Property Values Set to Fall from Bubble Peak to Long-Run Average

Seeking Alpha ^ | November 05, 2009 | Seeking Alpha

[Son House]

Price Trends / WAR OF THE WORLDS (Round # 2): If you use 120 years of data for your time horizon, and assume prices will return to the average, then our residential property bubble will fall 49% from the bubble peak to the long-run average (see above (a) aka “(x) - (z) / 202” aka “Projected Fall Peak to Trend”).

This total projected fall is less than the 60% predicted in my recent post based upon 20 years of data and a trend line drawn with the eye (click here to see that post).

Property Values Set to Fall 43% From Current Depressed Level

http://newobservations.net/2009/11/01/property-values-set-to-fall-43-percent/



This long-horizon data also shows values falling much less from today to the bottom than was predicted in the time frame of the 20-year data. This chart shows values falling 20% from the current prices to reach the long-term average. The previous estimate showed a 43% fall from current prices to trend. Obviously it is a huge difference.

I will continue to work with all data sets until I have a more complete picture of property values. Please send your suggestions about the best information. We will put it all together. Maybe we will see the future.

What we know today based on the best information is that values will fall a total of between 49% to 60% from the bubble top to the trend. Still ahead is a fall in property values of between 20% to 43%.

For a more complete picture of residential values, please click here for
“Property Values: 10 Key Charts”

http://newobservations.net/propertys-value/

Price Trends / War of the Worlds (Part 2): We still have 20% to fall nationally. That’s on this chart. On another one it is 43%. Price Trends / EQUITY VANISHES: About $7 trillion has been taken from the wealth account of property owners. If there are 130 million housing units in the United States (rental and owner occupied), then owners have lost an average of $54,000 per unit they own. The loss is massive.


SALES -UNITS: Looking at the long trend, there has never been a serious problem in terms of the number of units sold. The quality of the sales is another question. The Wall Street Journal recently reported that two-thirds of sales are a form of distressed sale (Improving Home Sales Belie Market Reality, 8/21/09). “‘Think about that for a minute,’ John Mauldin of Millennium Wave Advisors wrote this week. ‘Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage.’ And only a third of the remaining one-third — roughly 10% of overall sales — comes from ’something we could call a normal selling process.’”

[Son House]

Still ahead is a fall in property values of between 20% to 43%.

And the exodus of Doctors, who will quit if Health Care Insurance Reform passes, from the neighborhood should lower property values even more. Thanks Democratics!

[awestk]

Optimistic.

There is a glut of housing on the market. Prices should go below “normal” pricing levels...

[EGPWS]

Thanks Democrats!

I see a straw and a camel in our future.

CW2 perhaps?

[TheConservativeParty]

Despite historic property value losses all over the country, the property tax leeches in Wisconsin will raise our property value as they do without fail every year, and they will increase our tax burden. I’ll be expecting that they’ll add “fees” this year and every year into the future for things that used to be covered under the property tax levy.

They are only interested in taking as much as possible from the taxpayer. One year they doubled our property value. Same time frame as when 2 different public school referendums passed within 3 years. There is no end to their addiction to tax dollars. They’ll be mailing out our holiday greeting around Dec.15th. Will it be a tax of 6000, or maybe 7000 dollars this year? How about 8000? They take what they want, and if you refuse to pay they take your land. They got us right where they want us.

[Son House]

Yep, see that long run average in the first chart 1920 to 1940

[MinuteGal]

I'm serious about this.....send your comment as a letter-to-the-editor to your local rags. It was good. Most folks eat up letters like this one, mmm, mmm, mmm.

Leni

[Son House]

If Doctors start moving out of neighborhoods to nice sunny tropical locations, the first to move would likely keep the biggest part of their home value, as others follow that will lesson. The rest of us are stuck, and probably be expected to cover the loss in tax revenues too

[Son House]

Thanks Democrats!

