Goodbye, finally, to falling home prices?

I actually think bottom could be reached in a year. But that's a far cry from saying its bottom now - we'd have a lot more falling to do in the meantime.

Especially in Boston - the fact things haven't fallen that much yet just means they have more to fall.

You do realize that the data out there shows all the bounce has been in the bottom tranche? What happens when rates go up (considering the lows we are at, pretty much certain) and the first time homeowner credit goes away?

Take a look at the percentage of purchases funded by the FHA. Scary, eh?

Opinions are interesting, but the facts are more dependable.

These are the same economists who predicted a “soft landing” in 2006. They were wrong then, and they are wrong now.

Take a look at the sources quoted in the article. They work for large financial services companies that earn fees based on assets under management. In other words, the more money these companies convince customers to invest, the more they earn in fees. With an incentive structure like this, it's not surprising this group of paid shills (a.k.a. "economists") think now is a great time to buy.

Unfortunately, truth is not a popularity contest, so the relative leanings and predictions of 40 economists are not particularly useful. Keep in mind that as a whole, economists believed that "subprime is contained" and also did not think we were in recession until we were in it for about 6 months. I would rather hear the predictions of those who got it right in the first place.

How many of those 13 economists correctly predicted that housing prices would fall before the decline started? Probably very few. Why listen to them now?

I would like to know who these economists are and for whom they work. The one cited, Guy LeBas had this to say in an October 15, 2007 insurance paper:

"There are securities out there and, while they are increasing in risk and rated subprime, are highly unlikely to see any credit risk downgrade, but they have seen severe losses nonetheless," LeBas says.

I think there were some credit downgrades in 2008 if I remember correctly.

I guess we're once again back to agenda-driven opinions from a group with a horrendous track record for making predictions (pick one, NAR, Bankers, eCONomists) vs. the facts, which speak for themselves (and the media and govt. insists on ignoring, spinning, burying, etc.).

According to a paper by Harvard professor Ken Rogoff, by comparing current crisis to systemic banking crisis around the world throughout history, he estimated after the bubble burst, the average housing peak-to-trough price decline tends to be around 35% and downturn duration around 6 years. If you look at Case Shiller 10 or 20 city index, peak to trough is around 33%, and we are in year 4 of the downturn, going back to around 2002/3 price. Looking at Boston, the peak-to-trough is around 20%, but since Boston does not have the same run-up as other sunbelt city, it too has come back to general 2003 price level.

My personal opinion is nobody can time market peak and bottom, and 3% downside, while sounds very optimistic (10% sounds more conservative to me), is not unreasonable if you see it through historical comparison and the context of the whole crisis magnitude and duration.

The biggest decline in his sample is the bubble in 90s in Hong Kong (around 50% decline). Nobody can say for certain when/if price going to decline/rebound, but if people do expect around 20% peak-to-trough decline from here, you are essentially saying this housing bubble is the worst bubble ever in the history of housing bubble. Having personally lived through the Hong Kong bubble myself, I doubt it to be the case.

When measured in gold, home prices in the New England region are now at the low end of the 100 year range of 180oz to 600oz. Back in 2003 they were at the high end of the range, well over 500oz. 2003/2004 was a terrible time to buy a home in greater Boston - actually that was the peak back then. In the past few years, gold has doubled while home vaues have slipped 20-25% (or more) in dollar terms. If the trend continues, home prices will be (when priced in gold) at historic lows. Usually, when the cost of something is at a historic low relative to gold, its a good investment.

I **KNOW** that nobody buys a home in gold, so please dont remind me of that. However, looking at the price of any commodity in gold (land, food, clothing, oil, etc..) is always provides good long-term perspective on investment value, because it takes out the inflation/deflation noise of the dollar.

A few fun tid bits to take the other side of the argument, that we are nowhere near the bottom:

•13% of all homeowners are behind on their mortgage payments;

• 1.5 million homes entered foreclosure in the first 6 months of 2009;

• Approximately $2.5 trillion in Prime, Alt-A and Option ARM mortgages are scheduled to reset/recast over the next 3 years – Subprime was “only” $1 trillion;

• 48% of homes in the US are projected to have negative equity by 2011;

• The unemployment rate (U3) is 9.7%. The U6 rate is 16.8% (the unemployment rate was supposed to peak at 8% after passage of the Stimulus Bill);

• More than 34 million Americans receive food stamps

Yea, I'm hoping as many anxious buyers as possible fall for these types of nebulously sourced calls of a nationwide bottom to the real estate market and buy all the still overpriced junk housing available this year. That way there will be less competition when I go buy next year or two when the Boston real estate prices have finally shed the remaining 30% or so inflated portion of the current values. I've studied the CS data for a several cities and many have indeed hit bottom, but Boston sure hasn't gotten there yet. Depending on what other deus ex machina schemes the Fed concocts to prolong the approach toward the bottom, current trendlines indicate the Boston market may get there by next year. We've got significantly more than 3% to go between now and then though. Rising interest rates somewhere down the road, prolonged unemployment, the release of held-back foreclosures by banks, and people giving up and relocating to more reasonably priced markets may help speed things along.

