Housing Prices Will Fall at Least 50%

[PD]

I just received my Coronado paper. There are a lot of “Reduced” notices splashed across real estate adds. Additionally, there is an area called the Cays with homes on the water. I have not seen one of those houses listed for under 1.79M in the last 16 months. One of those houses just listed for an even 1.7M. There are also a lot of notices of empty lots for sale with plans and approvals for a new home. The builders are spooked.

[4plexowner]

“Builders being spooked”

Check out the recent action in their stocks and it is easy to see why they would be spooked.

Look at these homebuilder stocks: CTX, DHI, TOL, KBH, PHM

[sdduuuude]

Powayseller, while you are a good thinker and regularly provide excellent qualitative analysis, I don’t think you have “connected the dots” on how the current situation is 5 times worse than the last bubble. This article doesn’t help your position at all.

This article draws a random line and says “here is the trend.” The trend line takes 4 years of data, and extrapolates it out 20 years !!!!

I also think you have an inconsistency between your thinking that inflation is raging worse than the numbers show, but won’t affect housing or wages at all. Because if this, I’ll use a variety of inflation rates in my analysis below.

Lastly, the author needs to learn how to calculate growth based on a percentage.

The writer uses an inflation figure of 78% over 20 years, which is the same as 2.9% per year.
1.029 ^ 20 =~ 0.78%
He then incorrectly adds 20% because he assumes housing grows at 1% per year for 20 years (call it a “housing bonus”) over and above inflation.

To do it properly, you assume housing grows at 3.9% and multiply it by itself 20 times.
1.039 ^ 20 = 2.15
or up 115%, not 98%. This shows a reduction of 52%, not 56%.

Just getting started.

Now, using larger inflation figures – 5% (plus 1%) shows housing will only reduce by 30%. Using 7% inflation (with no 1% “bonus”) shows housing will actually increase by 4%. So, that government inflation figure, which is suspect, is very very important.

Oh – but wait. That is only in 2006
The author assumes an immediate reduction to the mean!! Idiotic! If it takes 7 years for the prices to adjust, the target price will grow. I get this for the year 2013:

2.9% inflation + 1% housing bonus => 36% reduction
4% inflation + 1% housing bonus => 16 % reduction
5% inflation + 1% housing bonus => 9% increase
7% inflation + with no housing bonus => 40% increase

Be careful seeking out articles that support beliefs you already hold. You can get badly tricked that way.

For the rest of you – don’t mistake powayseller’s excellent research, confidence or zillions posts for good or thorough analysis. Do your own.

[sdduuuude]

Another way to look at it: Your 50% “guess”, combined with the logic of this article puts inflation at 2% for the next 7 years – assuming a 7 year reduction to the 2% inflation + 1% housing bonus trend line.

Are you comfortable with that?
Sure you wanna buy gold?
I guess the dollar isn’t devaluing as much as you thought? Either that or housing isn’t.

[docteur]

sdduuuude. Both Posts are right on.

[PD]

Sdduuuude, I think everybody has a tendancy to focus on articles or figures that support their beliefs, including yourself.
One cannot argue with history, however. Every time there has been a significant runnup in housing prices to earnings, it has corrected to the mean.
I’m sure there were a lot of people in Japan who were saying the same thing you are, just before a very painful slide. Their propery values are now what they were 23 years ago.
You have the unpleasant tone of a person invested in real estate and unwilling to hear anything that would threaten your assets. Are you a realtor? Perhaps a deeply mortgaged homeowner?

[sdduuuude]

I am a long-time Piggington reader.
Believer in the bubble.
Expecting nominal price drops of 15 to 20%

Sold a rental property in August 2005 out of fear and made $150,000 in two years for doing nothing.
Keeping my home, with a 50% Loan-to-value ratio.

If you had, perhaps, focused on my analysis and not my tone, you would not have made the error in judgement.

[docteur]

HI PD. I’m not a realtor, nor I am a deeply mortgaged homeowner (I paid my mortgage off last Monday).

