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House prices are down (again) and will continue to go down!

Written by: Sean Hyman

Article Overview: The article discusses current house prices and where they are headed, the economy and invesment flows, and the Case Shiller index.

House prices are down (again) and will continue to go down!

The Case Shiller housing data came out last week. As I have said before, there are many house prices indices but Case Shiller gives the most accurate picture of the housing market, since it measures repeat sales in an apples-to-apples comparison. Hence you should pay attention when the data comes out (the last Tuesday of every month).

The data now covers the month of March 2009 and it is not pretty. In fact, the price decline set new month-to-month records in a number of cities, including New York (-2.5%) and, spectacularly, Minneapolis (-6.1%), apparently the worst monthly decline for any city in the index' history.

Curiously, after Armageddon has crushed many US metro areas for months on end, it is only now that New York is starting to fall off the cliff. After having been declared "immune" to the housing crash by numerous real estate gurus, reality is finally setting in. The 2.5% monthly drop that New York clocked from February to March 2009 may not seem as a lot in light of the disastrous declines other cities have posted but it was in fact the worst monthly decline for New York in the index' 22-year history.

San Francisco bay area, Las Vegas and Phoenix also continued their spectacular declines. San Francisco is now down 46% from the peak in 2006 and the index is back to mid-2000 levels. Las Vegas officially became the second major metro area in the US to decline by more than 50% from the peak (Phoenix passed that milestone in February and is now down 53% from peak level). Detroit continued its slide into the abyss and prices there are now back to 1995 levels (adjusting for inflation they are back to 1980'ies levels).

A couple of cities held up well and actually managed to eek out minor price increases. Most notably, Dallas, Denver and Charlotte were up by a few tenths of a percent. These were cities, however, that never had an exorbitant housing boom to begin with. Charlotte and Houston never flew very high (prices there "only" went up some 25-35% from 2000 to 2006) so there is less room to fall. By contrast, prices in Phoenix went up a good 125% over 6 years. That's why Phoenix is today a smoking crater of sub-prime and option-ARM wealth destruction.

Somewhat remarkably, the price declines in Los Angeles, Washington DC and San Diego slowed down to a crawl, even though these cities are far from bottom. I have no idea why that is (one can speculate that Washington gets a fair amount of giddy business from lobbyists swarming the new administration). However it is a safe bet that these cities are not done falling, and that almost anyone who buys at the current price levels will be sitting on a loss a year or two from now. In LA, for example, prices are still up 60% from the baseline year 2000, so there is a long way to fall.

I have previously predicted that the 20-city Case Shiller index will decline at least 40% from peak to trough before this correction has run its courseWe are currently at a 32% decline from the peak, so there is another 12% still to go (not 8% because of compounding effects!).

For those who have read my columns on the stock market you may wonder how I can comfortably make these predictions. After all, I maintain that although the stock market may not always be efficient, history has shown that it is exceedingly hard for any individual to predict and profitably speculate on the future direction of prices.

What makes me comfortable about making general statements about the direction of the housing market, by contrast, is the fact that house prices exhibit what economists call "serial correlation". This basically means that if prices fell last month, they are biased towards falling again this month (and vice versa for gains). This is not true for the stock market, but there are a number of reasons why it is correct for the real estate market.

One key difference is that stock prices ideally reflect the future stream of earnings of a company (something that is very hard to predict correctly, but that the stock market nevertheless tries to do every day). Unlike a factory or machine, a house is not a productive asset - it does not throw off products or services and is generally just a shelter.

When housing supply is very high (e.g. due to a poor economy which forces foreclosures) and demand is low (due to tight financing, high degree of uncertainty and high unemployment etc) house prices will fall. And once they start falling for these macro economic reasons, they tend to fall for a long time (typically several years).

When you add to this that we just had the most spectacular real estate bubble in the country's history, and that bubbles always pop and prices come down to pre-bubble levels, it is not hard to predict that house prices will continue to decline probably well into 2010 (if not 2011).

