Barry Ritholtz: A Closer Look at the Second Leg Down in Housing

Posted by Kendall Harmon

...the bottom line is Home prices remain too high: There can be no doubt that home prices have moved way down from the 2005-06 peaks. How did I reach the conclusion that, even after a 33% decrease in prices?

By using traditional metrics. Whether we are looking at US housing stock as a percentage of GDP or Median income vs home prices or even ownership vs renting costs, prices remain elevated. Indeed, we see prices remain above historic mean.

Consider price relative to income. From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP.

Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.

Read the whole thing.

Filed under: * Economics, PoliticsEconomyHousing/Real Estate MarketThe 2009 Obama Administration Housing Amelioration PlanThe Credit Freeze Crisis of Fall 2008/The Recession of 2007--

5 Comments
Posted June 24, 2010 at 6:08 pm [Printer Friendly] [Print w/ comments]



1. Bart Hall (Kansas, USA) wrote:

Okay. The real metric is this:

Take the amount of monthly rent the house would fetch in the current market. Add two zeroes. It is absolutely not worth more than that amount as a place to live. Conservative players in the rental market would multiply monthly rent by 70 to obtain a maximum price to pay for the house.

Got a house that would fetch $800 per month in your market? It is worth $80,000—tops—as a house. Anything above that number is pure speculative fluff, and you are quite likely to lose every bit of it (and more) moving forward should you be so silly as to pay it.

June 24, 11:03 pm | [comment link]
2. loyal opposition wrote:

Bart,

your numbers may work in Johnson County, but they don’t work in West Los Angeles.

June 25, 12:21 am | [comment link]
3. CanaAnglican wrote:

Or metro D.C.  Try Georgetown, Capitol Hill, Spring Valley, Bethesda, Potomac, or Great Falls.  This is because landlords rent out houses below the cost of PITI, in order to get tax breaks.  I am out of this now, but did it successfully for years at a multiple of around 200.

Let’s look at what it would cost to produce another one of Bart’s $80,000 houses.  $120,000?  $160,000?  We may have a bit more deflation, but the cost of building supplies and labor have not come down a lot.  Once the Government has to start printing money to pay off its enormous new debts (both Bush’s and Obama’s) the cost of reproducing that house may hit $1,000,000.

I bought one brick house near D.C. that was built in 1938 for $4,000.  In 1965, I paid $17,000.  Today it would sell in a week for $190,000.  It would only rent for about $1,000.

Once the excess property is taken up by teardowns and population growth.  The real value of a house will be what it takes to buy the land and put the structure on it with all the, government fees, site prep, utilities, landscaping, and other costs.  I see that trending up.  If someone wants to buy a house, they better think about right now.

(Disclosure:  I am not a realtor, and I no longer invest in houses.)

June 25, 10:06 am | [comment link]
4. Clueless wrote:

Part of the problem is that rents have been kept falsely low because of the ease of handing a No money down mortgage to somebody who obviously can’t afford it.  This will not change quickly because the huge oversupply of houses will likely be rented out for less than they are worth.  That calculus will likel change in aabout 10 years at which time people will not be able to buy a house, and rents will be expensive.  However that is sometime away.

June 25, 1:26 pm | [comment link]
5. Clueless wrote:

“This is because landlords rent out houses below the cost of PITI, in order to get tax breaks.  I am out of this now, but did it successfully for years at a multiple of around 200.”

Me, I am renting out one of my houses below cost of PITI, not so much for the tax break but because the family in question needs it, the house is paid off, and because I wish eventually to hand the house to one of my children, because I suspect it will be impossible for them to buy their own homes after about 2020.

June 25, 1:30 pm | [comment link]
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