I think sdduuuude is pointing out that inflation is a huge variable we must consider when trying to get to a reasonable prediction (that might be an oxymoron) of what could happen next in our economy, especially in the housing sector.

And if no one really knows the value of that variable, there are a multitude of outcomes that could be realized over the next several years. I believe he was simply pointing that out.

Powayseller asked what we could do to bring some civility to these forums. My suggestion is to perceive whatever is posted as being in support of all of us becoming more aware of what may happen next. Instead of interpreting a post as hostile or mean spirited, what would happen if we saw it as simply another contribution to our knowledge of this most complex situation.

No one, absolutely no one knows what will happen next. So, I try to base my beliefs on what is useful.

My opinion, my belief, is that the best thing to do is wait for an obvious trend to emerge and then follow it. Acting on predictions is a very dangerous way to operate. I try to run through as many scenarios as possible in my mind, (no matter how ridiculous they may seem) and then if one manifests itself, I will at least be prepared to deal with it and take action based on how accurately I analyzed that particular possibility.

Sometimes the best response is none at all. I try to observe and then simply follow the trend (react to what is happening around me). If no direction is clear, I simply step away and wait for one to emerge.

sdduuuudes post gave me a whole new perspective to operate from and helped create another level of awareness realting to the possible outcomes of this housing market.

Right now, no one knows what is going to happen. No one. But I keep coming to this website because I like to read your posts, powayseller’s, sdduuuude’s and anyone else who cares to state thier opinion or beliefs here.

This is not Japan and it is not 23 years ago. That was then, this is now and this is brand new territory for all of us. So let’s keep sharing our ideas, our opinions and our beliefs and keep the personal slights out of the forums.

Let’s just see where it all takes us and by discussing all the possibilities, different points of view, opinions and beliefs, we will be better prepared for whatever happens next. We will all benefit together through our willingness to participate in this forum. How exciting is that?

[sdrealtor]

Thank you! You have a better way with words than myself and I agree with everything you say. Comments like “prices WILL drop (fill-in the blank)% are utter nonsense. No one knows what is going to happen. I for one am constantly amazed by the market and how long/how well it has held up. Like everyone else here I am a housing bear who just happens to have a front row seat. I will not let what I hope will happen get in the way of my analyzing what is happening and encourage those that are letting their hopes guide their opinions to open up their minds to competing theories.

[powayseller]

I will e-mail your analysis to Mr. Smith.

However, I disagree with your assertion that inflation must show up in higher wages.

As I wrote before, historically, before the global labor market, price inflation led to wage inflation. People used to say that houses rose with inflation. Inflation has been higher than the gov’t statistics, so housing has been rising less than inflation for many years. People just said it rose with inflation, bec. they believed inflation was 2-3%, and housing rose 2-3%.

I would say that housing price increases have lagged inflation by 1-3%.

Wages are no longer rising as quickly as they did, in the global labor market.

I would not expect housing prices to rise with inflation, whether the 2% CPI or the 5-8% actual figure which includes housing/food/energy/tuition/health care and all the other stuff which is either left out or minimized. (For example, while health care takes up about 5% of a family’s budget, it only makes up 1/10% of the CPI, or something like that…)

[PD]

Sdduuuude’s comments about inflation were very interesting and a good addition to the forum. I took exception to his snide tone.
The truth is that we don’t know for certain how far down it will go. However, there are already some neighborhoods in San Diego that have seen over a 10% drop from the high already and it is just getting started.
I’ve posted before about a friend in Rancho Bernado. A very comparable house to theirs sold at the high for $650,000. Another comparable house went into escrow in February for $590,000.
Another friend in Rancho Bernado has their townhouse for sale at a good discount from the high and they don’t even have any nibbles. They say their street is awash in for sale signs. This is not going to stop at 15% for them. Their faces were quite grim when they told us about their situation. They are military and are moving in one month. How long will sit empty before they start slashing the price?

[powayseller]

sduuude, from the previous page, I don’t follow the point you are making. I don’t see what any of this has to do with the value of the dollar, which is falling due to our huge budget and trade deficits. I also think gold will rise long term because our price inflation is 5-8% now.

