Setting Q1 2007 to 100, the NY Times calculated prices fell to 92 in Q4 1996. Using CPI less Shelter, prices would have only fallen to 93 (minor difference).
"Second, real prices for houses do increase over time - perhaps on the order of 1% to 2% per year."
CR, actually I think they haven't increased even minutely over time. A longer term graph appeared in another Times article, where Schilling looked at prices back to 1890. It was even scarier than this one, because there was no sustained appreciation in real prices until this bubble. Real prices actually declined steadily up to World War I as balloon-framing and other mass-production techniques drove prices down, rose in '20s, declined again in the 30s, shot back up after WWII and then plateaued, interrupted only by a few mini-bubbles that reverted quickly to the mean. I have a copy of that graph on my hard drive at home. Will email you a copy if you're interested.
I agree with everything your saying, but Im wondering if your using the 1-2 percent growth rate, assuming its inflation adjusted, for each year since 87. From 1989-1995ish Inflation adjusted housing prices fell and remained flat. So I would think that the 122-150 value on your graph should come in a little lower, say around 110-120. Leets average it out to 115. I would expect that with all the bad news coming out, that real estate value would have to hit atleast 122.
The real price of the average house over time does increase. But what the Case-Shiller numbers measure -- change in resale values of existing homes -- has not increased significantly in real terms (that's the whole point of the famous NYT Case-Shiller graph). So "house prices increase in real terms" is not really an appropriate criticism for this graph.
But the average house does get better and more expensive in real terms over time, moving roughly with real income gains.
The issues about scale and starting point are all valid, but the NYT is clearly trying to make a bearish point here.
CR, could you do an EVA analysis of residential RE investment over a few decades? If analysis of the financial outcome includes WACC, the picture is completely different, and a better measure of whether the market conditions are helpful or hurtful
A point about the NYT article, concerning people calling the bubble "years early", as they point out.
In order to have any utility, a prediction has to be made BEFORE the event, not AS it's occurring. The second instance is how the NYT predicts events.
I to am wondering about the 1-2% per year. Christopher F. Thornberg's lecture (at the bottom of one of you're posts) said America runs .2% per year and Amsterdam ran about .1%.
1 to 2 percent on top of inflation? 1% is a stretch, 2% is absurd unless you think the current run up is justified and housings true value has been repressed for the last 100 years.
Which are the basics to explain the 1-2% real appreciation you mentioned?
Does it has anything to do with changes in household size, or in the number of second-third-vacational homes per inhabitant, changes in home sizes, construction quality, or what?
I too think you're wrong about the 1-2% real increase. Before the current run-up, they were about where they were in 1890, according to the Shiller index.
I have a copy of Schiller's Excel Spreadsheet data back to 1890. The trend going back was that significant decreases in real home prices were attributable primarily to double digit inflation vice nominal price declines.
Schiller includes the real building cost index as well, which shows that it costs roughly 60% more to build a place today than it did back in 1945. So if real prices were to reflect real building prices the index should be around 140 today.
For comparison sake the real and nominal long interest rates are included in the data set.
Out of curiosity I substituted the BLS CPI data with ShadowStats data from 1989-2006. Amazingly this adjustment puts real housing prices under 100. I don't think shadowstats inflation is correct nor BLS; reality probably lies somewhere inbetween.
I did a similar recalculation two weeks ago. By the time I used the shadow govt statics inflation series and then very roughly adjusted for hedonics I got an index of 115 rather than the 200 the C-S graph indicates. The graph. The posts.
In other words: if you normalized home prices by the "buildt" square feet (as we usually do in Spain), should you expect such annual 1-2% increase in real terms. Should it be the same appreciation rate in coastal zoned-zones as in the vast middle plains? Nothing to do with land scarcity?
This is a damned fine contribution to UberNerdity.
Sure, you could have traced the history of the development of the Excel Chart Wizard, making wise-ass remarks about its creation of a generation of dunces who just hit that auto-scaling tick box and go on, but this is a minor point.
Just remember, CR, you have to reel 'em in slowly. A few shortish, relatively painless UberChartNerd posts to get 'em hooked, then you can post 10,000-word treatises on Saturday morning and they'll devour it as avidly as if you'd just found the lost final chapter of The Mystery of Edwin Drood.
I immediately came here to comment on this weird idea that real estate prices have to appreciate 1% to 2% over "inflation" (Whatever the hell that is) for, apparently, eternity.
Where does this number come from? Do they grow 2% per year less affordable (then who is buying them?) or do we on average getting 2% richer in real terms every year until the day when presumably we sit around in robes in a green garden while robots do all the work, in which case saying that they go up 2% in "real terms" doesn't mean much if we all gain 2% more real inflation adjusted disposable income each year.
Headache inducing!
Perhaps houses are getting 2% smaller each year, due to over-population, and the prices should be totally stable?
Either way it is all going to end in tears unless the economy can be vibrant and 0% growth: sustainable.
Comparing the house price index to "business sector: real compensation per hour" is interesting. The shape is similar, although the increase in real compensation, annualized since 1987, is about 1.3% per year, compared to 2.5% per year for the real home price index increase.
Anybody want one of those Case-Shiller houses from the 1890s? No electricity. A 20% chance of indoor plumbing. No garage. If there was central heat then it was asbestos lined. Few small single paned wood framed windows.
What might be an interesting additional data set in this chart is a line representing avg degree of leverage. That might help determine where real prices should fall?
I think the 1-2% per year is true for the median price in recent history. However, as other posted have said, the average house has changed. Houses now have improved features, upgrades and more size.
It's reasonable for people to allocate a larger slice of their income to housing over time, but NOT FOR THE SAME HOUSE. Since the Case-Shiller index tracks same-house sales, it shouldn't show the median-price 1-2% increase.
I was contemplating that graph and was struck by the thought, what if buying during the boom was a good idea because of the ability to lock in cheap fixed financing? Why? Because of raging Brazilian style inflation over the next ten years.
In the spectrum of scenarios that folks keep talking about, persistent high inflation seems to be permanently discounted, but what if it actually comes to pass? What if our inflation predictions are way too low?
Just skewing the CR blog conventional wisdom of dropping home prices in nominal terms, but instead dropping home prices in real terms, with nominal steady, falling slightly, or even rising again? Does this give some really strange results that seem to be discounted by the mainstream?
Are we really sure inflation is tamed to the degree we all assume based on the last twenty years? Or could it once again give us the 1970's, in which case today's high real prices are tomorrow's normal nominal prices? Could the Fed be exhibiting the strain of the early 70's Fed when inflation began to exceed targets?
Thoughts I have been pondering over my sandwich. The real winners might be anyone with a fixed mortgage who can make the payments, and anybody who owns anything that has a commodity value.
If you take the long rate from Schiller's xls and add a 1.5% margin then figure out the monthly nut from the real home price index you can compare affordability.
When looking at this data homes were less affordable back in 1980 $1,232.02/month per thousdand index v. $1,207.42 / month today. The worst affordability was $1,450.09
in 1992 when long rates were 14.59%.
I think it is reasonable that real home prices (for the same homes sold over an interval) should increase with time; however, I don't know how much they should increase.
The reason I am certain there should be some increase, is that those homes include lots, and there is only so much land. Therefore, I would expect people to bid up the price of land in some proportion to their ability to pay, i.e., real income. And real income has historically increased with time (roughly in line with productivity increases).
But I would expect the real home prices to go up less than real income, since a home includes a lot and a house. You can't make more land, but you can make more houses, so I wouldn't think that the price of the house itself would be bid up in line with real income.
I guess you guys are assuming that salaries have kept up with inflation. I still think a better factor for affordability is the rent to price ratio. I agree that 1982 was bad, but its no peaches and cream right now either. I mean, your comparing unaffordable prices for a time when long rates were 8.5-9 percent higher.
What I want to know is how much the cost of maintenance has increased historically? $6000 to paint my house. $12000 to redo my rotting deck. The mortgage isn't a big deal. It is everything else.
"u were with me during the HOV squeeze. whaddaya think?"
