Values Have Dropped Only 25% of the Fall Needed to Reach Trend

[globaleconomicollaps]

I got this off of Yves Smith today.

Values Have Dropped Only 25% of the Fall Needed to Reach Trend
2009 November 11
tags: property price index, property values, real estate bubble
by Michael David White

property price index FHFA 1975 to 2009 by NewObservations.netPRICE TRENDS / WAR OF THE WORLDS (Part 4): Property owners nationwide have lost only one dollar for every four dollars they can ultimately expect to lose on their home.

The good news according to the leading data series issued by the United States government is that prices have only fallen 6 percent. If you are a homeowner, you are wealthier than you knew. The bad news is you still have three dollars to lose for every one dollar which has already been lost.

The total projected fall from the Federal Housing Finance Agency (FHFA) “All Transactions Index”, which begins in 1975, shows a peak-to-trend fall of 27%. Since prices are 6% lower by this measure, prices must still fall an additional 23% from today for prices to revert to trend.

The assumption built into these estimates is that prices in the years 1975 to 1999 advanced at a typical rate. A trend line was generated to the present based upon that 25-year period. The chart depicts the divergence of the trend established from 1975 to 1999 and the actual prices recorded from 2000 to 2009.

The FHFA prediction of a total fall of 27% is far less than the total fall of between 49% to 60% predicted by Case-Shiller. Based upon the four data sets reviewed in the last few weeks (see summary below), we can estimate a total fall of between 27% to 60% from the bubble top to the long-term trend. The average of the four indexes projects a total fall of 41% from the bubble high to the trend bottom.

Looking ahead from today, the average of the four indexes predicts that property values will fall 26% from our current price levels.

Please click here to see charts for each of four data sets at “Property Price Index”.

property price index summary of 4 data sets by NewObservations.net

Michael David White is a mortgage broker in Chicago.

[globaleconomicollaps]

Re: Values Have Dropped Only 25% of the Fall Needed to Reach Trend

counterpoint from Jesse today:

18 November 2009
Alternative View: Housing Prices Have Fallen Significantly Towards the Trend



Here is the graph associated with a view of the deflating housing bubble that shows we have appreciably fallen, further than the 25% in the blog entry from yesterday.



For the details on this view read here.

It appears that both sets of numbers, the ones above and the ones from yesterday, have been adjusted somewhat.

The numbers from yesterday are Indexed to 1980 = 100, and are therefore a percentage of increase.

The numbers above are nominal prices, and then adjusted for inflation using some governmental measure presumably.

I have not yet reconciled the two views, as I am rather tired and 'under the weather,' compliments of the children's propensity to bring home their sniffles and sneezes at this time of year, the head colds that seem to linger endlessly, despite the repeated application of vitamins, chicken soup, sudafed, ibuprofen, and the occasional sip of the nectar of Tennessee.

And yes, I did finally break down and listen to the spouse, obtaining a swine flu vaccination. Perhaps the mental slowness is merely due to my mercuy addled brain. Perhaps it will help me think like a Fed banker and figure out their gameplan. lol.

Posted by Jesse at 12:14 PM

[don]

Re: Values Have Dropped Only 25% of the Fall Needed to Reach Trend

The 25% figure sounded much too lean. Throw in the time-tested lending standards- 20% down, 28% monthly income ceiling towards a mortgage, etc. and shazam! the magic house price has arrived. Expect EJ's over correction to occur first-plunging right through the historical flooring (iTulipers leap in) once the Feds have finally failed in sweeping back the tide.

[globaleconomicollaps]

Re: Values Have Dropped Only 25% of the Fall Needed to Reach Trend

In France historic down payments have been 30% or over. In Mexico for many years mortgages where essentially unavailable to the general public. My grand parents bought their apartment in the 30's when it was typical to have a 10 year loan, meaning that the entire house was paid off in 10 years. Obviously prices would have to be much lower to accommodate paying for a house in 10 years. This is the core of the housing bubble theory. House prices have been driven up by extending more and more credit. To my mind a crash means returning to house prices where a 10 year loan is typical again. Think about it, would you extend a 30 year loan to a guy in his 50s? Your chances of getting your money back would look pretty slim to me.