What do you mean with he followed a 4 year line? His line goes back to 1986 to establish a trend.

Do you have any analysis of Shiller’s work? Just curious…

However wage inflation is much less. Adjusted for 2% inflation, wages are flat over that last few years.

I’m also not going to defend the article. It sounds like the author made some incorrect calculations, which offset his estimate by a few percent. I’m betting that he will appreciate you pointing this out, as I did as well.

Regardless of the article, by extrapolating Rich’s chart on income/median house price, I stand by my 50% fall prediction.

[powayseller]

PD, I’ve been through the snide tones before. I also found that whenever a lady takes exception to the snide tone, the guys tell the lady to have thick skin or ignore the comment, etc., but no guy comes forward and tells the other guy to knock it off and act like a man. You saw this happen above as well. I ignored the tone, you noted it, and the guys chided you for not liking the tone, instead of addressing the person who offended you. A bunch of woosies (sp?), I tell ya. But that’s how this group operates. Just so you know….

I’ve been called names on this forum many times, just for stating an opinion. Reach my post Sell Now from a month or so ago. Within hours, the name calling against me started, but it was done on other threads active at that time. It was surprising, but I’ve figured out who the offenders were. The people who get mad and defensive are the homeowners who will not sell because they are counting on a small drop. Any post which suggests more than that is perceived as threatening and can result in a negative tone.

However, in defense of everyone, the tone around here has been more civil and professional in the last week.

[sdduuuude]

I’m not really saying inflation should show up in higher wages.

One of the many reasons why I posted that is this – if you don’t think housing prices will rise with inflation, don’t post an article which uses that assumption to support your case.

Now, I hope you understand I’m not bagging on you as a person, but I am going to come down pretty hard on your analysis. Like my tone or hate it, I feel people need to understand your 50% number is nothing but a guess.

Again – you add a good perspective and lots of interesting links to this forum, but what you don’t add is good analysis to support your assertions.

Your 50% number is, in my opinion, completely unsupported. I’m not saying it is unsupporatble, I’m just saying you have not done the analysis, complete with a list of assumptions, that generates the number “50%”.

I know you haven’t done the analysis because you are “100% confident.” When one does a good analysis, they make assumptions, do the calculations, then take their assumptions and ask “what if this doesn’t happen the way I think.” Note how I changed the inflation figure, just to get an understanding of how much risk there was in the analysis. If I change the inflation figure dramatically and the end result doesn’t change much, I know there isn’t much risk there.

If you had done an analysis you would say “I think it is 50%, but the risks are x, y, and z.” But you don’t, you just claim 50% with full confidence. With a +/_ factor of 10 percentage points, you are saying 40-60% nominal or nearly 75% drop with respect to inflation. 75%? Its just too much, with no supporting analysis.

Your irreverence for the difficulty of macro economic anlysis is somewhat shocking. The best minds in the world have difficulty with it, but you read a few articles, and bam – you know with 100% confidence exactly what the market will do.

If I can do anything to reduce people’s confidence in that number, I’ll do it.

Keep in mind, I think you’ll do fine with selling your house and renting, then buying low. I did the same thing with an extra property. I’m just not a believer in massive risk-free gains or 100% certainty in ultra-complicated markets that rely on variables as disparate as people’s psychology, the price of gold, and the Bank of Japan.

[sdduuuude]

“Any post which suggests more than that is perceived as threatening and can result in a negative tone.”

Change that to:

“Any post which sugggest more than that , but hasn’t been backed by a good analysis can result in a negative tone.”

I feel it is my responsibility to convince people not to make difficult and large financial decisions based on your fairly random guesses. You have gained alot of respect on this forum because you post interesting posts very very often. But regular posts are not a substitute for good analysis and people need to take your advice with many, many grains of salt.

Finally, you guys complaining about my tone isn’t going to change my tone. In fact, I’ll assume that you couldn’t find any flaws in the analysis to complain about and and I’ll take it as a compliment.

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