Friday, February 13, 2009

US Existing Home Prices Fall to 2003 Prices

Slowly... but surely... despite all the government's actions... we are heading to the targets I proposed in late 2007 for US Home Prices; in [Dec 6, 2007: Analysis What Should Median Home Prices Be Today?] I wrote

As you can see from the mid/late 1970s to 2001/2002 the ratio was consistent in a tight range between 2.6x to 3.0x. Essentially this means the median home price in this country was 2.6x - 3.0x median household income. And it's been right around 2.8x for most of that time. That's 30 years....

In 2006 at the height of 'innovation' (where were these politicians 1 year ago? seriously), the ratio went "off" the chart, it appears 4.0x. After the 'correction' we've had, that ratio has fallen all the way to.... 3.8x.

What are median incomes nowadays? As of 2006 the median household income was $48,201.

$48,201 x 2.8 ratio (historical average for past 30 years) = $134,962

Folks that is still nearly $73K away.... or a drop of 35% from October 2007 levels. And a drop of 41% from peak levels in July 2006.

Now that's assuming we return to historical norms. I am fully confidant that by the time this is all said and done NEW financial innovations will be introduced (along with bailouts) which will keep prices elevated above where they 'should be' without the 'not so invisible hand' propping things up.

And let's assume instead of returning to the 2.8 ratio that is historically where median house values vs income falls, but instead we can now subsist at say 3.2x because of 'the invisible hand', this takes us to

2008: $52,134 x 3.2 ratio = $166,829

That's still a $40,971 drop in median pricing or just under 20% from today's levels.

Let's fast forward just under 15 months.... what's the latest data say?
  • Prices of existing U.S. single-family homes dropped a record 12.4 percent in the fourth quarter from a year earlier to the lowest level since 2003, the National Association of Realtors said on Thursday.
  • The NAR said distressed sales, which includes foreclosures, accounted for 45 percent of transactions in that quarter, dragging down the national median price of existing single-family homes to $180,100. It was the lowest since the second quarter of 2003 when it was $177,900.
Now a lot has changed since those innocent days in late 2007 - my gosh, have they. But despite all the moving variables and interference by Mother State, we're still on schedule for what (at the time) was a prediction I caught some flack for proposing... (yo!! you alarmist! doomsdayer!) We were still in the era of "cmon guy - home prices have never fallen nationally in America. Therefore they cannot!" logic [Jan 24, 2008: They Said it Could Never Happen. Ever.]

And no, I don't give a damn what interest rate the Mother State deems "correct" - many in this country will NOT want to ADD debt at any interest rate. To that end, the much hyped Toll Brothers (TOL) 3.99% mortgage rate? As CNBC pundits screamed at the time - this is gonna do the trick! Reality?
  • Toll's sales in its latest quarter were grim. Across the country, orders fell 59% from a year ago to just 266 homes, a larger decline than some analysts expected. They plummeted 70% in the North, followed by 63% in the Mid-Atlantic and 56% in the South.
  • Toll also acknowledged that a much-touted 3.99% mortgage interest-rate promotion had been used by only two dozen buyers since the builder started offering the rate last month.
All together kids... Kool Aid!*

Once more let me prepare you for the coming era of hype and misguided punditry. We are going to have a lot of housing "transactions" coming, and people will point to it as the rebound. It's going to be a "good thing" indeed as it works off inventory, but there is going to be a flurry of foreclosures for a long while yet. And people trying to sell their homes at "reasonable" prices (i.e. non foreclosure pricing) are going to have a lot of trouble. Since the majority of buyers are people who already have a home... if you can't sell; you can't buy. Which leaves us with first time home buyers. Who, if they don't use FHA require a down payment of 20%... in a country of non savers. So the great recovery rests on FHA first time home buyers ;)

But all the stock market needs to be happy is the pickup in sales, not the factual reasoning behind it, to build a thesis. Hence our burgeoning "housing stock" exposure. The fallout from job losses and typical business cycle on the housing market still lays mostly ahead of us. On top of that Americans are already levered up and need YEARS to disgorge - this is a quantum change in society. Not just a "cyclical" issue that gets solved by more easy money thrown at the problem. That was the LAST 20 years.

*Kool Aid is known to offset all intellect slowing diseases associated with the ingestion of mustard seeds.

[Dec 24, 2008: Median Home Prices Fall Most Since Great Depression]

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