Credit Suisse: Home price declines likely until late '09

Earlier I published a graph produced by Credit Suisse suggesting that housing prices are likely to decline until late in 2009 or early 2010. Here's more on the Credit Suisse research report containing that graph. The report was titled "House Prices: A Lot Done, More to Go."

The report, using two separate methods of predicting home price trends, says both methods "point to home prices moving back in line with past historical 'equilibrium' levels in 12 to 18 months..."  The report notes that housing prices could "overshoot" their equilibrium levels, and fall for even longer than 12 to 18 months, in which case, "'cheap' housing is still about two years away."

The chart at the upper right depicts one of the two "valuation metrics," which is tracking the ratio of median single-family home prices to median family income. That ratio held in a narrow range from 1981 through 2000, but then "exploded upward" and kept rising for five years, peaking in October 2005. (That, folks, is a housing price bubble.) Credit Suisse projections indicate that metric will return to the upper end of its previous range in September 2009, and the lower end of that range, if the decline continues, in April 2010.

The other "valuation metric" applies a price to earnings ratio for America's residential housing stock, with "price" being the total value of residential real estate and "earnings" being the sum total of all rents paid by renters and imputed rents paid by homeowners. That metric also held fairly constant from 1981 to 2000 and then shot higher, also peaking in the third quarter of 2005. Credit Suisse's analysis shows it returning to the upper end of its previous range in the third quarter of 2009, and the lower end of that range, if the decline continues, in the first quarter of 2011.

Relatedly: As reported on Tom Petruno's Money & Co. blog, the CEO of Home Depot today took a more optimistic approach to the current housing cycle, saying, "we're getting awfully close to the bottom."

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Graphic: Credit Suisse research

Comments

[Rational Renter]

Ha @ Home Depot CEO. Your job sort of depends on that unlikely prediction coming true, doesn't it?

[amir]

Kind of difficult to make these predictions for our national RE market, because it's made of so many different local markets, but they're as accurate as could be.

The Los Angeles RE market bubbled more than others and started to decline later, so 2010 might be too optimistic. Also, the so called 'nice areas' of LA have not seen much damage yet, so 2011-2012 might be the local equivalent.

[mbob]

The CEO of a chain that sells stuff to fix up houses? He is optimistic?

I'm shocked, shocked I tell you.

What comes next, a cautious note of hope from remodelers?

[E]

What amir said *2

[Amazing_Happens]

If everyone agrees on this, why make everyone wait? Just lower the prices down to "historical" levels tomorrow, and it'll all be fine ...

[jbunniii]

Even after prices reach bottom in LA, which certainly looks likelier to happen in 2012 than in 2009, if the past is any indication they will remain flat for several years after that, hence they will continue to decline once you consider inflation. Those looking for the optimal time to buy may do well to set their sights on 2015 or so. Meanwhile, relax and enjoy paying rent that is less than half the carrying cost of owning a comparable property, AND with no downside risk!

[save your ammo]

Based on a similar plunging graph line for the LA market,
the undercut will not reach bottom until late 2012. In
the end, only the affordability factor will stop the
slide. Side drift on the same graph would appear to
be about 3-4 years. New nominal price highs coming
between 2022-25. Discounting for inflation at 4%, figure
a 2007 nominal value to then be worth about 40-45%
of what the house was valued at in 2007. Simply put, 2005-2007
LA RE purchases may be dead as a catch-up investment for a lifetime.

[Yearning For Home]

(I'm copying-and-pasting my comment from Peter's earlier post on this, 'cause I'm really hoping someone can dig up some LA-specific data.)

...I'd love to see a chart like this for Los Angeles County, or the L.A. metropolitan area. My understanding is that from 1980 to 2006, the median home price-to-household income ratio for the Los Angeles-Long Beach-Santa Ana metropolitan area was 4.6. (It peaked at an amazing 10.0 in 2006!) Unfortunately, I was not able to find the median home price for that same area and that same time period, so I can't generate a comparison.

Assuming there's no unusual growth in household income, I would dare posit that the only real question is this: will the price-to-income ratio fall back to its 26-year historical median, or has something now fundamentally changed that will allow for that ratio to stick at a higher level? Fundamental change could mean certain types of government intervention/support not seen beforey, or new types of mortgage products (40+ year mortgages, anyone?) that allow for people to buy more expensive homes than has been seen historically, or still-historically low mortgage interest rates?

I have always thought the the historical price-to-income ratio is absolutely the strongest evidence for arguing that L.A. home prices must fall further.

[Qatar Boy]

Or better yet, NAR has proclamed that the decline is over, so, looking from that stand point the HomeDepot CEO is quite pessimistic. As for LA, we tend to dwell in extreemes so I'd expect at least 5 more years of bleeding. Just my 2c.