I'm calling them Democratics as per their wishes from now on, and it's close to moronic too

[TheConservativeParty]

Yeah, the year they doubled our assessment, I called the local CBS news station. I got a yawn. We went to the assessor’s day he gives us to complain...he yawned at us and the other enraged taxpayers. They got us. Until we all show up with more than words, they got us.

mmm mmmmmm mmmmmmmm Hussein Hussein Hussein, he’s the bestest fake president ever!

[PGR88]

There is a glut of housing on the market. Prices should go below “normal” pricing levels...

—————————————————————————————>>

I agree. Like all markets with strong trends, prices will overshoot and undershoot. We have had a historically huge property bubble for many years. Note for how many years property was below trendline as well.

[Reeses]

Maybe we should stop insulting rats and start calling them 'tics.

[Marie]

This is going to hurt - a lot. But we have to suck it up and take the hit. In the long run, it’ll be better if housing prices are more realistic and reasonable.

After the fall we need to put some onther “ol’ fashioned’ checks into place.

- No loans given without at least 20% cash down.
- No loans given for less than 6% interest. (We don’t need people buying who can’t afford it or who don’t understand interest rates. People who do understand compound interest will be encouraged to put up a larger down payment.)
- No loans given to people without proper identification and proof of citizenship.
- No 3, 5, or 7 year ARM loans. No ARM loans period.
- Only 5, 10, 15 or 20 year mortgages available. (Nope. No 30 year loans. If you’re so sorry that you have to take out another decade on your loan to get the payments down by $100-200 a month, then you can’t afford the loan. Example: A $100,000 loan at 7% for 20 years cost $665.30 a month. That same loan for 30 years is $775.30. If your budget is so tight that you can’t swing that $100, then you’re financially too close to the edge to get the loan.)
- No loans given without proof of income and a minimum of three non-related references.

We need people to save for their homes. Part of the problem with nothing-down loans is that the buyer has nothing personally invested in the house. It’s easier to just walk away.

With housing prices coming down, everything I outlined above is within reach of the average American.

But those of us left holding property while things crash are going to get hurt. (This includes my family.) That’s just the way it is and we have to accept that this adjustment is in the nation’s best interest in the long run. (Hubby and I will probably loose about $50,000 on our property.)

I do wish it had happened more gradually, though. If prices had dropped slowly over a period of 15 or 20 years, we would’ve been able to manage it easier. Less pain.

[mojitojoe]

If health care passes, my doctor said he is out of here. He will move his family out of the US where he has a beautiful vacation home. There isn’t a doubt in my mind he will do it.

[XenaLee]

My ex was just told by his doctor that he is going into sports medicine. That’s one medical specialization field that will be less-impacted by this communist bs. All the good doctors will either go into another specialty or will leave the country and we’ll be stuck with Muslims and other foreigners that don’t give a damn.

If they pass this, it’s our signal. Tney really intend to do anything and everything they please against our will. It will be “We, the Government”.....unless or until we show them otherwise.

[XenaLee]

That’s an insult to tics everywhere.

[Reeses]

Hubby and I will probably lose about $50,000 on our property.

You haven't lost house wealth unless you convert it into a different asset class. If you need to move and sell your house and buy another similar one, it's a wash because you'll save $50,000 on the purchase.

[EGPWS]

I'm calling them Democratics as per their wishes from now on, and it's close to moronic too

The democrat party is FAR from being democratic.

[Marie]

“You haven’t lost house wealth unless you convert it into a different asset class. If you need to move and sell your house and buy another similar one, it’s a wash because you’ll save $50,000 on the purchase.”

It’s not quite so neat.

Let’s say that hubby and I have to move for his job as an enlisted soldier.

We bought the house for $100,000. Let’s say that we got 100% financing for the $100,000 plus $3,000 closing costs with a 30 year loan at 7%. (Common practice, but we didn’t do that because we’re not stupid.)

We’ve lived in the house for about 4 years, so we’d owe $98,000.

Now let’s say that the house is worth only $58,000 (just to keep numbers round.) We’re short $40,000.

To sell it we have to either pay $40,000 cash or take out a loan.

