Goldman Sachs on Housing Prices
Submitted by
CalculatedRisk on Sun, 07/30/2006 - 7:37pm (22 comments)
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I do think that both real and nominal prices might start falling soon.
The only questions are how far and how fast.
Eye-balling that graph, it looks like historical growth of housing is about 1% real. That makes sense -- it's pretty close to wage growth. If we revert to the mean, that'll be a nasty drop.
Very insightful information CR- and it flies in the face of those wo have said for several years 'Real Estate only goes up' or 'there has never been a fall in real estate prices ever'......
Be that as it may, since the reality is that prices are falling and will fall more- I wonder what affect this will have on the consumer and economy in the next 2 years?
Since I feel the FED will be forced to up rates again next month- or eat a big fat inflation sandwich later, the stock market could be a deadly trap. As for housing- its dead meat right now. Stormy days ahead.
I actually think that wages are a better index than prices. Over the long term, wages increase faster than prices. Indexing by prices (of other goods) implies that people will spend a smaller and smaller percentage of their incomes on housing, while I suspect that they spend the same percentage but buy more housing. After wages are what people buy their houses with, prices are simply what everything else costs.
Jim
under 'normal circumstances' what you theorize might be possible.
But considering the vast amount of excesses since 2002- a soft landing seems unlikely.
Yes in the past wages grew more then housing prices- but for wages to catch up to the 100% or more of house price increases in many important geographic markets- the time to 'catch up' has been greatly stretched like an elastic band- a snap back should be expected to bring us back to a more realistic time frame of wages and prices.
Seems that in past reversions to the mean the index gives back half the gains in twice the time. How does roughly -7% per year for 8 years for a cumulative -40% retracement sound? Sounds like exactly what many have been saying here and elsewhere for a year.
as i saw in merrill lynch's investment newsletter:
"The housing boom had become so big that it accounted for more than a third of
overall job growth in the past three years. Moreover, the ability and willingness to
tap ever-rising home equity made the difference between 2% average annual real
consumer spending growth and actual trend of 3.5%. When you tack on (i) the
"volume" impact from lower construction activity and (ii) the "price" impact from
lower real estate values and hence lower household cash flow from all the various
forms of equity-tapping, then the "recession" and "deflation" underway in the
housing market could very easily on its own end up shaving as much as two
percentage points from baseline GDP growth"
so if anyone wants to see where we could end up when this all said and done, it's not pretty considering how much all of the auxillary effects of the housing run-up has caused... it makes a recession scenario much more likely...
I wish somebody would define what is meant by a 'soft landing' vs a 'hard landing'... then I think we could better compare notes.
I'll try:
Soft Landing: Economists have jobs
Hard Landing: Economists compete for Walmart greeter positions.
Soft vs. hard has always been the same:
Soft: general economic downturn.
Hard: personal economic downturn.
Every single person, without exception, predicting a "soft landing" has a dog in the hunt. Soft landing predictions suffer from the ultimate in positional bias.
Maybe for this group we could come up with some figure such as % of potential workers actually working.
Of course that would be a trailing figure.
Regarding, "long term wage growth being higher than inflation" - does anyone have any data on this ?
This has been past - but I don't think future.
The "quality" of jobs has been decreasing (death of manufacturing, offshoring, etc) - I think wage growth will be lucky to keep up with inflation.
Agree housing prices long term tracks wage growth - which is not encouraing
"Seems that in past reversions to the mean the index gives back half the gains in twice the time. How does roughly -7% per year for 8 years for a cumulative -40% retracement sound? Sounds like exactly what many have been saying here and elsewhere for a year."
Robert;
While I agree with your outlook in price decline (though I think it will reach 80% in some areas)
I think a slow orderly 7% a year is off.
