Every so often some commenter, frequently Steve V., observes that for the housing market to recover prices will need to fall to the market clearing price to which someone else invariably responds “How far will they need to fall?” That’s a tough question to answer but here’s a guess, a first approximation: prices need to revert to their historic levels. Courtesy of Barry Ritholtz the chart above shows the long term trend in housing prices along with a red line at the far right that illustrates the change that would need to occur in housing prices for them to return to their historic levels. Said another way, housing prices would need to fall roughly another 30% to return to the historic trend sans bubble or boom.
Another wrinkle in the housing prices story is that just as housing prices didn’t rise uniformly around the country I don’t think that we should expect prices to fall uniformly around the country. My off-hand guess is that the areas that are most over-built, typically but not exclusively those that saw the largest increases, are likely to fall the most, possibly even below the historic support point. There are major demographic patterns at work here, too, not to mention issues of wealth distribution. The groups in the population that are growing most rapidly and, consequently, could be expected to enter the housing market don’t necessarily have the dough to buy a house, particularly in the post EZ Credit world.
This is the second time you have (rightfully, its an important topic) directly addressed this issue.
There may be rebound effects. Prices falling below equilibrium simply on momentum. These are “gross” considerations.
There may be local geographical/demographic effects – Naples, FL (we have a place there) may benefit from demographic and tax haven effects that dwarf what’s going on in, say, MI. So with Scottsdale, AZ, where we are considering properties.
But I’d hate to be reliant on home values in OH, IN, MI, PA, IL etc. Ugh. Demographically and economically challenged.
Speaking of real estate……..
This is for Dave. I know you are into the fine arts. I don’t know if you are into architecture and interior design, but my family visited the Driehaus Museum this weekend, the former Nickerson House (40 East Erie). It is amazing we haven’t gone earier. My wife worked for Richard for ten years. But if you enjoy 1880 – 1920 era architechture and design its worth the time, if you haven’t already done it. Private and personal tours. A real period piece. When in Chicago, you might want to spend an hour or two.
I know steve got here once, perhaps Reynolds. You could spend your time here less well.
Just a note.
So, what this chart also tells me that the common wisdom that housing was a good investment following WWII is mostly bunk. The real estate industry might rival De Beers in terms of marketing prowess.
Thanks for the tip, Drew. No, I haven’t been there. I’m sure my wife would like the Tiffany collection there.
Andy:
IMO barring demographic issues and the geographic issues Drew mentions above housing should depreciate slowly. Rather than hokum I think that the post-war investment quality of housing has largely been an artifact, temporary.
Drew- Wife and I had a great time. We both love architecture. We are visiting Falling Water this w/e. We did the boat tour in Chicago. Will put this on our to do list for next summer.
To the general issue, real estate is a core reason for my pessimism. I dont really expect it to go to 100, homes did get bigger, but it needs to drop a lot yet. This will add even more foreclosures which will not be a real positive either.
Steve
Nice post Dave, in looking at past booms the projection does seem reasonable, and it looks like housing prices still have a way to fall yet.
steve –
I assume you meant the architecture boat tour. That’s great stuff.
If you do come to Chicago I would put the museum on your list. Its just a few blocks off of Michigan Ave, so its easy to get to. The home was built circa 1880 by a Chicago banker, and later sold to a sewing company owner. The College of Surgeons then, collectively, purchased it until Richard Driehaus bought it (its across the street from his similarly fabulous offices) in about 2003.
Its only a 1-2 hour visit, but they have taken great pains to be true to original design elements, which are magnificent.
… to which someone else invariably responds “How far will they need to fall?â€
Well, I would like to know the answer. Because in many neighborhoods locally prices have fallen back to prices levels last seen in the early 1980s. That doesn’t account for inflation. Throwing that factor in I wouldn’t be surprised if we’ve gone far below the bottom of the chart’s cutoff. Meanwhile, the rich neighborhoods have seen some drop-off, but they’re rebounding now according to the grapevine. So the story seems to be that you either need to be in the top 1% or your home needs to be worth zero.