As most people don’t have $40,000 laying around (especially enlisted military) the majority would need to look into loans. But right now there is a “Credit Crunch” and loans are hard to come by. If you do get a loan, you’re probably looking at getting one with stupid interest rates.

Now it’s harder to qualify for another mortgage. Your credit line is extended too far. Because mortgages are dropping, so are rents so you can’t even keep the house and let somebody else pay for it.

More and more people are going to find themselves in this situation and foreclosures are going to continue to rise as housing prices fall.

In my situation, hubby and I plan on paying the house and property off in the next few years and just eating the loss of property value. If the army makes us move again, we’ll just keep the house and get a cheap apartment at the new location. But we bought much less house than we could afford and got a good interest rate on a 15 year loan. We saw the writing on the wall and did our best to protect ourselves. (Had I know it was going to happen so soon I would’ve waited to buy property all together, but we thought the market would stabilize for a time before the fall.)

[Son House]

Right in line with the losses stated above;

Price Trends / EQUITY VANISHES: About $7 trillion has been taken from the wealth account of property owners. If there are 130 million housing units in the United States (rental and owner occupied), then owners have lost an average of $54,000 per unit they own.

[Son House]

Yep,

70 percent of specialty doctors oppose health-care reform proposals

http://www.news-medical.net/news/20090819/70-percent-of-specialty-doctors-oppose-health-care-reform-proposals.aspx

The American Society of Medical Doctors (ASMD) today released a nationwide, nonpartisan poll* of physicians showing that:

70 percent of specialty doctors oppose current Congressional and White House proposals for health-care reform;

66 percent believe that a government-run health insurance plan would restrict doctors’ ability to give the best advice and offer the best care possible to their patients;

and
More than 60 percent would not accept new patients with government insurance (including 27% who would not accept any patients on the new government plan).

Chairman of the ASMD, Alfred O. Bonati, M.D., said that, “As a physician, the results of this poll are not surprising to me. Any doctor who has ever dealt with Medicare knows that government coverage severely limits our abilities to deliver care that best fits the needs of the patient and the patient’s family. We know that government coverage does not allow for flexibility, creativity, or, sometimes, even compassion.”

“I hope this research will serve as a wake-up call to policy makers,” Bonati said. “Doctors are against the creation of government-run health insurance and many of us will not accept new patients with that type of coverage.”

ASMD spokeswoman, Holly Pitt Young, noted that, “When it comes to our health, we listen to our doctors. Now it’s time for Congress to do the same.”

Pitt Young also highlighted the political orientation of the poll’s participants. “More than 60 percent of the doctors in this poll described themselves as moderate, somewhat liberal or very liberal. When a group like that agrees with conservatives, it seems that something awfully important is being said.”

[Marie]

As I said in another post, we’ve positioned ourselves so we can take that loss.

Most people bought more house than they could afford. Most people got either 30 year loans or some other loan with wacky terms. Most people counted on their homes building equity forever.

Think about it. It’s not unusual at all for a person to have a four or five year old mortgage on their home that’s 98% of the home’s value on the day they bought it, plus a huge home equity loan at a higher interest rate, plus a couple of maxed-out credit cards and little (if anything) in savings...

That’s *normal*!

And we made this happen by creating policy that forced banks to give loans to financially immature adults and by keeping interest rates so low that the temptation to finance everything was too good for many to resist.

We’re perpetuating the problem by bailing out the banks. If they had to deal with the losses from bad loans on their own, they’d practice much more responsible and cautious lending practices.

There are many financial institutions that loved the new regulations and ate up the opportunity to give sucker loans to as many people as possible.

[Son House]

And the sellers aren't so keen on losing value. What's that when you get caught holding a equity that drops in value? Like a bear stock. Most my bro's(4/5) got 2X the mortgage value because of them home equity loans covering credit card debt ect.

It’s not unusual at all for a person to have a four or five year old mortgage on their home that’s 98% of the home’s value on the day they bought it, plus a huge home equity loan at a higher interest rate, plus a couple of maxed-out credit cards and little (if anything) in savings...