Given the size of this bubble and the Change in sentiment from last year to this, throw in the amount of speculators and exotic loans that make up the bubble, I see a much more rapid and steep crash. 405 -50% in 3 years.
i'm in residential real estate and clearly see a slow down, although we still see significant MEW to pay for renovations.
what i dont see in my market (500-1.5MM residential) is pricing being that out of wack.
example, i pay around $5000/month in piti w/30yr fixed for my house. its a 2400 sqft 4 br on .25 acre in a top notch 'hood in DC. think lawyers and lobbyists.
i went around to find rentals at the same $5000 figure and could only come back with 3br apts of 1600 sqft. there are no houses in my area for rent.
given the options, it seems as though the price paid by for my house is reasonable and there is no rental equivalent.
how does one value rentals vs owned property in this context??
its easier to compare 1 br apts and condos which clearly are out of wack...
will the market be bifurcated?
Peter, I certainly never meant to imply that I believed that there will be a "soft landing." I certainly believe that a general price decline in housing of 40% is more likely than 10%. I just wanted to point out wages are a better guide for what people can pay than what everything else costs. And yes, wages have been stagnent in the last few years. Productivity improvements have mostly resulted in higher returns on capital, not labor. It's my understanding that what compensation improvement there has been has mostly been in higher healthcare costs.
As for definitions, a few people here worry that we could go through a sustained "stagflationary" recession. The rest of us call that a "soft landing."
Sorry Jim to misunderstand your real thoughts- a 40% decline would be truly amazing- seems many feel this could happen- and if it does it would most surely cause a recession.
My own experience in living through a housing bust here in central Connecticut from 1989-1997 7 years, horrendous years I may add. Housing fell 7% from 1989-1993, then 4% a year 1994-1996.
Nearly 40% over all. A new townhouse I bought in 1989 for 107K fell to 65K by late 1996. Another townhouse I bought new in 1992 for 90K dropped to 66K by 1997.
Our little bubble here was nothing compared what has gone on nationally in this decade-
As for the 'soft landing crowd' All I can say is dream on, good night and good luck.
Men Not Working, and Not Wanting Just Any Job
from the NY Times.
Men Not Working, and Not Wanting Just Any Job - NY Times
These guys are tapping into their home equity and saving so they do not have to work. I wonder how much longer this can go on? Western society is getting lazy. This would not be happening in Asia....
Men Not Working, and Not Wanting Just Any Job - NY Times
The Business Online title (first time ever) is misleading since economic historians maintain that there were extensive nominal and real house price declines during the Great Depression. It has happened before, and only 75 years ago at that. An important issue to address, given the massive scope of government intervention in, and support of, the housing market, is why might it happen again and what credit conditions, monetary mechanisms and global economic patterns are able to overcome the New Deal palliatives and their myriad progeny to again threaten the economic system with the specter of asset price decline, bad debt and deflation?
Good to see some worthwhile reports.
Home prices in the Bubble markets (coastal housig markets) are in for big price drops.
That is an eye-opening article in the NYT. Confirms what many on this site have said. There is very liitle room for error in this society if one aims to grow financially. You cant do drugs, have illegitimate children, marry poorly, get incarcerated, flunk school, be obese, be casual in the workplace,waste your assets etc. The penalties are great. The Capitalistic Western Civilization" allows people to achieve their human potential. But most squander this opportunity.
Too bad there is no means of determining how much of that MEW is used to pay for the mortgage. This could delay the reckoning.
doc1
Add get sick, unlucky, make wrong job decision, say IT over Re salesman, marry badly, have sick parent, children, spouse or be born poor.
And so on.
Go Social Darwinism. THe lucky and well born do well, look at how many times that the current president screwed up business wise and was saved by dad, or family.
In any case, the logical end of the society will be where life is short and brutish.
dc1000 - as per rent in Washington - its always been that way. Most folks don't consider staying forever (they all bitch DC sucks compared to 'home' right)... except then the next thing they know 20-25 years are behind them and instead of 'going home' they retire on the Eastern Shore or Shenandoah. Seen it happen a million times.
DC/Tide Water is and always will be different than the rest of the country as a result unless and until the growth of gov't gets slowed.
I think we have a better shot at slowing global warming than slowing gov't in Washington. Growth in gov't is something both parties believe in.
Enjoy the ride.