for the rest of the market.

c) And last but not least, the SAME banks that once fell over themselves to give us all those wonderful toxic loans on inflated prices, are NOW refusing to give loans that they think are "over market value". And what sets the market value? All those "forced"/distressed sales with Alt-A/Option-ARM loans.

This isnt 2005 anymore..........

Boston renter -
a) - If you believe the moveup market is dead (and I do), then not only is it less demand, but less supply. And the demand would have been for the 2,000/3,000 sq ft+ houses. The supply (generalizing) is the quality start-up homes that first-time home buyers want. This is not a positive development for first-time home buyers.
b) People who can no longer afford their homes also can no longer afford upkeep on their homes. Banks are not kicking people out of houses any more. Those houses that you are waiting for might have been nice in 2005-07, but they're going to be fixer-uppers with no negotiation available when they go to auction or get listed.

Decent homes priced below assessed value $50-100K (which is still on the high side based on income levels) are selling in two days... especially multis. Bargain hunters and investors, (which may still get bit), may be creating a false blip in sales. Over all trend is still down and I agree on at least a 20% decline. 1.5 years is not enough time to shake out the hand to mouth wage slaves (who can't add). This brings us to the $8k credit clowns...the government is trying to enable buyers to buy some thing they can't afford...if an $8k credit makes a difference in you buying a house, PLEASE DO NOT BUY IT AS YOU WILL FAIL!....Cash for clunkers sound familiar! At least that was 30% the cost of the new car on average. My rule of thumb is a 2000 sq ft house should be about 4 times the yearly salary of 5 year experienced professional (engineer for example). In 1991 that was $160k (when i bought) today that's about $280000. It should get there soon... especially when the $8k credit runs out.

If the government wasn't putting our grandchildren on the hook by subsidizing and guaranteeing mortgages on the still-overpriced houses, you'd find out in a hurry what real estate is REALLY worth.