Oh no, I think you just described a big part of the Neighborhood

[TheConservativeParty]

Another thing that’s been happening here in WI, the public school enrollments often go down (like in the small town we pay taxes for), yet the cost to the taxpayers for the public school keeps climbing steadily. The teacher’s unions, they’re stealing from us all. And they teach immoral values to the children with our money. If I had kids they’d be in a Christian school.

[TopQuark]

You seem to have collected a great deal of data, but your manipulation of the data is less than clear. The sensational predictions of over 40% fall in prices certainly requires a more clear explanation and analysis. [Actually, the more provocative a conclusion, the more duty you have in justifying it.] I would refrain from such predictions until they are fully justified.

There is also a need to reconcile the conclusions you draw from individual charts. Consider for instance the index of affordability. If the numbers at the left of the chart were taken as a norm (I am not suggesting the should be, but that the only time window we have), then the prices should fall only about 7% (assuming no or small rise in in median income) to reach that norm. The numbers behind that chart are quite robust, in contrast to those on some others. The 7% drop appears therefore quite reasonable. It's not of the same magnitude, however, as your over 40% prediction.

[TopQuark]

Would you be willing to share the data sets behind the charts?

[TopQuark]

Marie, with all due respect, this does not make any sense.

put some onther “ol’ fashioned’ checks into place. "- No loans given without at least 20% cash down. [OK]
- No loans given for less than 6% interest."

This has never been the case.

"(We don’t need people buying who can’t afford it or who don’t understand interest rates."

You are being presumptuous here. Great many people understand interest rates. If they do, it makes sense for many of them in great many circumstances to accept more than 6% interest.

"People who do understand compound interest will be encouraged to put up a larger down payment."

This is certainly not true.

"- No loans given to people without proper identification and proof of citizenship."

This too has never been the case in this (or any other Western country.

"- Only 5, 10, 15 or 20 year mortgages available."

What is the basis for that? The duration of a loan has no economic effect.

" (Nope. No 30 year loans. "

Well, if there was anything "good ol'" on this list it was the 30-year loan.

"If you’re so sorry that you have to take out another decade on your loan to get the payments down by $100-200 a month, then you can’t afford the loan."

It's like saying, "if you can't afford a Jaguar, then you should live without a car."

You also sound like a dictator of a banana republic. Who on earth are you to dictate to people measures that have no economic consequences for others?

[TopQuark]

"There are many financial institutions that loved the new regulations and ate up the opportunity to give sucker loans to as many people as possible."

The extent of subprime lending was actually prescribed by Congress since the 1998 Community Reinvestment Act.

[mojitojoe]

We refuse to comply if it passes. We refuse to pay anything and we revolt. They can’t and won’t arrest millions. The line in the sand has been drawn. This is it for me. I refuse to comply in any way and that includes taxes on it, penalties, all of it. I’m ready to totally revolt against it.

[Outlaw Woman]

"There are many financial institutions that loved the new regulations and ate up the opportunity to give sucker loans to as many people as possible."

Absolutely dead on! I'm in real estate and when I got in a few years back, it was so bad that all you had to be doing was breathing to get loan approval. I saw Mortgage 'Brokers' approving ANYONE for hundreds of thousands and they clearly couldn't afford it. Frankly, it was disgusting and although I worked at that time with mostly first time buyers, we would proceed with caution. Another problem? Inflated appraisals and home equity loans (I'm not even sure about those statistics but anyone who thought they had equity would go to the bank, bank would send appraiser, and magically the house appraised for thousands over what the owners owed. There is so much that has contributed to the entire situation.

[Neidermeyer]

Prices will continue to fall ,, in Florida homes in foreclosure in my neighborhood sold for 60% or so below peak last year ,, this year banks are not listing their foreclosures ,, soon they will be forced to.. Unemployment is up since then ,, income is down ... I see at least a further 10-15% discount *and maybe much more) ,,, for those of you in non-bubble areas take this as an advance look at 2010/2011. We are going to overshoot on the downside; but it may still be a great time to buy .. just think in 2012 you can make the decision ,, pay off your $250,000.00 mortgage or buy a package of twinkies ,, they’ll be the same price by then.

