The Future of Housing Prices

Paul Krugman sends us to Calculated Risk's graph of the Case-Shiller house-price series:

and comments:

Barry Ritholtz tells us that the president of the Boston Fed is surprised that housing isn't recovering. This is truly bizarre. Like Calculated Risk, my working assumption throughout the housing boom and bust has been that history, if it doesn't repeat itself, at least rhymes: the rise in housing prices looked a lot like bubbles past, and we should expect the bubble's deflation to follow past patterns too. And that tells us that we should expect a prolonged, grinding decline in home prices, back to more or less their pre-bubble inflation-adjusted levels.

That strikes me as too pessimistic. The rise of Asia and the resulting demand by the rich and by governments for U.S. assets to hedge political risk is likely to keep savings glutting for decades. We aren't buiding more superhighways, there are no major transportation improvements on the horizon, America is filling up, andlso land-value gradients are on the rise. If the income distribution continues to erode, we will wind up with higher prices for scarce positional goods--chief among which is location, location, location.

My guess is that we will ultimately give back half of the doubling...

Comments

[Nicholas Weaver]

This is why I prefer "buy v rent delta" rather than others as a metric of bubble or not, because it includes the land-scarcity and location factors.

[save_the_rustbelt]

One must remember that the housing market is very, very regional, there are many varieties of housing markets, each with its own problems and opportunities for healing.

Even as the rustbelt continues a 5 year orgy of foreclosures, there are tiny signs of life, with apparently first time young buyers leading a slight pickup of bargains here and there.

[Lord]

I think you are underestimating the problems with jumbos. I expect it will give back 2/3s but probably not much more.

[Crab Nebula]

I think you're wrong, Brad. A whole new generation of global investors has never learned that housing is not a fail-safe investment - and they've never learned that a US recession can happen. This will sting, and badly.

I think you are partially right, but are overestimating the new post bubble equilibrium level. Prices are still going way down.

[a]

As Nicholas says, "America is filling up" doesn't make much sense, since it would impact rents as well as prices. But if you plot "buy vs rent", and you will arrive at the same conclusion of CR. Or you can plot "housing prices vs income". Use whatever metric you want, the conclusion is the same; housing prices are still going to fall - a lot. And why is the conclusion "pessimistic"? For every seller there's a buyer; lower prices are good for first-time buyers and the young.

"My guess is that we will ultimately give back half of the doubling..." Actually, I don't think CR would say you're off here, because you're talking, I presume, nominal prices. Half of the doubling in nominal terms is will be almost all the doubling in real terms. But that, I think, is supposing we avoid a severe recession.

[Crab Nebula]

Oh, and also, America is NOT REMOTELY FILLING UP. There is plenty of infill land even in SF and Manhattan.

With increased fuel prices, there will be much demand for well located semi-urban (new urbanist?) homes.

Exurban sprawl will become increasingly unsustainable without mass transit....but that transit may get built, creating many new desireable exurbs.

My dream? To have enough money to purchase well located run down suburban malls. They will become awesome spots for dense condo and apt developments.

[trotsky]

Plenty of infill land in Manhattan?

What means this "plenty," kemosabe?

[PaulC]

This may be a very naive comment, but wouldn't you want housing prices to revert to a previous inflation-adjusted level? I.e., if the price of housing consistently outpaces inflation, then doesn't it become increasingly more costly to own a home relative to other expenses?

Maybe it doesn't hold if we are all continuously getting richer in real terms. I'm sort of puzzling over why a house today should cost more inflation-adjusted dollars than the same house 50 years ago. Even superior-quality houses don't need to be more expensive to build if construction productivity has improved. The land value is a little trickier since it is possible for the same location to increase in value with regional economic development. But it is also possible for the location to lose value as jobs and people move away.

In short, I think the idea of home ownership as a magically risk-free investment is fallacious to begin with. People may want to own a home (e.g. for the increased autonomy) and they may benefit from tax incentives. But an extended boom on real estate prices would be a benefit for only one generation and a disaster for ones to follow.

[Neal]

In order for a market to exist, there has to be a customer willing and able to pay the price.

What we have seen is the market that was made by the willing but unable.

Soon we will see the market made by the unwilling and unable.

There still is a long way to fall.

A return to inflation adjusted trend-line, at best.