No clue, but I doubt it. I have a hard time with the brokers, long or short. Their shares whip around like an injured rattlesnake. BSC probably a good short, if you have balls of titanium.
To adjust for inflation, the NY Times used the CPI from the BLS. This is a slight technical error; an economist would adjust the Case-Shiller index using "CPI less shelter". Admittedly the differences are minor.
Although I've seen economists use CPI less shelter when adjusting shelter for inflation, can somebody enlighten me on why this is more accurate?
Since we're getting so technical and long-term, isn't it true that the value of most housing depreciates over 70-80 year horizons?
It's actually the value of the LAND under the house that provides most long-term appreciation?
Why is this distinction important?
Because builders have created an illusion of land wealth in the exurbs. Imagine a country of $6 gasoline. Wouldn't you see huge depreciation in a lot of the exurban land, the same land that has probably appreciated by 5-6% per year in the past? It could make a big difference long-term. What do you think, CR?
Elvis
True. Dallas Gutter just quoted me $660 for 47 feet of gutter while Home Depot sells 10 ft metal gutter sections for under $10 bucks. Two recent bids to stain a wood fence were $875 and $1,300. A 20x20 carport is $2,400. I pray each winter the central heat comes on and stays on without burning down the house. Replacing rotted french doors was $1,800. The Energy Store (Jeld-Wen products) wants almost $10,000 to replace two leaky bay windows.
I have often wondered why I'm told my house anchored to the ground will appreciate so much more than a house merely tethered (sitting on wheels) to the ground, lol.
Further, having a "mobile" home seems like a big advantage!
Probably a stupid question, but has anyone read the papers on C-S methodology and verified that price changes aren't in real terms to begin with? No offense to CR, but I had thought this to be the case. Just seeking clarification.
I was interested in purchasing a house and had received a quote from Countrywide. In the middle of the process there was this rate cut so I email Countrywide and asked them if this cut would bring prices down and I was told yes and they would email me an update. It took a couple of days for them to return my email --- and I don't understand this but I was told that the rates had gone up. I'm confused.
Countrywide's currently sitting at the wonderful junction of amorality and bankruptcy.. so they'll be taking a larger monthly mortgage check than any other company while telling you they're thinking of your best interests!
there was this rate cut so I email Countrywide and asked them if this cut would bring prices down and I was told yes and they would email me an update. It took a couple of days for them to return my email --- and I don't understand this but I was told that the rates had gone up.
Well yes, home prices went down and then they emailed you with an update of higher rates. What's the problem?
"Although I've seen economists use CPI less shelter when adjusting shelter for inflation, can somebody enlighten me on why this is more accurate?"
The purpose of the current exercise is to see the house price movements relative to the prices of other consumer goods and services.
So, deflating with "the CPI less shelter," you are more closely measuring such relative price movements.
If you deflate with the regular CPI, its housing components may end up deflating the house price and its run-offs, which is not what you want.
But, the CPI housing components are mostly rent and rent equivalence. They do not necessarily track the house prices, so the differences are quite minor.
One thing it doesnt isolate that R. Timm so aptly pointed out is real mortgage payment...
The other concern (question) I have is, as BR pointed out, what if there has been a cultural / structural change in the consumer's psyche. Other countries allocate different percentage of their incomes to housing. What if 40%+ is here to stay on the coasts.
A natural counter argument to the point I'm over-posting on is that the buyers of the 80's had many opportunities to refinance as rates went down.
The counter-counter is that rates should only go up again if inflation goes up again. You might be stuck at the same rate, but your LTV goes down in that environment.
This is long term. Right now inflation is rising and housing is falling but eventually they move in the same direction.
Some of the comments got me thinking of the early days of the housing explosion in Eire: Do vigorous price stability policies merely lead to higher rates of asset inflation?
I think the answer is yes, but the thing that needs to be answered is hw the stagnancy of RE in places like Germany and the midwest tie in.
Housing cannot keep going up without wage increases to support the cost; similarly, we cannot have runaway inflation to "fix" the housing Bubble unless we also have run away wage inflation. When I see the minimum wage increasing at 10% per year and I am getting a 20% raise just for showing up, I'll believe that inflation will fix the Bubble, but in reality, people are growing poorer as stagflation eats this nation alive. Housing will go down the tubes with everything else.
Tomas and Martha Hernandez said Ms. Valdovinos had convinced them that they could afford a $745,000 home in San Jose, even though Mr. Hernandez earned about $4,000 a month and told them he could pay no more than $2,500 a month.
I know this is a bit OT, but wow just wow. The article is trying to paint a picture of people getting defrauded, but they just look stupid. Listen you make $4000 a month, $2500 is WAY TO MUCH TO SPEND ON YOUR MORTGAGE, much less what the loans closed at. $745,000 houses that look like the one in the picture?
At what point to do you take a step back and say wait a minute this may be a bad idea, oh wait, I guess that time is now.
Listen you make $4000 a month, $2500 is WAY TO MUCH TO SPEND ON YOUR MORTGAGE, much less what the loans closed at. $745,000 houses that look like the one in the picture?
the sucker sale is the comparison--
in san jose , you get your 1100sq ft apt for $2500,
or
A phat 3400sq ft home with yard and 3car garage for 2500..
I know this is a bit OT, but wow just wow. The article is trying to paint a picture of people getting defrauded, but they just look stupid. Listen you make $4000 a month, $2500 is WAY TO MUCH TO SPEND ON YOUR MORTGAGE, much less what the loans closed at. $745,000 houses that look like the one in the picture?
The article's main point was more technical. These people speak fluent Spanish but only minimal English. The sales process was conducted in Spanish. Their lawsuit claims that if the sale was in Spanish, the disclosures have to be in Spanish, under state law.
The article also said Hispanic homeowners have been a target of real estate greed/fraud, in part due to language barriers.
I'll agree: People who speak any language should never have bought the home in the picture for that kind of money.
I think this just goes ahead and proves the government has no freaking clue.
Let's penalize the people who played by the rules, planned estates accordingly, and managed their money. We can just tax the people making money to pay the people who lost money.
What a kick in the balls, or breasts.
We can also argue the merits of passing legislation that effectively increases prices into an environment of declining prices. That should help move some houses.
I agree the article was about the language barrier (legal implications), but numbers look the same on a paper in Spanish or in English. The third loan problem was also ridiculous, and illegal it seems, but the process should have never even got that far. These people made a terrible financial decision and are now wasting time and more money trying to litigate out of it.
Punchline: the victim bought the house from his boss. They flip houses together. Boss keeps the sale, Jose gets a new papers and calls himself Juan. Juan's looking for a place in Half Moon Bay next week.
"We can just tax the people making money to pay the people who lost money. "
I don't think this is the case.
I think all those that went to make money in Real-estate - in part due to goverment action - made phantom profits - and as such should indeed be taxed.
The phantom profits they made, are because interst rates were kept low - which mean real savers (CD owners) have already paid the price for the real-estate party that was going on.
"Buying a house was a bigger hit on disposable income in 1982 than it is today."
Well, yeah, mortgage interest rates got up to 15-17 percent briefly in the early 80s. I knew a guy with one of those. If the seller didn't have a fat assumable loan to make the deal work, you were mad to go ahead.
seems we're not alone in our pessimis...errr... realism.
Reuters reports: A majority of hedge fund managers say a U.S. recession is "very likely" in 2008, but fewer than one in five said an economic slowdown would be bad for their funds, a survey of several-hundred hedge fund managers released on Tuesday found.
Rothstein Kass, a provider of auditing and tax services for funds, said it sponsored the survey that polled 239 hedge fund principals with a median $492 million in assets under management. More than 61 percent of those polled said they believed a recession was "very likely" in 2008, the survey found.
Still, only 17 percent of those surveyed viewed an economic downturn as bad news for their funds, with some 66 percent suggesting a recession would bring investment opportunities.