[Marie]

It's going to get a bit tricky keeping all this in order, but I'll do my best...

"my original"
(your response)
my response to your response

"- No loans given without at least 20% cash down."
(OK)

"No loans given for less than 6% interest."
(This has never been the case.)
Right now there are mortgages available for 4.5-6%. This has been going on for some time.

"We don’t need people buying who can’t afford it or who don’t understand interest rates."
(You are being presumptuous here. Great many people understand interest rates. If they do, it makes sense for many of them in great many circumstances to accept more than 6% interest.)
I worded that sentence very badly. I was thinking about the out-cry that went up last year when this whole mess started. People were saying that they only got into trouble with their mortgages because they didn't understand compound interest or the terms of their ARM loans. I was trying to say that higher interest rates would make loans less desirable.

"People who do understand compound interest will be encouraged to put up a larger down payment."
(This is certainly not true.)
We're just going to have to disagree on this point. I think that sensible people will want to put down more money to save money on the life of the loan.

"- No loans given to people without proper identification and proof of citizenship."
(This too has never been the case in this (or any other Western country.)
Actually, this *is* true. They're called LIAR loans. This is how many illegals have managed to buy homes in the US.

"- Only 5, 10, 15 or 20 year mortgages available."
(What is the basis for that? The duration of a loan has no economic effect.)
The longer the life of the loan, the higher the risk for the bank. There is more time for the buyer to loose their job, die, get sick, etc. That's why interest rates rise as the length of the loan increases.

"Nope. No 30 year loans."
(Well, if there was anything "good ol'" on this list it was the 30-year loan.)
Actually, the 30 year mortgage was unheard of until after WWII. Until that point, people generally paid cash for their homes. They either lived with family or rented until they could save enough money to buy a house. Many people waited to marry until they could afford a home and/or land. The 30 year mortgage is a 20th Century Invention which was a result of the GD and WWII. For us, it's become a habit - and it's a bad habit. In many ways, it's contributed to the current mess we're in. Do you think that housing prices would ever have gone so high if it was the norm to pay cash for a house?

"If you’re so sorry that you have to take out another decade on your loan to get the payments down by $100-200 a month, then you can’t afford the loan.
(It's like saying, "if you can't afford a Jaguar, then you should live without a car.")
No it's not. It's saying that nobody should make the commitment of a mortgage if they can barely afford it. Nobody should buy if it's going to cut their budget that close. Cars will break down. Kids will need braces. The washing machine will need to be replaced. If you can't afford that extra $100 a month, then you're cutting it too close to be able to afford *that* house. Maybe a person should consider getting a smaller/older/less desirable house if they are determined to buy and they can't swing that extra $100.
The main reason it's important to cut the life of the loan is to reduce the risk for the lender; however, in the end, it's better for the borrower as well. For example, if somebody took out a $100,000 loan at 6% interest for 15 years, they would end up paying the bank a total of $171,943 in payments. If that same loan was for 30 years, they end up paying $215,838. Buy cutting the life of the loan, the buyer is saved almost $44,000. The bank is secure and the buyer isn't being ripped off. (And yes, a 30 year mortgage is a rip-off. It's a scam. It is an immoral act. It's designed to get tens of thousands of dollars out of people who don't know better. In my humble OPINION - it's the biggest banking scam ever perpetuated on the American people.)

(You also sound like a dictator of a banana republic. Who on earth are you to dictate to people measures that have no economic consequences for others?)
You don't think that the housing crisis affects us all? The irresponsibility of others (the government, the banking institutions and the individuals who participated in these lending practices) will definitely have a long-term impact on EVERYONE. Saying that we must have responsible banking practices is not out of line. Saying that we shouldn't make it easier for financially immature people to get into trouble is not wrong. In the end, it costs US money NOT to do this.

[Marie]

"There are many financial institutions that loved the new regulations and ate up the opportunity to give sucker loans to as many people as possible."