[Karl Seeley]

Brad's observation that there are no major transportation improvements on the horizon gestures at a possible solution but then moves past it without acknowledgment.

We are where we are in part because we've built ourselves into massive dependence on gasoline at a time of high oil prices, with no reasonable prospect that they'll go back down a lot ($80/barrel would look low at this point).

Got a savings glut that you don't know what to do with? Hey, how about refurbishing urban transit? How about subsidizing construction of high quality-of-life urban neighborhoods where people can get around without a car? How about building a bunch of windmills? How about buying back people's gas-guzzler cars and helping them buy high-MPG ones? How about taxing carbon and not returning all of the revenue (or if you're bothered by poverty, returning it on a sliding scale, with lower incomes getting back their full "share" of carbon tax paid, with higher incomes getting back less)?

We're facing long-term high oil prices and an urgent need to reduce carbon emissions, and the Professor can't think what to do with a savings glut other than pour it back into houses? A stunning failure of imagination.

[Crab Nebula]

Trotsky, have you ever been there? Plenty of sub 4 story outdated structures throughout the west side. Dozens. The entire west side west of 9th avenue could handle 100k worth of units easily with upzoning. That upzoning will happen.

[Rickster Sherpa]

I think it will depend somewhat on regional matters. But the down turn in housing to date has been just because it reached unsustainable price levels. Now, as people lose jobs, demand will continue to decline and foreclosures will accelerate. Prices where I live have already fallen by 30%.

[kis]

I'm sort of puzzling over why a house today should cost more inflation-adjusted dollars than the same house 50 years ago.

Population growth and 'scarce positional goods'. There is a practical limit to how far from desirable urban centers people can move, and density restrictions that limit infill.

Do we really expect that housing should follow the same inflation trend line as hamburger in the CPI? The same CPI that hasn't accurately reflected the REAL inflation in housing, food, and energy over the last 10 years?

[Mstar]

Crab:

The rezoning has already happened, but little is, and will, get built. That area is too far from the subways, and the rezoning got in trouble trying to address affordable housing needs (inclusionary zoning, which only works with rentals, but the development costs need condo price points).

[Crab Nebula]

Mstar, you're right as to why that land won't be as valuable as Park, but wrong that nothing will get built. It's already happening. The 7 train is going to be extended to Javitz. There are buses. There are river views. There is proximity to West Chelsea - very desireable. And it's Manhattan. And in the end, there is plenty of land for both affordable and market rate rentals.

People said nobody'd ever live on the Queens waterfront. That happened, and it's expanding too. Same for the NJ waterfront.

[Crab Nebula]

Let me add - nothing looks like it's gonna get built now because of that little thing called the housing meltdown. Next cycle, it will happen big time. And I also didn't mention upper Harlem. Same deal.

There is also ample room in Queens for industrial rezoning near existing rail lines (near Maspeth)

[Frank the sales forecaster]

There is a normal historical relationship between the age of head of household and the likelyhood of being a home owner. There is a normal historical relationship between the age of the head of household and the square footage of owned homes. Run the baby boom through the historical likelyhoods and, tada, you get a housing boom. Adjust for the baby boom's abnormals (higher education acheivement, two income households, late child bearing) and, tada, you get a housing boom with a need for more large homes. Surely you economist don't have a hard time with the idea that as demand goes up price goes up. Ceterus parabus, of cousrse.

And yes, the world is excess capital. Between the trade deficit, the budget deficit, the glut of mature adults accumulating net worth, and the yen carry trade what do you expect.

[Dean]

hahahaha

looks like delong has been availing himself of the bayarea koolaid a little too much - just like every other bayarean, he is convinced his house isn't _that_ overpriced. It'll only give back half the gains, he guesses. ha!

[Mstar]

Crab:

Perhaps you are right - next cycle.

But it takes more to develop real estate then demand. Its a question of demand at what price point?

If it costs $400/sq ft to build based on construction costs (so figure $800/ sq ft all in with land, soft costs, etc), and people are only willing to pay $800/ sq ft for a condo in that neighborhood, nothing will get built. You also can't develop rental for anything over $500/ sq ft, which is where the most demand is.

[jodie]

Housing isn't that expensive relative to some other assets. Like Gold/Oil/Stocks.

[maynardGkeynes]

The one thing I have noticed on all of my cross-continental flights is that we have a lot of empty land in this country. Filling up? I don't think so.