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Article Tags: abyss, apples to apples, apples to apples comparison, armageddon, declines, house prices, housing market, index history, inflation, last tuesday, metro area, metro areas, milestone, month of march, nbsp nbsp nbsp nbsp nbsp, peak level, price decline, real estate gurus, san francisco bay, san francisco bay area



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Re: Time to get rich in real estate? - House prices, like a lot of the economy in Japan, have been pretty stagnant. Hiroshima is no exception, at least on the secondary market; Apartment in new apartment blocks are more attractive to people who buy for residential purposes.
Re: What is your biggest challenge? Today? - [quote="christew":1f5i0uox][quote="Alan Mater":1f5i0uox]The question of quality comes into play at this point. [/quote:1f5i0uox] Yeah quality is often correlated with price, but paying more won't always guarantee higher quality. If you look around there is a huge amount of great writing talent that work at good prices. I was once one of those writers (started at $3/post) before I eventually ended up doing my own thing. The internet has empowered almost anyone to become a writer very easily, which has opened up the job market, pushing down prices considerably.[/quote:1f5i0uox] No, but it's a good indicator that you'll get good quality. People that provide quality know that they can raise prices due to the quality of their work. But, as you said, because of the competition these days, the prices are low and forcing people to charge less than they normally would. It's finding the balance between the price you want to pay and the quality you want that can be a challenge. You may have to go through several different freelancers before you find one that will be your long-term provider. I have a client I write articles for at very minimum prices. I don't mind it, though, because it's not my main service, and I know I'm helping the client out with getting more work. He has to charge lower prices because of the competition, so in turn I get paid less. This brings up the question: Should freelancers lower their prices just to please the market and risk losing money in the long-run? A problem I see is that people under-value their work too much and to the point where it's really not worth doing anymore. I would much rather keep my prices a bit higher and continue to provide outstanding service, rather than depreciate and devalue myself. Should we let the market determine how much we're worth, or should we tell the market how much we're worth and let it up to them to decide if what we're saying is true?
Spend Wisely to Save Money - Have you ever noticed that the things you buy every week at the grocery and hardware stores go up a few cents between shopping trips? Not by much…just by a little each week but they continue to creep up and up. All it takes for the price to jump up by a lot is a little hiccup in the world wide market, note the price of gasoline as it relates to world affairs. There is a way that we can keep these price increases from impacting our personal finances so much and that is by buying in quantity and finding the best possible prices for the things we use and will continue to use everyday… things that will keep just as well on the shelves in our homes as it does on the shelves at the grocery store or hardware store. For instance, dog food and cat food costs about 10% less when bought by the case than it does when bought at the single can price and if you wait for close out prices you save a lot more than that. Set aside some space in your home and make a list of things that you use regularly which will not spoil. Any grain or grain products will need to be stored in airtight containers that rats can’t get into so keep that in mind. Then set out to find the best prices you can get on quantity purchases of such things as bathroom items and dry and canned food. You will be surprised at how much you can save by buying a twenty pound bag of rice as opposed to a one pound bag but don’t forget that it must be kept in a rat proof container. You can buy some clothing items such as men’s socks and underwear because those styles don’t change, avoid buying children’s and women’s clothing, those styles change and sizes change too drastically. Try to acquire and keep a two year supply of these items and you can save hundreds of dollars.
zipcar saves Gas cost - The gas prices haven't affected me in anyway. I use the Transit system and ZipCar. I love Zipcar 'cos it has Gas and Insurance included in the prices and they haven't raised that for a couple of years now.
Re: What is your biggest challenge? Today? - [quote="Alan Mater":3qk869js]No, but it's a good indicator that you'll get good quality. People that provide quality know that they can raise prices due to the quality of their work.[/quote:3qk869js] It is certainly an indicator, but my personal experience after working with many many freelancers, that price is can be a weak indicator. Quite often the reason is some people are much better at marketing and selling themselves, which results in more clients, and higher prices. But their ability to market and sell themselves it not necessarily an indicator of their quality. [quote:3qk869js]Should we let the market determine how much we're worth, or should we tell the market how much we're worth and let it up to them to decide if what we're saying is true?[/quote:3qk869js] The market always decides. The price is not set until a transaction takes place, so you could put your prices where-ever you want but if nobody wants to buy it, then the market has refused that price. Its certainly true some people undervalue their work (just as some over-value), but you can only raise prices as much as people are willing to pay, and as you raise your prices you'll find fewer and fewer willing to pay (market forces). If you can charge more than average in your industry then that is great, certainly you should not lower your prices and I was in no way suggesting that. Its up to the freelancer to try and get as much as they can for the work they do, but market forces will always limit that.


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