1. Low rates for savers
2. CD are taxed as income in many cases.
Yal | 09.26.07 - 4:53 pm |
in the big picture, they were already paid... there are no guarantee's once you get it/save it...
everyone is dependent on everyone else in this economy..
and if that means mal investment on occasion, to keep the migrant's housed, the trucks moving, the oil fields drilling, the banker's yachting... whatever it takes to keep the ball moving forward... the CB provides easy access for those with money making ideas(on paper) to give it a shot.
a saver should recognize that... they were shrewd enough to save!
reason: no point moving and waiting two years - can sell now.
It could really crush the vacation home market through 12/31/10. It isn't just the threat to repeal the $500,000 (married) exclusion of capital gain. It's also the scheduled expiration of the low 20% rate on gains. All 3 Dem candidates say they won't extend it.
If you had a $400,000 gain on vacation home, you could be looking at zero fed. tax now vs. $112,000 on January 1, 2011, assuming LTCG rate goes back to 28%. There would be a selling stampede among vacation owners with low basis.
I don't mind vacation homes to get crashed. After all, the deductibility of the interest payments on a mortgage for a vacation home is insane (secondary home). Why giving subsidies for buying a vacation home?????
While it's true that the average house has been getting better/bigger over the decades, average lot size has been decreasing. The output of the big national builders consists mainly of McMansions or cookie cutter units on postage stamp lots. And since it's really the land/location that determines future value, I don't see how the bigger/better argument, or even the construction cost argument, can justify any 1%+ real price appreciation over time. Houses sit out in the rain and deteriorate.
"Two recent bids to stain a wood fence were $875 and $1300."
I just stained my 400 sq.foot deck and it cost me about $90.00 in stain and 10 hours work (two coats; pillars and handrails).
"The Energy Store (Jeld-Wen products)wants almost $10,000 to replace two leaky bay windows."
Now, I have not seen your bay windows but unless they are encased in gold I just cannot see over $2000 in the windows. $8000 for labor? Where do you live? I'll come down, do your deck and your windows for about two days work and clear nine grand.
If your paying these kind of prices, then I have a bridge I'd like to sell you.
Maintenance on a home is not that extreme. That is unless you buy a 50-year-old home that has never been maintained.
All, Amazing how people are so wrong on the real return on housing. Yes, during periods of no population growth (see Amsterdam) the real return was close to zero. But during periods of steady growth, the real return is somewhere above zero - "perhaps" on the order of 1% to 2%.
Yes, 2% is excessive - but I was trying to point out that those expecting a fall to 100 are probably as wrong as those that thought housing would never go down.
Do people think there was no population growth over the last 20 years? The U.S. averaged a very robust 1.1% per year!
Do people think there will be no population growth in the future?
Do people think there will be no population growth in the future?
Best to all.
Calculated Risk | Homepage | 09.26.07 - 5:27 pm | #
Well, there is the baby boomer demographic bulge and plague is not totally out of the question.
Notice that many species of critters out there increase their population size until they overexploit their resources and then suffer a population die-off. Kind of like a recession in economics. It makes room again for more.
It's a good thing us superior Humans don't overexploit resources.
According to Appraisal theory Land appreciates,and improvements depreciate due to loss of utility,physical deterioration etc.Land of course can also depreciate for a number of reasons...
The shiller indices based on the 20 metro areas are not going to catch everything --esp those vacation homes (some quite sizable). It is also a lagging index in not recording sales that don't have atleast a 6 month history.
Nonetheless, I have no problem with it being an improvement over its predecessors...but when I look at these compiled (and more robust) results beside that video showing the Miami auctions @ ~50%, I am reminded that in some metro locations the latest compiled Shiller house price declines have little resemblance to the current reality.
CR
There will be population growth, but because of the chimney effect it won't help out homeowners for quite a while. Gen X is too thin compared to Gen Y.
Gen X is the major initial homebuying cohort, and even with immigration, it just doesn't have enough people, especially with high paying jobs.
Now if the boomers would hurry up and start actually retiring and causing a shortage of labor this might be mitigated, but their poor planning ensures, in whole, they will be participating in the workforce for some time to come.
Check out the demographics, they are not good for anyplace that doesn't anticipate a flock of shuffleboarders soon. High end golf will probably be a bust.
anon: why are you surprised at the stupidity of people when bombarded with propaganda (as in your story of the Hernandez). After all millions of Americans supported the invasion of Iraq and a large percentage still do. Typical American=pretty stupid. Posters here are certainly the exception.
I think I finally found something to disagree with you on (took long enough!).
But during periods of steady growth, the real return is somewhere above zero - "perhaps" on the order of 1% to 2%.
I see no reason it should be. 68% of my home's value is a hard asset sitting on top of the valued land (according to the government). So let's talk about that 68%.
Much of it is made from a renewable resource: lumber.
It is a hard asset that requires rather substantial maintenance (unlike silver or gold).
It is a hard asset that you must pay taxes on annually (property taxes).
I believe you are mistaken. It is the land itself that is worth the money, and that land represents just 32% of my home's value (according to the government, very near Seattle).
Granted, you can rent your hard asset out to earn money on it. That's true of any hard asset though. Heck, they rent out TVs. That doesn't make TVs long-term stores of value though.
This does not mean that I expect house prices to drop to historical norms. The land represents 32% of my home's value and I pump money into the 68% that's a hard asset to see it hold its value. The net result is something, on average nationwide, possibly much closer to 0% than 2% though, from a real return perspective.
StagflationaryMark,
The 600 year chart shows the decline of silver as a result of the discovery of the new world, increased production from western USA mines, and finally, the ability to recover through Sol/Ex. The funny thing is that when silver ceased to be a monetary metal, stocks of silver vastly increased as coins were melted in large quantities. I do not believe the disinvestment will be as large as 79/80 without seeing $75-100 an ounce in 2007 dollars. In other words, the last great melting episode created the shortages that will be greater when the prices soar this time. There are no large banks full of silver coins to meet demand. There are no US, Russian, or any other government stockpiles.
In other words, the great overhangs of supply are gone, and what is left, is all there is. There are literally tons of silver jewelry, but most folks won't melt it for a lousy six to eight dollars net. A tremendous amount of silver flatware and serving wares were melted in 79/80- were they ever replaced in people's households? No.
What I find interesting is the price is now being driven almost entirely by falls in the dollar. Panic is so far off in the metals markets that I think if we ever have serious inflation start up here, there will be literally parabolic increases day after day.
But the great flows of coins that drove 79-80 and met the demand of the Hunt brothers and literally overwhelmed their ability to buy are gone. So even if the metals soar, most people have very little to sell.
I find it curious that most people have so very little of what their ancestors would have considered wealth, and so much paper.
CR - great stuff but it won't sell newspapers but you are right.
Dean Baker - Your rent payment is still more that your old house payment was and the home is still worth more than what you sold it for - just a timing issue.
I did own a lot of silver from 2004 to 2006. In hindsight, perhaps I should still own it (I took profits on the parabola). In any event, you are preaching to the stagflationary choir.
Clearly the best time to stop hoarding lumber was back in 2004, which was about the same time I began hoarding silver.
Just a comment on lumber, the top is usu limited by substitution (steel which is fairly stable) and the bottom by cost. In the USA it is a protected industry (imports) in some owl-less states.
I usually don't bother with adding to my own stockpiles of what I call end of the world investments, but the Fed cut pretty much convinced me that we will end up inflating. So I went to the US Mint website to buy some of the common AE gold in uncirculated. Um, withdrawn for repricing. So I went down to one of the few remaining coin dealers in Phoenix, and he was doing almost land office business. On the other hand, there are approximately four or five retail coin stores to serve 3 million people. I don't count the investment sized folks who sell bars and coins in quantity online and have physical offices here in Phoenix.
That inflation will be met by a realization that most people have very little in the way of "inflation proof" assets, and a tremendous amount of consumer goods that aren't worth didly. The upper middle class is stuffed with stocks, houses, furniture, clothing and consumer goods- all things that just don't have a resell market. I am seriously thinking of buying used HD motorcycles here from the repo men and containering them to China to sell to the rising business class.
I like to joke that I know I am on to something when everything I want is expensive on Ebay, and everything noncoin that I sell goes for bupkiss.