[SMRR]

3rd on what Amir said. Amir, did you ever work in research for a Democratic pollster in Santa Monica? Wondering if I know you. - SMRR

National housing bubble is NOTHING compared to the distortion that happened in los angeles. A chicken shack across the street from me speculated up 500% since 98. Everyone talks 2001 as the bottom, but if you look at the long term housing price graph, the bubble in LA started in 96. And that's where we will return - if not lower, with the tsunami that is about to hit us. The greatest credit retraction in world history. Over correction will take us to 1980. I'm going to offer Ed McMahon's kid (or his maid) depending on how the will is executed, a fat $95K for his 92 room beverly hills manse. And they will be happy to take it. :)

[SMRR]

re: home depot ceo

The downturn will hit most of us. For instance, I think I got a 4.5% raise after having anunprecedented year in my vertical. My guys are getting 2% and they have very rare skills and work very hard. This is below inflation amounts, but I'm happy we're getting anything at all.

However. Those folks in the home improvement/construction industries are doomed. Sell your stock in HGTV right now unless the re-brand as the Repo Man channel. Credit card execs, bank execs, all the home depot execs & stock, pottery barn, restoration, crate & barrell, lumber yards -- doomed. Home depot's CEO needs to brush up the resume or take the early retirment option. On my drive to one client, there are 3 home depots in a 5 mile radius - just on my commute - haven't checked how many in that radius that I DON'T see, tucked away. The big laugher is, for the last six months I've watched a Lowe's get built --- the thing must be 400,00 square feet. I mean... I wouldn't hate to be the planning guy who screamed in 2004 - "Home Depot is killing us in XXXXX! We gotta put a flag down there!" However, if I were the EVP who decided in 2007 "-- yeah, you know I think our planning guy is right!" I would just walk into the nearest one of my stores, buy some rope, loop it, toss it over a rafter and have someone kick the paint can I'd just stepped on out from under my feet.

[sunsetbeachguy]

I disagree with Amir.

Yes, real estate is local but mortgages and finance are national/international.

The price bubble isn't possible without toxic mortgages.

All RE values are falling and will continue to fall, it isn't different this time, even on the Westside.

Sir John Templeton said it best...

The simple phrase "it's different this time" are the four most expensive words in the English language.

[Cal]

Yearning:

Here's a quickie:
http://tinyurl.com/5vtt8o

That is the NAHB HOI median price / median income from 1996 forward.

[amir]

Hey SMRR, sorry, never worked as a pollster.

to sunbeachguy, I didn't say the national trends will not influence LA. Their prediction is not bad as far as predictions go. However, real estate also has a local element. LA will suffer more and longer for many reasons:

The bubble here was more intense and less connected to fundamental economic reality.

The city depends on low gas prices more than other metropolitan areas since it's spread out and doesn't have efficient public transportation.

The city depends on media businesses that are in trouble: music, news, movies, TV.

San Francisco for example, is doing better because high tech is still a great industry. So is New York. Sorry LA.

In my opinion, LA could become one of the cheapest large cities in the US, because of the lack of growing high paying industries and the size of the city which means a large amount of land that is available.

[lisa]

Totally off-topic, but you do have to link to the LAT story about a family of bobcats living large in Lake Elsinore.

"Taking advantage of a slump in local real estate, a family of bobcats has moved into a foreclosed Lake Elsinore home, lolling about on fences and walls and riveting an entire neighborhood."

http://www.latimes.com/news/local/la-me-bobcats5-2008sep05,0,2286826.story

[RyanT]

So how do you know when to sell and when to buy?

Sell the Ceiling and buy the Floor! The Ceiling is the top end of home prices based on when the reach price levels where buyers can no longer get financing.

The Floor is the bottom of prices where a house makes sense to own because of the income it generates.

Check out the Ceiling and Floor values for your area at www.UsHousingMeltdown.org

Prices in many areas of So Cal busted through the Ceiling to income to home price levels of 10 to 1. The highest that can be sustained is 4 to 1. When you do the math, realizing the maximum responsible lenders will allow a borrower is 28% of gross income for mortgage costs, this ratio makes sense.
http://www.ushousingmeltdown.org/home-value.asp

[ryanman]

Cal, there's a problem with that graph, there is only 1 measurement from '02. Probably done just to make the spike look bigger. I understand the point though, something changed dramatically.

[FinancialServicesRenoNV]

Greetings all members, I would just like to say hello and let you know that I'm happy to be a member - been a lurker long enough :) Hope to contribute some and gain some knowledge along the way....