"Absolutely dead on! I'm in real estate and when I got in a few years back, it was so bad that all you had to be doing was breathing to get loan approval. I saw Mortgage 'Brokers' approving ANYONE for hundreds of thousands and they clearly couldn't afford it. Frankly, it was disgusting and although I worked at that time with mostly first time buyers, we would proceed with caution. Another problem? Inflated appraisals and home equity loans (I'm not even sure about those statistics but anyone who thought they had equity would go to the bank, bank would send appraiser, and magically the house appraised for thousands over what the owners owed. There is so much that has contributed to the entire situation."

Thank you. ;-)

[Son House]

Actually, it's Seeking Alpha web site that has the article, most of the links I thought important were also included, but there were more links for his sources. It's a little confusing because the author keeps saying "I" too. The conclusion the author offers is;

What we know today based on the best information is that values will fall a total of between 49% to 60% from the bubble top to the trend. Still ahead is a fall in property values of between 20% to 43%.

I don't think he is far off considering the "chart shows values falling 20% from the current prices to reach the long-term average"

Quote:

Price Trends / WAR OF THE WORLDS: If you use a 20-year time horizon, and assume prices will return to the trend line, then our residential property bubble will bottom after values fall over 40% from current levels (see above (c) aka “(Y) – (Z)” aka “Loss Today to Bottom”). I make no predictions. I do watch numbers. The chart shows a catastrophe of falling real estate values loaded up on top of our current catastrophe in real estate values.

[TopQuark]

I saw that graph, and the point I made was that the author was too flippant about his methods. What does the average over time mean? Absolutely nothing. Home values increase over time, in part because of inflation.

Look also at the reasonably flat portion of the graph. The prices peaked and then remained reasonably flat from 1980 to 1990. Did they return to the previous mean? They did not.

The author looks haphazardly at some portions of the graphs and makes outlandish predictions that are apparently designed to cause a sensation.

[TopQuark]

Everthing you said is undoubtedly true. But you facts are in no contradiction with my post:
“The extent of subprime lending was actually prescribed by Congress since the 1998 Community Reinvestment Act.
Lending institutions were mandated a certain amount of bad loans. Those in the trenches were given the orders “to look the other way” in order to meet the stated targets.
People respond to incentives and prescriptions of the government.

[Velveeta]

Bookmark

[XenaLee]

How about... we also let the guys in DC know that there very well could be blood in the streets if they pass this against our will. Their blood. DC streets.

Would that work? Hahaha! (probably not)

That’s probably what it’s going to take tho. And yes, I’m quite sure that they have pre-planned and strategized and prepared for even that possibility. They’ve been working on this takeover for decades.

[mojitojoe]

No matter how much they plan, it won’t matter much. Look at ever war in history. You can’t plan for every scenario, that’s what makes good generals. They plan better than the other side and don’t think for a second the military will ever stand by him should the SHTF. It will split. He may get 20% of he’s lucky.

[Son House]

I'll have to say I agree with the author, prices may well return to the long run average. House prices are also high because of the 'asking price', and I believe they are still to high, I can think of 3 examples of sellers I know who asked too much and haven't sold. Just like ebay, the final sale would be the market average, and many houses aren't selling. I should have also brought up that first graph;

If you use 120 years of data for your time horizon, and assume prices will return to the average, then our residential property bubble will fall 49% from the bubble peak to the long-run average

Now I'll example my bro's house, currently at $149k, can't sell after coming down 2X. I think it started out at $169k. Had he came down 23%, about $40k, you get around $129k, That price probably would have sold it. Reasonable assumption within that "120 years of data // assume prices will return to the average // residential property bubble will fall 49% from the bubble peak to the long-run average"

[TopQuark]

"If you use 120 years of data for your time horizon, and assume prices will return to the average"

As any book on economics or economic history will attest, prices to do return to any averages. This is simply false. And from a falsehood, one could draw any conclusion one wants.

If you don't want to read, then stop thinking about your brother. Ask your grandfather instead. He'll tell you he could by a suit for $3 in 1920. Good luck finding a suit for the price averaged over 120 years!