Want books? Most of them are cheaper than dirt online and used. Food still is really cheap in the US- energy is not. Draw your own conclusions as to the best investments. I have begun to wonder how much longer things will go on without massive changes.
lumber prices pre 2004 were driven by the buldup to the Iraq war. Prior to desert whatever, OSB easily doubled in price over 6 months due to military demand.
Sorry to beat a dead horse but I have another issue as well.
Using 1987 as a starting point, a 2% real return would have put current real prices at 150; a 1% annual return would put the current value at 122.
Why are you using 1987 as the starting point? That's actually near the top of a previous housing boom. In my opinion, your projection is therefore projecting roughly where the top of this bubble SHOULD have been.
Wouldn't it be more accurate and consistent to use a trough to find the next trough? If so, the trough on your chart is around 1997. If you project that forward you'd be projecting a number more like 100.
Hey, I'm not predicting anything here. I'm simply pointing out that you are leaning a bit more towards the optimist than the data would suggest. (Much to the horror of those who think you are too bearish!)
OT Sorry to go off topic, but , as people of intelligence could you answer one question? Here it goes: on cnbc channel screen during the day we have prise of main commodities( oil , ngas, gold, silver, copper in $ per unit, then there are main currencies as bpound, euro - are in $ per unit too, treasuries the same , but one thing only given inverted ( units per and it is Japanese yen . So, if any currencies
The percent rise in real home prices depends on the window of time you choose... Just take a look at Shiller's graph of real home prices. From 1890 to about 1945, the change would be negative.
If you look at the beginning of the graph (1890) to the beginning of the latest boom (mid-1990's), the gain was certainly much less than 1% (more like a tenth of a percent, if I am reading this right).
That's how I'm reading it. I'm firmly in the camp that believes home prices have gone up with inflation and not much more than that (nationwide anyway).
That's not to say I'm necessarily a believer that's how it will be in the future though. Part of it has simply been based on a productivity miracle (modern construction equipment) and fairly cheap energy.
Further, at least our country still is growing its population. If Japan is any indicator, it will be Europe that's going to be getting some nasty surprises soon. Inflate (your population) or die (deflate).
Does Case-Schiller take in account the fact that houses are getting bigger and nicer these days. I would think that would affect what appears to be an "appreciation". It seems to me, while you may be paying more, adjusted for inflation to own a home, you are getting more for your money long term. Am I wrong?
Case-Schiller tracks the same house over time so therefore should be immune from that effect. From what I understand, Schiller was simply trying to determine how you'd do as an investor if you simply bought a house and then resold that very same house later.
S&P/Case-Shiller® Home Price Indices First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs.
Dimitry: I believe the Yen is quote as it is because of its weakness, nothing more. If it were re-valued then they would invert it. As for the psychological your guess is as good as mine, but if I had to guess I'd guess that people in the forex arena are far to calculating to let anything like this bother them.
1-2% long run real appreciation sounds optimistic to me. Real income has not risen that fast. I'd believe that housing consumes a relatively constant proportion of real income.
Best data I've seen on long real appreciation is the Eichholtz 350 year study on Amerstdam. Schiller commenting on it is available here
The one thing I like about the NYT graph is that it better visually illustrates the risk most buyers face since they buy with a high amount of leverage. The zero point isn't really relevant when you are buying with a 90% LTV.
First, it is important to look at growth of number of households as they drive demand for housing (commented on earlier). Households have been growing but fairly slowly. We should get bump in 2010 as baby boomlet gets married and wants to settle down.
Second, population growth in a country like the US which for all intents and purposes is not land constrained has no impact on prices except in a couple of "special cities" - like Manhattan and SF. Every place else, the cities just sprawl out.
A CHANGE in population growth (not just growth itself) can cause prices to temporarily go up or down - providing nice signal to builders to either build more or go on vacation.
Greg Mankiw has paper on his website from late 1980s showing the linkage between price and households.
From a mathematical perspective, if the land was constantly appreciating more than the house itself (which should be worth at most replacement cost), eventually the house part of the price would be inconsequential.
Even if the Bubble represents real inflation rates, which I do not believe is the case because of the fraud factor, lack of lending standards, and the mania, salaries have not kept up, thus either housing prices must drop or salaries must skyrocket. I am betting on the price drops.
michaelcampion - I started that blog shortly after I retired earlier this year. I recently landed some consulting work on distressed debt (for servicers) and it would be a dis-service to the client to be doing both.
You may recall a couple months ago I wrote about a very nasty looking transitional CMBS issue (with narrative involving drinking scotch and passing out). One of the those assets (the #5 office building) has yet to make a payment and I am now doing consulting work on it.
CR, I think this criticism of the NYTime's graph is a bit petty. It's redundant to have half the graph filled with gray; a complete waste of space. It's not as though they hid the index value, it's in plain sight. They used 100 as a baseline and they didn't truncate above any troughs. If it seems like they're trying to be overly dramatic about the bubble, consider the scale of it compared to bubbles in the past and tell me it's not dramatic in its own right.
but i thought all housing was local?
Zero-suppression is a crime.
CR
Setting Q1 2007 to 100, the NY Times calculated prices fell to 92 in Q4 1996. Using CPI less Shelter, prices would have only fallen to 93 (minor difference).
u meant setting to Q1 1987...
I am just wondering, when this CR dude will write an article saying "I was too optimistic".
Would any of this be a structural change? . I know this would be a strange time to highlight this.
"Second, real prices for houses do increase over time - perhaps on the order of 1% to 2% per year."
CR, actually I think they haven't increased even minutely over time. A longer term graph appeared in another Times article, where Schilling looked at prices back to 1890. It was even scarier than this one, because there was no sustained appreciation in real prices until this bubble. Real prices actually declined steadily up to World War I as balloon-framing and other mass-production techniques drove prices down, rose in '20s, declined again in the 30s, shot back up after WWII and then plateaued, interrupted only by a few mini-bubbles that reverted quickly to the mean. I have a copy of that graph on my hard drive at home. Will email you a copy if you're interested.
CR:
I agree with everything your saying, but Im wondering if your using the 1-2 percent growth rate, assuming its inflation adjusted, for each year since 87. From 1989-1995ish Inflation adjusted housing prices fell and remained flat. So I would think that the 122-150 value on your graph should come in a little lower, say around 110-120. Leets average it out to 115. I would expect that with all the bad news coming out, that real estate value would have to hit atleast 122.
The real price of the average house over time does increase. But what the Case-Shiller numbers measure -- change in resale values of existing homes -- has not increased significantly in real terms (that's the whole point of the famous NYT Case-Shiller graph). So "house prices increase in real terms" is not really an appropriate criticism for this graph.
But the average house does get better and more expensive in real terms over time, moving roughly with real income gains.
The issues about scale and starting point are all valid, but the NYT is clearly trying to make a bearish point here.
And the index neglects the cost of debt!
If the standard buyer is financing the transaction with debt, then failing to account for interest rate is criminally misleading.
Tanta,
Sue CR for Ubernerd infringement! Go for the whole tips bucket.
CR, could you do an EVA analysis of residential RE investment over a few decades? If analysis of the financial outcome includes WACC, the picture is completely different, and a better measure of whether the market conditions are helpful or hurtful
A point about the NYT article, concerning people calling the bubble "years early", as they point out.
In order to have any utility, a prediction has to be made BEFORE the event, not AS it's occurring. The second instance is how the NYT predicts events.
CR,
I to am wondering about the 1-2% per year. Christopher F. Thornberg's lecture (at the bottom of one of you're posts) said America runs .2% per year and Amsterdam ran about .1%.
Any clarification available?
And I wholly agree Professor Foland, Criminal!
CR, How difficult would it be to create your graph for the 10 cities in the C-S index? After all, all real estate is local.
1 to 2 percent on top of inflation? 1% is a stretch, 2% is absurd unless you think the current run up is justified and housings true value has been repressed for the last 100 years.
Which are the basics to explain the 1-2% real appreciation you mentioned?
Does it has anything to do with changes in household size, or in the number of second-third-vacational homes per inhabitant, changes in home sizes, construction quality, or what?