Economists are like weathermen. Useful for describing what the conditions are right now but less useful for predicting anything more than a week away.

Also, neither seem to get fired when they get it wrong. No one ever seems to hold their lack of success against them.

Limitless speculation and loose research, combined with zero accountability. I think I need a new job.

If you are waiting for Boston to drop as much as other parts of the country, dont hold your breath. I travel around the country quite a bit and i can tell you - Eastern MA has been hit by this recession FAR LESS than in other places. There are areas in the midwest and west coast where it seems like 1/4 of the businesses have gone under and the shopping areas are ghost towns.

When I come home to Bostons (Somerville) I am always amazed at how on a relative basis Boston seems as vibrant as ever. Was at Cambridegeside Galleria and it was PACKED the other day. Burlington mall too. Walked down to Harvard Square on Sunday? PACKED.

Dont hold your breath - this area is holding up very very well.

Approximately $2.5 trillion in Prime, Alt-A and Option ARM mortgages are scheduled to reset/recast over the next 3 years – Subprime was “only” $1 trillion;

Wondering what you mean by Prime here. Vanilla ARMs? Those are usually tied (indirectly) to the Fed Funds rate, which is .5 at the moment and likely will not be raise for some time. Just saying. The Alt-A and Option ARMs are problems.

48% of homes in the US are projected to have negative equity by 2011;

One study projects this. Other credible sources think it's pessimistic. The number I've seen more often is 25%.

The unemployment rate (U3) is 9.7%. The U6 rate is 16.8% (the unemployment rate was supposed to peak at 8% after passage of the Stimulus Bill);

Yes, and it's projected to peak early next year, and then decline.

More than 34 million Americans receive food stamps

A very terrible thing no doubt, but unrelated to house prices as far as I can see.

3% is too low and I'll agree with the 10% mentioned above. Big reason outside of Lou's statistics is that high end homes aren't benefitting from the uptick in purchases and pending sales. However, Frank really does have a point. There certainly are signs of slow downs but Wrentham Outlet the other weekend continued to back up off ramp traffic on 495, restaurants and shops are still busy in Boston, and I don't see as many empty storefronts as I would expect with such a down economy. One restaurant closed in our town center and the space was immediately picked up by another. Another storefront that emptied is now under an agreement and renovations are starting. We Yankees are frugal and thrifty. If you are waiting for a deeper bottom, I wouldn't hold your breath.

Middle

That is a horribly flawed analysis! All you are doing is pointing out that gold has gone from $400 an ounce to $1,000 an ounce. Do the same analysis using nominal, median household incomes. The average family has gone from making 110 ounces of gold per year in 2004 to making less then 50 ounces (at today's prices). And that's assuming you aren't one of the 9.7% that don't have a job.

Now simplify your fractions and you get house prices / household income - and you will see things are still massively overpriced relative to people's ability to pay.

Now the housing bulls will say that housing prices don't matter and all that matters is the mortgage payment / household income. So low interest rates magically lead to higher home prices. This is probably true in the short-term (1-2 years). But in the long-term a debtor government does not control its own interest rates, its lenders do.

Right now we are enjoying subsidized mortgage rates from the Chinese so that we can continue to buy their VCRs. Because the Chinese do not want the Yuan to appreciate and cause their exports to be less competitive, they are forced to buy US treasuries at any rate we choose to sell them for. However, they are waking up. The fact is the $1 trillion of USD foriegn reserves they have earn enough interest to buy the same amount of gold that $330bbn of USD foreign reserves did in 2004 ($1,000bbn x 3.5% / $1,000 = 35mm tons. $330bbn x 4.25% / $425 = 35mm tons). So basically they have been giving us all these VCRs and toasters for free because we are debasing the money that they lend us. People used to be convinced that the US would never stoop to the level of a Banana Republic and monetize its debt. But now Helicopter Ben is bragging about how its the solution to all our troubles. Our lenders are going to catch on and raise the cost of USD borrowing to reflect their expectations of future inflation. When that happens, long-term interest rates go up, no matter what the Fed sets the overnight interbank rate at. And this will raise the cost of mortgages and cause another leg down in the housing market.

In the near-term, it might be smart to buy a house just to lock in a low rate before prime mortgages start costing 10%+. And that might cause housing prices to rise in the short-term. But even if you do lock in a low rate, eventually you will have to try and sell your house to someone that will be paying 10% for their mortgage. So unless you are buying a house that you never plan to leave - sorry Charlie.

