Where Will The Market Go

[Doofrat]

I used the professor’s graph of housing prices to income ratio to do a rough guess of where housing prices should be if they were to return to normal levels.

http://piggington.com/images/primer/flattening.gif

This was a very sloppy calculation because I don’t have the actual figures, and I’m doing this at work, and taking time from work to post here is almost like stealing.

The figures I get are:

If housing prices were to end up at the top of the range, we’d have about a 30% decline, if they were to reach the normal level, we’d have about 40% decline, and if they hit the bottom of the range, we’d have a 50% decline.

Does anybody agree or disagree with these figures? Mind you that they don’t factor in income increases which the figure clearly shows will eat away at the amount of decline over time.

[PD]

The link from above. Yea! I figured out to make a proper link today.

[powayseller]

I started a thread in the last few months with these calculations, but I included a 4% annual wage increase. I came up with a 35 – 50% drop. The Search feature on this blog is lousy, and I don’t feel like reading all the old threads. I should keep my analysis stuff on my computer, so I can copy it at times like this. But I didn’t….

[PerryChase]

doofrat, i agree with the 30%-50% range depending on the neighborhood.

This threat is a good summary for everyone to put in their predictions.

We need some kind of system here to wager and keep track of predictions (but that would be online betting and illegal). I think that something like a $500 bet payable in 5 years would be kinda fun.

I already bet with my friend on the outcome in Iraq. Hope to collect in 2010, and hope he’s still my friend, ha.ha.

[(former)FormerSanDiegan]

Doofrat – you are half right.

Be careful how you interpret this graph.

From the chart you can show that if prices re-trace to historical norms, that the PRICE to INCOME ratio will decrease by 50%. However, that does not mean that home prices decrease by 50%! Why ? The income part.

Example: The last cycle in this chart shows the plotted ratio going from about 9.5 down to about 6.75 from 1990 to 1997. This is a ~ 29% decline (9.5-6.75)/(9.5)in the ratio.

What did SD County median home prices do during the 1990 to 1997 period *

1990 Median = 183,210
1997 median = 185,210

* source : http://www.laalmanac.com/economy/ec37.htm

In fact the SD county median price peaked in 1991 at 187,510
and hit a bottom in 1994 at 176,010. Not a 29% decline !

Why ? Perhaps incomes increased by something like 23% or so over this 7-year period, and median prices dropped 6-7%.

I’d guess more in the 20% range if you account for wage increases.

[(former)FormerSanDiegan]

An additional note –

The price to median ratio does not account for differences in interest rates over these periods.

This does not matter if rates at the next bottom are at 8-10% (30-yr fixed) like they were at the last two bottoms.

My guess is that 30-year rates could easily be in that range so theres no need for an additional correction for rates, IMO.

[Doofrat]

Former San Diegan,

I calculated the figures I got by getting the income figure by dividing the median price by the income to price ratio. I then figured out how much that median priced house would have to drop to get the ratio back to the figures on the graph. I did’t use the percent decrease of the ratios themselves.

[Bugs]

If wages and costs for everything (but RE) are increasing it only means those dollars are devaluing. The nominal price changes in RE may not be as much but the value will still have declined because you’ll need more 2011 dollars to buy the same stuff that you can buy now with fewer 2006 dollars.

In effect, inflation forces the masses to pay for the mistakes and the greed of the fools, while making us even less competitive in the global economy. That’s why I’d prefer more correction and less inflation.

[(former)FormerSanDiegan]

doofrat –

Did you assume that wages remain the same ?

I have an idea:
Use the same method to figure out how much houses would have to drop from the last peak to the last bottom (~1990 to 1997), then compare to the actual drop.

[Doofrat]

I assumed wages stayed the same and stated so. I’ll calculate the last downturn tonight or tomorrow and use the actual figures and see if it’s any different, but the last peak and bottom were also not as extreme as this one, so there would be alot more influence from factors such as wages.

[(former)FormerSanDiegan]

OK.

I too believe that this downturn will be worse that the last one. But that’s not the point.

The point of the experiment about the last downturn is not to compare it to this one, it is to compare the method you are using to predict this one.

If the method you used to interpret Rich’s data accurately measured the downturn the last time, you will have more confidence that it is the right method to predict it this time.

[(former)FormerSanDiegan]

Raw Numbers, anyone ?

Anyone find the raw numbers that go into Rich’s famous Median price-to-per capita income chart ?

With those, it would be easier to play games with projections, such as Rich did in his VOSD article.

Rich

[powayseller]

Rich one e-mailed me that he gets the income data from bea.gov. I think he used the OFHEO data at one time, but now prefers Case-Shiller.

[(former)FormerSanDiegan]

PS –

Thanks. I noticed on his chart he has OFHEO, BEA, and BLS as references. I poked around those web sites for about 15 minutes and couldn;t nail it down. Thought it might be available somewhere else here with easier access.

Anyway, I’ll have to work to get my attention span to longer than 15 minutes on those sites, but it’s hard since they are Gov’t sites.

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