How does it compare with real wage growth?
best regards
CR,
I too think you're wrong about the 1-2% real increase. Before the current run-up, they were about where they were in 1890, according to the Shiller index.
A really great illustration is housing roller coaster animation.
I have a copy of Schiller's Excel Spreadsheet data back to 1890. The trend going back was that significant decreases in real home prices were attributable primarily to double digit inflation vice nominal price declines.
Schiller includes the real building cost index as well, which shows that it costs roughly 60% more to build a place today than it did back in 1945. So if real prices were to reflect real building prices the index should be around 140 today.
For comparison sake the real and nominal long interest rates are included in the data set.
Out of curiosity I substituted the BLS CPI data with ShadowStats data from 1989-2006. Amazingly this adjustment puts real housing prices under 100. I don't think shadowstats inflation is correct nor BLS; reality probably lies somewhere inbetween.
I did a similar recalculation two weeks ago. By the time I used the shadow govt statics inflation series and then very roughly adjusted for hedonics I got an index of 115 rather than the 200 the C-S graph indicates.
The graph.
The posts.
Shiller's long-term graph here:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
doesn't appear to show the 1 - 2% increase. As Name notes, it would be nice to have this chart normalized to interest rates.
In other words: if you normalized home prices by the "buildt" square feet (as we usually do in Spain), should you expect such annual 1-2% increase in real terms. Should it be the same appreciation rate in coastal zoned-zones as in the vast middle plains? Nothing to do with land scarcity?
http://www.irrationalexuberance.com/Fig2.1Shiller.xls
For all you armchair economists out there.
This is a damned fine contribution to UberNerdity.
Sure, you could have traced the history of the development of the Excel Chart Wizard, making wise-ass remarks about its creation of a generation of dunces who just hit that auto-scaling tick box and go on, but this is a minor point.
Just remember, CR, you have to reel 'em in slowly. A few shortish, relatively painless UberChartNerd posts to get 'em hooked, then you can post 10,000-word treatises on Saturday morning and they'll devour it as avidly as if you'd just found the lost final chapter of The Mystery of Edwin Drood.
Has anyone updated the "real estate roller coaster" video? Adding in the current downturn could be very exciting!
Got popcorn?
Neil
Indeaverage for Case and Shiller since:
1890: 103.1343
1990: 136.3003
1995: 144.0848
Last 10 years: 176.2832
The point is real estate has a long fall ahead.
Index & Schiller
I immediately came here to comment on this weird idea that real estate prices have to appreciate 1% to 2% over "inflation" (Whatever the hell that is) for, apparently, eternity.
Where does this number come from? Do they grow 2% per year less affordable (then who is buying them?) or do we on average getting 2% richer in real terms every year until the day when presumably we sit around in robes in a green garden while robots do all the work, in which case saying that they go up 2% in "real terms" doesn't mean much if we all gain 2% more real inflation adjusted disposable income each year.
Headache inducing!
Perhaps houses are getting 2% smaller each year, due to over-population, and the prices should be totally stable?
Either way it is all going to end in tears unless the economy can be vibrant and 0% growth: sustainable.
St. Louis Fed: FRED Graph
Comparing the house price index to "business sector: real compensation per hour" is interesting. The shape is similar, although the increase in real compensation, annualized since 1987, is about 1.3% per year, compared to 2.5% per year for the real home price index increase.
Anybody want one of those Case-Shiller houses from the 1890s? No electricity. A 20% chance of indoor plumbing. No garage. If there was central heat then it was asbestos lined. Few small single paned wood framed windows.
Think Housing's Bad? You Ain't Seen Nothing Yet (with graphs)
Think Housing's Bad? You Ain't Seen Nothing Yet -- Seeking Alpha
What might be an interesting additional data set in this chart is a line representing avg degree of leverage. That might help determine where real prices should fall?
I think the 1-2% per year is true for the median price in recent history. However, as other posted have said, the average house has changed. Houses now have improved features, upgrades and more size.
It's reasonable for people to allocate a larger slice of their income to housing over time, but NOT FOR THE SAME HOUSE. Since the Case-Shiller index tracks same-house sales, it shouldn't show the median-price 1-2% increase.
anyone have info on the Buffett buyout of BSC? another squeeze?
I was contemplating that graph and was struck by the thought, what if buying during the boom was a good idea because of the ability to lock in cheap fixed financing? Why? Because of raging Brazilian style inflation over the next ten years.
In the spectrum of scenarios that folks keep talking about, persistent high inflation seems to be permanently discounted, but what if it actually comes to pass? What if our inflation predictions are way too low?
Just skewing the CR blog conventional wisdom of dropping home prices in nominal terms, but instead dropping home prices in real terms, with nominal steady, falling slightly, or even rising again? Does this give some really strange results that seem to be discounted by the mainstream?
Are we really sure inflation is tamed to the degree we all assume based on the last twenty years? Or could it once again give us the 1970's, in which case today's high real prices are tomorrow's normal nominal prices? Could the Fed be exhibiting the strain of the early 70's Fed when inflation began to exceed targets?
Thoughts I have been pondering over my sandwich. The real winners might be anyone with a fixed mortgage who can make the payments, and anybody who owns anything that has a commodity value.
Strange days...
If you take the long rate from Schiller's xls and add a 1.5% margin then figure out the monthly nut from the real home price index you can compare affordability.
When looking at this data homes were less affordable back in 1980 $1,232.02/month per thousdand index v. $1,207.42 / month today. The worst affordability was $1,450.09
in 1992 when long rates were 14.59%.
Correction 1982 was worst affordability.
I think it is reasonable that real home prices (for the same homes sold over an interval) should increase with time; however, I don't know how much they should increase.
The reason I am certain there should be some increase, is that those homes include lots, and there is only so much land. Therefore, I would expect people to bid up the price of land in some proportion to their ability to pay, i.e., real income. And real income has historically increased with time (roughly in line with productivity increases).
But I would expect the real home prices to go up less than real income, since a home includes a lot and a house. You can't make more land, but you can make more houses, so I wouldn't think that the price of the house itself would be bid up in line with real income.
barely
u were with me during the HOV squeeze. whaddaya think?
I guess you guys are assuming that salaries have kept up with inflation. I still think a better factor for affordability is the rent to price ratio. I agree that 1982 was bad, but its no peaches and cream right now either. I mean, your comparing unaffordable prices for a time when long rates were 8.5-9 percent higher.
What I want to know is how much the cost of maintenance has increased historically? $6000 to paint my house. $12000 to redo my rotting deck. The mortgage isn't a big deal. It is everything else.
Buyer for Sallie Mae can't close deal on current terms: SLM
Sallie Mae says plans to pursue 'all remedies' to close deal
R. Timm
Finally someone looking at both sides of the issue. If virtually nobody is buying with cash, then affordability is defined by the rate.
Buying a house was a bigger hit on disposable income in 1992 than it is today.
Bravo.
House Panel Passes Tax Rise on Vacation Home Sales
"I thought vacation homes were something of a sacred cow..." Mmmmmm00000000000000000ooooooooooooo
House Panel Passes Tax Rise on Vacation-Home Sales (Update1) - Bloomberg.com
"Buying a house was a bigger hit on disposable income in 1992 than it is today."
Maybe if you are using an exotic loan payment as a basis.
"u were with me during the HOV squeeze. whaddaya think?"
No clue, but I doubt it. I have a hard time with the brokers, long or short. Their shares whip around like an injured rattlesnake. BSC probably a good short, if you have balls of titanium.
To adjust for inflation, the NY Times used the CPI from the BLS. This is a slight technical error; an economist would adjust the Case-Shiller index using "CPI less shelter". Admittedly the differences are minor.
Although I've seen economists use CPI less shelter when adjusting shelter for inflation, can somebody enlighten me on why this is more accurate?
What would we do without Warren Buffett and the Federal Reserve to prop up our markets?
Bear Stearns Rises on Speculation It Will Sell Stake (Update3) - Bloomberg.com
He's bought HOV, CFC, now BSC, what else?
Great charts!
I just put up a chart showing CPI vs. Business Cycles on my homepage for anyone interested.