The potential for the Federal Government to stop supporting housing prices is growing. Automatic earth has written several articles about this, I will try to dig up an appropriate quote later. The take home message is that government support will be withdrawn soon ( i.e. no FHA loans, no Ginnie Mae securitisation and no FHLB support )

http://theautomaticearth.blogspot.co...ces-ready.html

What the graph also shows is that an estimated 4 million homes will still be sold in 2009, and that is not good news, unless you're trying to offload unwanted properties and/or your income depends on loan transaction fees of one kind or another. If you’re a buyer, you pay too much for the home. If you're a taxpayer, you get stuck with guarantees for loans and securities based on home prices that are too high.

How much too high? Goldman Sachs said recently that the homebuyer tax credit, modification programs and foreclosure moratoria pushed US housing prices up by 5%. While that looks to be a very low estimate in itself, it doesn't really matter, because it pales in comparison to the price increases caused by the ever more extreme presence of the government in the market.

This graph from San Francisco Fed senior economist John Krainer shows that Fannie Mae, Freddie Mac, and the fast rising star Ginnie Mae (which provides blanket guarantees for FHA securities), who not so long ago were responsible for less than 50% of securitizations, now are left with about 95% of them. They can't sell them to China anymore, those days are over, so the Fed has bought well over $1 trillion of the stuff just in the past year. It's in this graph that the real market-distorting perversity can be found, as well as the reason why the government needs to get out of housing as fast as it can.



You see, it's starting to look as if the homebuyer tax credit might not be renewed as is, nor even extended. Instead, we're in for a phase out. Which probably means that those people on the Hill that are up for re-election actually have begun to listen to some of the voices critical of this particular tax break. Reports have now come from multiple sides which suggest that the cost per newly purchased home of the credit is anywhere between $43,000 and $292,000, once you exclude the 85% of buyers that would have bought a home regardless of the credit.

Still, while those reports are convincing and damning at the same time, they tell but a tiny sliver of the real story. Which is that of those 85%, precious few would have been able to purchase a home without the ever-present ever-willing assistance of a full slew of governmental or semi-governmental agencies and corporations eager to buy up and securitize any and all mortgage loans the banking system can lure their dumbfounded and unsuspecting clientele into.

It would seem reasonable to assume that 85% out of those 85% wouldn't be able to get a mortgage if the government were not so hungry to put the tax revenues it receives from its citizens and voters into a housing (equals mortgage equals banking) market that is guaranteed to collapse someday soon regardless of what amounts of public funds are injected.

That is at issue here: the US housing market is way beyond any shape or form of salvation. And that in turn means that the only thing the government achieves with its tax credits and other attempts at stimulating or stabilizing the market, or whatever politically palatable term may be found, is an under the radar stealth transfer of real estate losses from the private to the public sector. And I for one don't believe for a moment that Washington doesn't know that.

So why can we be so sure that US real estate is pining for fjords and pushing up daisies? This weekend's Miami Herald provides a good answer.

'Shadow market' clouds housing recovery

[..] an analysis of the so-called shadow market done for The Miami Herald suggests the number of homes and condos in the pipeline to come on the market in South Florida is nearly five times larger than all residential properties currently listed for sale


It's the sheer number of properties available, and the avalanche of foreclosures and walkaways in the pipeline. There is no way the government can buy them all, or provide and guarantee the credit for 10-20 million new homebuyers to purchase a home. And certainly not at today's elevated prices.

Oh, and at the same time that the homebuyer tax credit will be phased out, did you hear that the Federal Reserve is about to start phasing out its securities purchases? There’ll be no buyer left. It's hard to predict what other tricks Wall Street's Treasury Department has up its sleeve, but rising or stabilizing home prices are out of the question. It has cost the American people trillions of dollars to prop up the market to the present day, where general price levels have fallen "only" 30%. All attempts to keep the market alive have failed miserably, at least, that is, from the point of view of ordinary Americans.

With the government support about to vanish, the future prospects for home prices and the building and mortgage industries are Halloween material, while Bank of America (which bought Countrywide) and Wells Fargo (the country's largest mortgage lender) face increasingly shaky days. Home prices are ready to go into a freefall. When the smoke clears prices will be down 80-90% from their peak. Needless to say that will cause such a chaos it's hard to predict what America will look like.

This is one of several well reasoned blog posts on this subject. It is hard for me to swallow 90% drop in housing in San Francisco. I can see a 10% drop in some of the high priced areas maybe. Possibly even 20%, but right now there are too many people with actual cash money ready to buy a house.

[Jay]

Re: Values Have Dropped Only 25% of the Fall Needed to Reach Trend

The take home message is that government support will be withdrawn soon ( i.e. no FHA loans, no Ginnie Mae securitisation and no FHLB support )

Sweet, do it! I want rates to be 20% too!