[anne]

http://krugman.blogs.nytimes.com/2008/04/08/permanently-high-home-prices/

April 8, 2008

Permanently High Home Prices?
By Paul Krugman

Brad DeLong * is of the belief that home prices won’t fall back to pre-bubble levels, because “America is filling up” and “we will wind up with higher prices for scarce positional goods–chief among which is location, location, location.”

The trouble with this argument is that it’s an argument for rising rents as well as rising prices — and if you believe the BLS data, that just hasn’t happened nationally. Below are the Case-Shiller home price index and the BLS index of “rent of primary residence”, both adjusted for overall CPI and expressed as indexes with Jan. 1987=100. Bottom line: rents have hardly risen at all in real terms.

Now, maybe the BLS is wrong. But for what it’s worth, the data say that essentially all the rise in real home prices came from a rise in the price-rent ratio, which suggests that things will go right back to where they were.

[Chart] Fill ‘er up?

* http://delong.typepad.com/sdj/2008/04/the-future-of-h.html

[dilbert dogbert]

Take a run over to todays Irvine Housing Blog, Ivine Renter, who has a prediction for the intersection of Price and Appreciation (2012?).
He posts the first 40% price reduction also.
Here in my area of RE crazyness a place just went for $1000+ per sq ft.
Enjoy

[N]

Has anyone compared the recent downtrend (slope, other) with the downtrend of the Nasdaq, S&P 500 and other stocks in year 2000-2002?

[foo]

"Here in my area of RE crazyness a place just went for $1000+ per sq ft.

--- that is nuts - so nuts that I won't find the claim credible without a location reference.

[PeeDee]

I, too, am detecting just a whiff of Prof DL talking his 'book' here.

Either real incomes grow to support the higher cost of shelter (difficult) or real house prices fall (ouch!) or the difference is inflated away (easy, but takes time).

[Tom]

Krugman: "Bottom line: rents have hardly risen at all in real terms."

Not yet. They have been kept artificially low with the increased homeownership rate. They will soon rise, and will justify a higher price of real estate.

[Maurice Lanselle]

I don't know whether city-data dot com has a timeliness issue with their stats, but it seems every city I look at has housing sales transaction counts for 2007 Q4 at barely a third what they were a year earlier (and no 2008 Q1 data).

I suppose Pr. DeLong may have hinted at his position (and leverage?) a couple of days ago when he wrote:

> Perhaps the best way to look at the situation is to recall that three locomotives have driven the world economy over the past 15 years.... The second was investment in buildings, once again centered in the US, driven by the housing boom...

In what circumstances housing is an "investment" in the sense he intends is debatable. Just as there are at least two kinds of capitalist, those who save to be able to attempt their project and those who save to be able to lend to someone who has a project, there are at least two different types of residence-buyer (not counting landlord/rentier buyers). There are those who do so because they have a project: those who want to be forced to save and those who are willing to pay a premium (over rent) to be able to make the place their own (tear down wall, add windows, plant or remove trees, etc.). To this we might add those who just wish to hedge against inflation when rent increases seem to be likely: their project is security. Then there are those who do so to make money, to out-smart the market (to buy cheap junk and sell antiques?). These range from the flippers through the live-in-and-flippers and those who buy as an investment--especially because tax deductions make it cheaper than renting. [reference needed].

If you're not too highly leveraged, you can care less. You should be able to sell your property and buy an equivalent property with the proceeds (unless price trends are too fast for escrow!). But that is if the equity is yours, not highly leveraged.

Maybe Pr. DeLong is looking ahead to a move to D.C to serve in another Clinton administration; maybe he should consider leasing. Or planting the trees he'd like to watch grow.

[Al Brown]

A house today costs more than it did, even adjusted for inflation, because of location. Even a house in exactly the same spot has a different location than it used to. Its most likely more densely populated by more affluent people, who are willing to pay to be close to work or play.

Such a location pushes prices up. Obviously a three bedroom house in Manhattan built in 1800 would suffer such a fate and this is clearer when you look at land prices.

Of course, the inflation in housing of the last 5 years swamps normal price growth and the correction will be significant, but less than it would have been if the Fed continues to inflate. And it seems as if it is inflating like crazy now, and will continue to do so through the election.