Since we're getting so technical and long-term, isn't it true that the value of most housing depreciates over 70-80 year horizons?
It's actually the value of the LAND under the house that provides most long-term appreciation?
Why is this distinction important?
Because builders have created an illusion of land wealth in the exurbs. Imagine a country of $6 gasoline. Wouldn't you see huge depreciation in a lot of the exurban land, the same land that has probably appreciated by 5-6% per year in the past? It could make a big difference long-term. What do you think, CR?
Elvis
True. Dallas Gutter just quoted me $660 for 47 feet of gutter while Home Depot sells 10 ft metal gutter sections for under $10 bucks. Two recent bids to stain a wood fence were $875 and $1,300. A 20x20 carport is $2,400. I pray each winter the central heat comes on and stays on without burning down the house. Replacing rotted french doors was $1,800. The Energy Store (Jeld-Wen products) wants almost $10,000 to replace two leaky bay windows.
jl in sd,
Adjusting the price of homes by the price of homes (using CPI with shelter in it), it tends to reduce the effect you are trying to see.
I did something similar as a joke chart where I adjusted the price of gasoline solely by the price of gasoline.
Gasoline Price (Gasoline Price Adjusted)
Keep in mind it was a joke, but I think this will help demonstrate the problem.
Real prices have increased over the past 25 years or so due to continuous government sweetening of housing as assets (tax-exemptions, GSEs, etc.)
However, the biggest driver since the early 1980s has been steadily declining interest rates.
If you look at monthly mortgage payments, I'd bet that they trend quite nicely with inflation.
rich,
I have often wondered why I'm told my house anchored to the ground will appreciate so much more than a house merely tethered (sitting on wheels) to the ground, lol.
Further, having a "mobile" home seems like a big advantage!
(I completely agree with you.)
Probably a stupid question, but has anyone read the papers on C-S methodology and verified that price changes aren't in real terms to begin with? No offense to CR, but I had thought this to be the case. Just seeking clarification.
"Buying a house was a bigger hit on disposable income in 1992 than it is today."
Maybe if you are using an exotic loan payment as a basis."
Oops thats 1982.
But NO it does not consider exotic loans.
I did a similar calculation not using Case-Schiller, but just median prices, income and inflation and got similar results with a different scale.
The median priced house with 20% down at the median 30-year rate cost a higher portion of income in the early 1980s than it does today.
I was interested in purchasing a house and had received a quote from Countrywide. In the middle of the process there was this rate cut so I email Countrywide and asked them if this cut would bring prices down and I was told yes and they would email me an update. It took a couple of days for them to return my email --- and I don't understand this but I was told that the rates had gone up. I'm confused.
RP - Most home rates are based on the LIBOR. The spread between the LIBOR and the Fed Funds rate is increasing because of inflationary concerns.
Countrywide's currently sitting at the wonderful junction of amorality and bankruptcy.. so they'll be taking a larger monthly mortgage check than any other company while telling you they're thinking of your best interests!
The spread between the FFR and the LIBOR is about 40 basis points. This is for the 6 month. For the 3 month its a little wider.
Here's a repeat of the farmland price chart that I did a few days ago to compare and contrast to the chart CR has provided.
U.S. Farm Real Estate History
there was this rate cut so I email Countrywide and asked them if this cut would bring prices down and I was told yes and they would email me an update. It took a couple of days for them to return my email --- and I don't understand this but I was told that the rates had gone up.
Well yes, home prices went down and then they emailed you with an update of higher rates. What's the problem?
To:jl in sd
"Although I've seen economists use CPI less shelter when adjusting shelter for inflation, can somebody enlighten me on why this is more accurate?"
The purpose of the current exercise is to see the house price movements relative to the prices of other consumer goods and services.
So, deflating with "the CPI less shelter," you are more closely measuring such relative price movements.
If you deflate with the regular CPI, its housing components may end up deflating the house price and its run-offs, which is not what you want.
But, the CPI housing components are mostly rent and rent equivalence. They do not necessarily track the house prices, so the differences are quite minor.
This is one of the few studies that is able to isolate the many variables people have touched on. house size, location, inflation...
From Dutch history, a real estate lesson - The New York Times
One thing it doesnt isolate that R. Timm so aptly pointed out is real mortgage payment...
The other concern (question) I have is, as BR pointed out, what if there has been a cultural / structural change in the consumer's psyche. Other countries allocate different percentage of their incomes to housing. What if 40%+ is here to stay on the coasts.
RealEstateRisk: any plans for future posts?
A natural counter argument to the point I'm over-posting on is that the buyers of the 80's had many opportunities to refinance as rates went down.
The counter-counter is that rates should only go up again if inflation goes up again. You might be stuck at the same rate, but your LTV goes down in that environment.
This is long term. Right now inflation is rising and housing is falling but eventually they move in the same direction.
Some of the comments got me thinking of the early days of the housing explosion in Eire: Do vigorous price stability policies merely lead to higher rates of asset inflation?
I think the answer is yes, but the thing that needs to be answered is hw the stagnancy of RE in places like Germany and the midwest tie in.
Housing cannot keep going up without wage increases to support the cost; similarly, we cannot have runaway inflation to "fix" the housing Bubble unless we also have run away wage inflation. When I see the minimum wage increasing at 10% per year and I am getting a 20% raise just for showing up, I'll believe that inflation will fix the Bubble, but in reality, people are growing poorer as stagflation eats this nation alive. Housing will go down the tubes with everything else.
Tomas and Martha Hernandez said Ms. Valdovinos had convinced them that they could afford a $745,000 home in San Jose, even though Mr. Hernandez earned about $4,000 a month and told them he could pay no more than $2,500 a month.
The Loan That Keeps On Taking - NY Times
I know this is a bit OT, but wow just wow. The article is trying to paint a picture of people getting defrauded, but they just look stupid. Listen you make $4000 a month, $2500 is WAY TO MUCH TO SPEND ON YOUR MORTGAGE, much less what the loans closed at. $745,000 houses that look like the one in the picture?
At what point to do you take a step back and say wait a minute this may be a bad idea, oh wait, I guess that time is now.
This will add more homes on the market:
House Panel Passes Tax Rise on Vacation-Home Sales (Update1) - Bloomberg.com
reason: no point moving and waiting two years - can sell now.
This will also reduce demand.
Listen you make $4000 a month, $2500 is WAY TO MUCH TO SPEND ON YOUR MORTGAGE, much less what the loans closed at. $745,000 houses that look like the one in the picture?
the sucker sale is the comparison--
in san jose , you get your 1100sq ft apt for $2500,
or
A phat 3400sq ft home with yard and 3car garage for 2500..
easy to sink you fangs into naive prey.
The article's main point was more technical. These people speak fluent Spanish but only minimal English. The sales process was conducted in Spanish. Their lawsuit claims that if the sale was in Spanish, the disclosures have to be in Spanish, under state law.
The article also said Hispanic homeowners have been a target of real estate greed/fraud, in part due to language barriers.
I'll agree: People who speak any language should never have bought the home in the picture for that kind of money.
Nice article Yal.
I think this just goes ahead and proves the government has no freaking clue.
Let's penalize the people who played by the rules, planned estates accordingly, and managed their money. We can just tax the people making money to pay the people who lost money.
What a kick in the balls, or breasts.
We can also argue the merits of passing legislation that effectively increases prices into an environment of declining prices. That should help move some houses.
Rich,
I agree the article was about the language barrier (legal implications), but numbers look the same on a paper in Spanish or in English. The third loan problem was also ridiculous, and illegal it seems, but the process should have never even got that far. These people made a terrible financial decision and are now wasting time and more money trying to litigate out of it.
Punchline: the victim bought the house from his boss. They flip houses together. Boss keeps the sale, Jose gets a new papers and calls himself Juan. Juan's looking for a place in Half Moon Bay next week.
International Herald Tribune
Senators accuse rating agencies of conflicts of interest in market turmoil (American media silent)
Senators accuse rating agencies of conflicts of interest in market turmoil - The New York Times
"We can just tax the people making money to pay the people who lost money. "
I don't think this is the case.