Also, even if we manage to keep rates low long-enough for the massive wave of prime-ARM and interest only mortgages to pass. And even if people are smart enough to refinance into 30 year fixed mortgages. Its not going to keep us from having to pay the piper. If the banks are dumb enough to refi everyone into long-term, low fixed rate mortgages right before interest rates sky rocket and their funding costs go up, we will simply have locked in massive losses for the banking industry, leading to another financial/lending crisis.

Simply put this is a very long-term problem with no easy fix except time, hard work and spending less then we make for a few decades to pay all the bills we racked up. We let the idiots in government convince us that everyone deserves to own a home whether they can afford it or not. We let the idiots in NAR convince us that low interest rates meant all our houses were worth more and we were all rich. And then we let the idiots at the banks convince us to borrow against our inflated home values to buy marble counter tops and plasma TVs. Now its time to pay that bill. The only thing we CAN choose is if we want housing prices to drop another 20% and consumer spending to contract another 10% TOMORROW so we can all get back to a normal future, or if we want to delude ourselves for 15-20 years like the Japanese did after this happened to them in the early 90s.

Excellent job Frank in gauging the US housing market with the foot traffic in a few local malls. You may want to start paying attention to things like the health of the local job market, or P/E ratios, and other financial fundamentals instead of people walking around in a mall or Harvard Square.

Ah...Doug, the inflation/deflation scenario. I think if we believe in massive US dollar devaluation and inflation (which seems to me that you do), then one needs to find inflation hedge. If that's the case, hard asset, real estate being one of them, does the trick. And remember, inflation favors debtors over borrowers (your asset moves with inflation while fixed debt/mortgage got inflated away). Another preferred form of inflation protection is gold, but gold in itself can be bubbly as well (which, ironically, make Middle's analysis quite useful in comparing Gold/Real estate prices).

If you believe in deflation/low-to-no-growth scenario, then your best comparison in Japan in 90s. The real estate market dropped peak to trough 35%-40% and last 15-20 years. So if you believe this bubble is comparable to Japan, I think you will see very little upside in real estate in the next decade, but at the same time, probably not the 20-30% downside from here given the market already down 33% from peak.

Great reader comments and for all the other bears out there, read "As an Exotic Mortgage Resets, Payments Skyrocket" in todays New York Times (which owns the Globe).

They bring to light the coming problems of all the interest only and ALT A loans imploding in the coming future, which is why it is still years away from breaking out the Champagne and the thought of stable home prices anywhere in the country.

Are things really getting better? Some recent headlines.

"Treasury: Millions more foreclosures coming
Official says a strong housing market is crucial for the economy"

"Job openings down 50% from the peak in 2007
6 unemployed people for every available position"

"Consumer Credit Contracts Record $21.6 Billion"

"Greenspan: 'Market Crisis Will Happen Again' "

"Job outlook hits worst-ever level
Employers’ hiring plans at lowest point in Manpower survey’s history"

And from the duh! files:

"Taxpayers Unlikely to Recover GM, Chrysler Investment"

One more comment - housing market, as of now, is heavily distorted. Given what happened last year, we can be reasonably sure US government have limited pain tolerance towards significant fall in real estate price, and will prop up the market via various schemes at the expense of US taxpayers (in forms of various MBS purchase programmes) and cautious savers (in forms of reduced short/saving rate).

The implication of government intervention is that 1) rational economic principles do not work properly, especially when it comes to extreme downside where government is most likely to act. If for any reason national housing market dropped another 20%, you can expect A LOT more serious bailout/intervention from government (substantially more/extended tax credit, heavier loan modification programme, more purchase from fed, etc). I just don't think the current government has the stomache for the pain esp given the state of the economy. So while economics may indicate there will be severe housing trouble, ironically homeowners may not be the one who will shoulder most of the pain (since they already lost a lot and government will bail them out). Rather, to a certain degree, the government intervention will be reallocated the pain to other taxpayers and savers.

Lai, though sadly I think you have a very good point, what more can the govt easily do? They already finance 9 out of 10 mortgages, and the Fed buys all the debt to keep rates down. There's only so much more that can be done before the dollar becomes worthless - what we are doing already scares the heck out of me, and I'm about as far from a gold bug as you get.

I think the banks are trying to suspend the market and keep Real Estate prices over inflated so their losses are minimal. The Govt has been holding the interest rate steady. As soon as that rate goes up, prices are going to bottom out. We have not hit the bottom of the RE market. In my town prices in general are what they were in 2007. Realtors are pricing property according to 2007 data which is inaccurate. Because there are so many buyers and the Bank won't free up the property, whenever a home is priced accurately it creates a buying frenzy. People want to purchase but are very cautious at continuing to purchase at over inflated prices. Much of the property on the current market is still overinflated. We will not see this bubble burst until the rate goes up. Also No Jobs = No Recovery. It's pretty simple. No Good paying Jobs I should say.