I think all those that went to make money in Real-estate - in part due to goverment action - made phantom profits - and as such should indeed be taxed.
The phantom profits they made, are because interst rates were kept low - which mean real savers (CD owners) have already paid the price for the real-estate party that was going on.
People with CD paid twice:
BTW, wht would the new legislation "raise home prices " ?
"Buying a house was a bigger hit on disposable income in 1982 than it is today."
Well, yeah, mortgage interest rates got up to 15-17 percent briefly in the early 80s. I knew a guy with one of those. If the seller didn't have a fat assumable loan to make the deal work, you were mad to go ahead.
Boy, I really miss assumable loans.
"Nice article Yal."[we are all screwed]
Ditto. What he said.
"I think this just goes ahead and proves the government has no freaking clue."we are all screwed]
Beg to disagree. Republicans bail out Liar/Lenders, Democrats bail out Flipper/Speculator/Borrowers.
seems we're not alone in our pessimis...errr... realism.
Reuters reports: A majority of hedge fund managers say a U.S. recession is "very likely" in 2008, but fewer than one in five said an economic slowdown would be bad for their funds, a survey of several-hundred hedge fund managers released on Tuesday found.
Rothstein Kass, a provider of auditing and tax services for funds, said it sponsored the survey that polled 239 hedge fund principals with a median $492 million in assets under management. More than 61 percent of those polled said they believed a recession was "very likely" in 2008, the survey found.
Still, only 17 percent of those surveyed viewed an economic downturn as bad news for their funds, with some 66 percent suggesting a recession would bring investment opportunities.
1. Low rates for savers
2. CD are taxed as income in many cases.
Yal | 09.26.07 - 4:53 pm |
in the big picture, they were already paid... there are no guarantee's once you get it/save it...
everyone is dependent on everyone else in this economy..
and if that means mal investment on occasion, to keep the migrant's housed, the trucks moving, the oil fields drilling, the banker's yachting... whatever it takes to keep the ball moving forward... the CB provides easy access for those with money making ideas(on paper) to give it a shot.
a saver should recognize that... they were shrewd enough to save!
Bloomberg.com refer=home
reason: no point moving and waiting two years - can sell now.
It could really crush the vacation home market through 12/31/10. It isn't just the threat to repeal the $500,000 (married) exclusion of capital gain. It's also the scheduled expiration of the low 20% rate on gains. All 3 Dem candidates say they won't extend it.
If you had a $400,000 gain on vacation home, you could be looking at zero fed. tax now vs. $112,000 on January 1, 2011, assuming LTCG rate goes back to 28%. There would be a selling stampede among vacation owners with low basis.
I don't mind vacation homes to get crashed. After all, the deductibility of the interest payments on a mortgage for a vacation home is insane (secondary home). Why giving subsidies for buying a vacation home?????
BTW, wht would the new legislation "raise home prices " ?
I meant to say raise the cost of home ownership in an environment of home price depreciation.
While it's true that the average house has been getting better/bigger over the decades, average lot size has been decreasing. The output of the big national builders consists mainly of McMansions or cookie cutter units on postage stamp lots. And since it's really the land/location that determines future value, I don't see how the bigger/better argument, or even the construction cost argument, can justify any 1%+ real price appreciation over time. Houses sit out in the rain and deteriorate.
"Two recent bids to stain a wood fence were $875 and $1300."
I just stained my 400 sq.foot deck and it cost me about $90.00 in stain and 10 hours work (two coats; pillars and handrails).
"The Energy Store (Jeld-Wen products)wants almost $10,000 to replace two leaky bay windows."
Now, I have not seen your bay windows but unless they are encased in gold I just cannot see over $2000 in the windows. $8000 for labor? Where do you live? I'll come down, do your deck and your windows for about two days work and clear nine grand.
If your paying these kind of prices, then I have a bridge I'd like to sell you.
Maintenance on a home is not that extreme. That is unless you buy a 50-year-old home that has never been maintained.
idoc, thanks.
All, Amazing how people are so wrong on the real return on housing. Yes, during periods of no population growth (see Amsterdam) the real return was close to zero. But during periods of steady growth, the real return is somewhere above zero - "perhaps" on the order of 1% to 2%.
Yes, 2% is excessive - but I was trying to point out that those expecting a fall to 100 are probably as wrong as those that thought housing would never go down.
Do people think there was no population growth over the last 20 years? The U.S. averaged a very robust 1.1% per year!
Do people think there will be no population growth in the future?
Best to all.
Do people think there will be no population growth in the future?
Best to all.
Calculated Risk | Homepage | 09.26.07 - 5:27 pm | #
Well, there is the baby boomer demographic bulge and plague is not totally out of the question.
Notice that many species of critters out there increase their population size until they overexploit their resources and then suffer a population die-off. Kind of like a recession in economics. It makes room again for more.
It's a good thing us superior Humans don't overexploit resources.
According to Appraisal theory Land appreciates,and improvements depreciate due to loss of utility,physical deterioration etc.Land of course can also depreciate for a number of reasons...
The shiller indices based on the 20 metro areas are not going to catch everything --esp those vacation homes (some quite sizable). It is also a lagging index in not recording sales that don't have atleast a 6 month history.
Nonetheless, I have no problem with it being an improvement over its predecessors...but when I look at these compiled (and more robust) results beside that video showing the Miami auctions @ ~50%, I am reminded that in some metro locations the latest compiled Shiller house price declines have little resemblance to the current reality.
CR
There will be population growth, but because of the chimney effect it won't help out homeowners for quite a while. Gen X is too thin compared to Gen Y.
Gen X is the major initial homebuying cohort, and even with immigration, it just doesn't have enough people, especially with high paying jobs.
Now if the boomers would hurry up and start actually retiring and causing a shortage of labor this might be mitigated, but their poor planning ensures, in whole, they will be participating in the workforce for some time to come.
Check out the demographics, they are not good for anyplace that doesn't anticipate a flock of shuffleboarders soon. High end golf will probably be a bust.
anon: why are you surprised at the stupidity of people when bombarded with propaganda (as in your story of the Hernandez). After all millions of Americans supported the invasion of Iraq and a large percentage still do. Typical American=pretty stupid. Posters here are certainly the exception.
CR,
I think I finally found something to disagree with you on (took long enough!).
But during periods of steady growth, the real return is somewhere above zero - "perhaps" on the order of 1% to 2%.
I see no reason it should be. 68% of my home's value is a hard asset sitting on top of the valued land (according to the government). So let's talk about that 68%.
I believe you are mistaken. It is the land itself that is worth the money, and that land represents just 32% of my home's value (according to the government, very near Seattle).
Granted, you can rent your hard asset out to earn money on it. That's true of any hard asset though. Heck, they rent out TVs. That doesn't make TVs long-term stores of value though.
This does not mean that I expect house prices to drop to historical norms. The land represents 32% of my home's value and I pump money into the 68% that's a hard asset to see it hold its value. The net result is something, on average nationwide, possibly much closer to 0% than 2% though, from a real return perspective.
StagflationaryMark,
The 600 year chart shows the decline of silver as a result of the discovery of the new world, increased production from western USA mines, and finally, the ability to recover through Sol/Ex. The funny thing is that when silver ceased to be a monetary metal, stocks of silver vastly increased as coins were melted in large quantities. I do not believe the disinvestment will be as large as 79/80 without seeing $75-100 an ounce in 2007 dollars. In other words, the last great melting episode created the shortages that will be greater when the prices soar this time. There are no large banks full of silver coins to meet demand. There are no US, Russian, or any other government stockpiles.
In other words, the great overhangs of supply are gone, and what is left, is all there is. There are literally tons of silver jewelry, but most folks won't melt it for a lousy six to eight dollars net. A tremendous amount of silver flatware and serving wares were melted in 79/80- were they ever replaced in people's households? No.
What I find interesting is the price is now being driven almost entirely by falls in the dollar. Panic is so far off in the metals markets that I think if we ever have serious inflation start up here, there will be literally parabolic increases day after day.
But the great flows of coins that drove 79-80 and met the demand of the Hunt brothers and literally overwhelmed their ability to buy are gone. So even if the metals soar, most people have very little to sell.
I find it curious that most people have so very little of what their ancestors would have considered wealth, and so much paper.
CR - great stuff but it won't sell newspapers but you are right.
Dean Baker - Your rent payment is still more that your old house payment was and the home is still worth more than what you sold it for - just a timing issue.
AllenM,
I did own a lot of silver from 2004 to 2006. In hindsight, perhaps I should still own it (I took profits on the parabola). In any event, you are preaching to the stagflationary choir.
Clearly the best time to stop hoarding lumber was back in 2004, which was about the same time I began hoarding silver.
Lumber: 1999 to 2007
You will note that if the lumber price was adjusted for inflation it would look even worse.
Now that lumber is cheaper, perhaps the builders can build a few more homes to boost up those housing inventory numbers. Good grief.
Just a comment on lumber, the top is usu limited by substitution (steel which is fairly stable) and the bottom by cost. In the USA it is a protected industry (imports) in some owl-less states.
StagM,
That was a small jump. Just wait.
I usually don't bother with adding to my own stockpiles of what I call end of the world investments, but the Fed cut pretty much convinced me that we will end up inflating. So I went to the US Mint website to buy some of the common AE gold in uncirculated. Um, withdrawn for repricing. So I went down to one of the few remaining coin dealers in Phoenix, and he was doing almost land office business. On the other hand, there are approximately four or five retail coin stores to serve 3 million people. I don't count the investment sized folks who sell bars and coins in quantity online and have physical offices here in Phoenix.
That inflation will be met by a realization that most people have very little in the way of "inflation proof" assets, and a tremendous amount of consumer goods that aren't worth didly. The upper middle class is stuffed with stocks, houses, furniture, clothing and consumer goods- all things that just don't have a resell market. I am seriously thinking of buying used HD motorcycles here from the repo men and containering them to China to sell to the rising business class.
I like to joke that I know I am on to something when everything I want is expensive on Ebay, and everything noncoin that I sell goes for bupkiss.
Want books? Most of them are cheaper than dirt online and used. Food still is really cheap in the US- energy is not. Draw your own conclusions as to the best investments. I have begun to wonder how much longer things will go on without massive changes.
lumber prices pre 2004 were driven by the buldup to the Iraq war. Prior to desert whatever, OSB easily doubled in price over 6 months due to military demand.
What year did the mortgage interest deduction begin? Has real appreciation (assuming CR is correct) occurred at a higher rate since then?
Do people think there will be no population growth in the future?
Sweet, we get to talk about Jared Diamond tonight!
Because builders have created an illusion of land wealth in the exurbs. Imagine a country of $6 gasoline.
So, those Yuma lots could be valuable if they raise the speed limit and gas drops to 50c a gallon...
CR,
Sorry to beat a dead horse but I have another issue as well.
Using 1987 as a starting point, a 2% real return would have put current real prices at 150; a 1% annual return would put the current value at 122.
Why are you using 1987 as the starting point? That's actually near the top of a previous housing boom. In my opinion, your projection is therefore projecting roughly where the top of this bubble SHOULD have been.
Wouldn't it be more accurate and consistent to use a trough to find the next trough? If so, the trough on your chart is around 1997. If you project that forward you'd be projecting a number more like 100.
History of a housing bubble
Hey, I'm not predicting anything here. I'm simply pointing out that you are leaning a bit more towards the optimist than the data would suggest. (Much to the horror of those who think you are too bearish!)
OT Sorry to go off topic, but , as people of intelligence could you answer one question? Here it goes: on cnbc channel screen during the day we have prise of main commodities( oil , ngas, gold, silver, copper in $ per unit, then there are main currencies as bpound, euro - are in $ per unit too, treasuries the same , but one thing only given inverted ( units per
and it is Japanese yen . So, if any currencies
The percent rise in real home prices depends on the window of time you choose... Just take a look at Shiller's graph of real home prices. From 1890 to about 1945, the change would be negative.
http://www.speculativebubble.com/images/homevalues1.gif
If you look at the beginning of the graph (1890) to the beginning of the latest boom (mid-1990's), the gain was certainly much less than 1% (more like a tenth of a percent, if I am reading this right).
Am I reading this right?
continue if any currencies or commodity rise it shows green arrow but opposite for yen. Could it have psychological effect on investors ? Thank you
Is KB Homes some sort of Mickey Mouse operation, or what?
KB Home and Disney Collaborate to Bring Disney Magic into New - Bloomberg.com
The logic here being that working with Martha Stewart for home design worked so well that the same can be applied to a cartoon character. I guess.
ShortCourage,
That's how I'm reading it. I'm firmly in the camp that believes home prices have gone up with inflation and not much more than that (nationwide anyway).
That's not to say I'm necessarily a believer that's how it will be in the future though. Part of it has simply been based on a productivity miracle (modern construction equipment) and fairly cheap energy.
Further, at least our country still is growing its population. If Japan is any indicator, it will be Europe that's going to be getting some nasty surprises soon. Inflate (your population) or die (deflate).
World Population Growth
Just my two cents. Puts me at about a dime today, lol.
CR-
Does Case-Schiller take in account the fact that houses are getting bigger and nicer these days. I would think that would affect what appears to be an "appreciation". It seems to me, while you may be paying more, adjusted for inflation to own a home, you are getting more for your money long term. Am I wrong?
Chris M,
Case-Schiller tracks the same house over time so therefore should be immune from that effect. From what I understand, Schiller was simply trying to determine how you'd do as an investor if you simply bought a house and then resold that very same house later.
S&P/Case-Shiller® Home Price Indices
First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs.
Dimitry: I believe the Yen is quote as it is because of its weakness, nothing more. If it were re-valued then they would invert it. As for the psychological your guess is as good as mine, but if I had to guess I'd guess that people in the forex arena are far to calculating to let anything like this bother them.
1-2% long run real appreciation sounds optimistic to me. Real income has not risen that fast. I'd believe that housing consumes a relatively constant proportion of real income.
Best data I've seen on long real appreciation is the Eichholtz 350 year study on Amerstdam. Schiller commenting on it is available here
The one thing I like about the NYT graph is that it better visually illustrates the risk most buyers face since they buy with a high amount of leverage. The zero point isn't really relevant when you are buying with a 90% LTV.
CR-
A couple of comments.
First, it is important to look at growth of number of households as they drive demand for housing (commented on earlier). Households have been growing but fairly slowly. We should get bump in 2010 as baby boomlet gets married and wants to settle down.
Second, population growth in a country like the US which for all intents and purposes is not land constrained has no impact on prices except in a couple of "special cities" - like Manhattan and SF. Every place else, the cities just sprawl out.
A CHANGE in population growth (not just growth itself) can cause prices to temporarily go up or down - providing nice signal to builders to either build more or go on vacation.
Greg Mankiw has paper on his website from late 1980s showing the linkage between price and households.
From a mathematical perspective, if the land was constantly appreciating more than the house itself (which should be worth at most replacement cost), eventually the house part of the price would be inconsequential.
113th
Even if the Bubble represents real inflation rates, which I do not believe is the case because of the fraud factor, lack of lending standards, and the mania, salaries have not kept up, thus either housing prices must drop or salaries must skyrocket. I am betting on the price drops.
michaelcampion - I started that blog shortly after I retired earlier this year. I recently landed some consulting work on distressed debt (for servicers) and it would be a dis-service to the client to be doing both.
You may recall a couple months ago I wrote about a very nasty looking transitional CMBS issue (with narrative involving drinking scotch and passing out). One of the those assets (the #5 office building) has yet to make a payment and I am now doing consulting work on it.
CR, I think this criticism of the NYTime's graph is a bit petty. It's redundant to have half the graph filled with gray; a complete waste of space. It's not as though they hid the index value, it's in plain sight. They used 100 as a baseline and they didn't truncate above any troughs. If it seems like they're trying to be overly dramatic about the bubble, consider the scale of it compared to bubbles in the past and tell me it's not dramatic in its own right.
forex wonder