Home Prices – Are We There Yet?

Any parent who has ever been on a trip with a child knows the all too frequent question of “Are we there yet?”  That question is no longer exclusively relegated to children on trips—it is now the mantra of homeowners and prospective homebuyers across the country.   So, in terms of home prices, are we there yet—at the bottom, that is? In one word, no.  First the caveats.  When discussing home prices everyone needs to be reminded that there is no such thing as a National Real Estate Market.  All real estate is local in nature and responds to the supply and demand in each respective market.  Even within a city, price changes impacting each and every home are different at the same point in time depending on neighborhood, price range, product type and specific location. Nevertheless, we will still address a national price.  So how much have home prices declined? The answer to that depends on which source is utilized.  The National Association of REALTORS® (NAR- of which I am a member) shows the median home price decline of 9.5 percent from August 2007 to August 2008.  That is an accelerating drop from the 7.1 percent decline from July 2007 to July 2008.  The Case-Shiller Home Price Indices indicate a 16.3 percent decline from July 2007 to July 2008 for the 20-city composite, and a 15.4 percent decline on a national basis from the second quarter of 2007 to the same period in 2008.  The Office of Federal Housing Enterprise Oversight (OFHEO) estimates that home prices declined 4.8 percent in the second quarter of 2008 from the same period in 2007.  The difference is that each source has a different dataset used to generate their statistics.  NAR bases its data on a sample of multiple listing services across the US.  NAR data, including national and state sales numbers and national and metropolitan area homes price and methodology can be seen at http://www.realtor.org/research/research/ehspage. OFHEO’s data are available monthly on a national, regional, state and Metropolitan Statistical Area basis at http://www.ofheo.gov/hpi.aspx. OFHEO uses a similar methodology to Case-Shiller in that repeat sales are weighted and used to calculate an index.  The data, however, are all conforming loan data from Fannie Mae and Freddie Mac transactions.  The Case-Shiller index is based on tracking of same-home resales over time.  They make available a 20-city index and aggregation of those cites on a monthly basis through the parent company Standard & Poors.  They also release a national estimate quarterly.  http://www.standardsandpoors.com The latest Case-Shiller Home Price Indices covering data though July 2008 reveals significant differences in price changes across the 20 metropolitan statistical areas covered ranging from the smallest one-year price change of 1.8 percent reduction in Charlotte, North Carolina, to the largest decline in Las Vegas, Nevada, of 29.9 percent.

Real estate bubbles were not responsible for all of these declines.  Look at Detroit, Michigan, for example, showing a decline of 26.6 percent from the high in December 2005 through July 2008.  They never had a real estate bubble—but what they had was a massive reduction in the number of jobs in the Detroit market.  Since August 1999, the Metropolitan Detroit area has gone from 874,000 jobs to 742,100—a decline of 15.1 percent or 131,900.  That decimates a housing market and is vividly shown in the decline. Which do I like the best?  Probably the Case-Shiller National Index.  As a former appraiser, matched pairs are hard to beat in extracting trends and these pairs are the same homes selling at different times.  Granted, OFHEO’s index is calculated in a similar measure, but since it is limited to just loans passing through Fannie and Freddie it misses much of the truly distressed real estate that had sub-prime, Alt A loans or other exotics such as option-payment ARM mortgages.  All three indicate an accelerating rate of decline.  Trends basically continue until something changes the trend. Thus, I believe that these trends will continue, and we have yet to reach bottom.  Further examination into supply and demand, the cost availability of loans and the economy (read that as jobs) all provide further details of a declining economy. The news on jobs is bad.  Really bad.  Since January 1 this year, the US has lost 760,000 jobs.  And when you consider we need to add roughly 100,000 new jobs per month just for the people entering the workforce for the first time, we are now short 1.6 million jobs.  Just like housing price declines accelerating, so are job losses.  Total jobs lost from August to September this year were 159,000 compared to a monthly average decline this year in the first eight months of 75,125.  No jobs lost due to Hurricane Ike were included yet, so the number of lost jobs will likely rise even more in October.  Other than retirees, most people need a job to buy a home. We continue to overbuild—much akin to doubling down on a losing black jack hand.  In the past 12 months, the US has lost 519,000 jobs but at the same time has issued 1.35 million permits for dwelling units (single family, duplexes, condos, townhouses, coops and apartments).  In a normal market and economy, you need 1.25 to 1.5 net new jobs per new dwelling unit.  We have lost 2.6 jobs per new dwelling unit.  So the hole we have to climb out of is getting deeper every month.  We are not overbuilding everyplace, however.  Laredo, Texas, has created 2,300 net new additional jobs in the past 12 months while only starting construction on 1,154 new dwellings.  Ditto Anchorage, Alaska, which had posted 900 new jobs and 548 new dwelling units—for 1.64 new jobs per new dwelling.  On the other end of the spectrum, for example, was Phoenix, Arizona which has lost 41,700 jobs in the past year while adding 33,167 new dwellings.  A great source for easy access to building permits data and employment statistics for the US, States and all Metropolitan areas can be found at the Real Estate Center at Texas A&M University at:  http://recenter.tamu.edu/. What are the implications on home values and future real estate lending of the just-passed Emergency Economic Stabilization Act of 2008? Unfortunately not very positive on real estate.   In my opinion there is very little that will slow the fall of residential home values (in those markets where they are declining).  These actions were more targeted at keeping banks solvent rather than making new loans.  It is highly appropriate that the portion of the Act that allows either guarantees or outright purchases by the US Government or mortgage-related securities is known as the Troubled Asset Relief Program, (TARP) rather than the Commercial and Residential Property Economic Tourniquet (CARPET).  Why so?  Because you can hide a whole lot more dirt under a TARP than a CARPET, and that is exactly what Congress has done with this Act.  While the TARP segment of the bill is $700 billion, congressional members added another $112 billion of pork projects and earmarks.  To name just a few of the more than 2,300 earmarks swept under the TARP:

  • $192 million rebate of excise taxes to US Virgin Island and Puerto Rican Rum produces
  • $33 million reduced corporate taxes on income earned in American Samoa
  • $478 million tax incentive to Hollywood movie and TV producers to do US productions in the next 10 years
  • $2 million tax break to Oregon manufacturer of wooden toy arrows
  • $49 million tax benefit to plaintiffs involved in the 1989 Exxon Valdez oil spill
  • $100 million in tax breaks to racetrack owners in the next seven years
  • 2008 repeal for 20 million tax payers from the alternative minimum tax
  • Renewal and expansion of renewable energy incentives and alternative fuels
  • Tariff relief to US wool fabric manufacturers,  $148 million
  • Fringe benefits to bicycle commuters from employers, $10 million

So where will home prices go?  Down is the primary direction.  Fewer jobs, a more stringent qualifying requirement for loans, lack of liquidity in the market place and ongoing over-construction, all point to sustained price declines.   We still are facing more than two million foreclosures in the next 18 months.   The primary question is whether we will be seeing the sequel to TARP a year from now.


  1. Harry Hayes

    Very informative, just wish it was better news.

  2. Hugh Fitzpatrick

    Although I don’t like reading this information, it does make a lot of sense.

  3. David G

    Very informative, articulate and comprehensible. Thank you for presenting something coherent, rather than the gibberish that permeates most other blogs.

  4. Prashant Kothari

    Great, lucid analysis… wish the news were better but it is what it is. Sugar-coating the facts or going into denial is going to make things worse

  5. Rocky Navarro

    The Prize (By Daniel Yergin) “Oil runs the world economy”, per Yergin.

    As the US Goverment prints and spends $2 Trillion US Dollars (USD), they will crash the USD and cause inflation. All comodities such as copper, gold, oil and natural gas will skyrocket. Just add some middle east turmoil and “Prophet of Oil”, Matt Simmons (Twilight in the Desert) will be right on.

    Better fill up my suburban now because, cheap gasoline is just for a short while.

    I guess the FED would rather have inflation over deflation/depression.

    Land just might be the inflation hedge we should buy (closing all deals with Gracy.)

    Dr. Ted, please keep visting Austin. We love your economic reviews. They have always been right on the money.

    Rocky Navarro, Broker / Investor

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    (English translation – Very interesting! capable)

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    We had a depression fair in the back yard. A major game there was Pin the Blame on the Donkey. (Richard Lewis) 🙂

  11. Bob Yanega

    This is an excellent, succinct, and extremely accurate analysis. I predict that no one in government or banking would ever say that, because the truth is unpopular. I am looking forward to seeing you back in Cleveland in January!

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    P.S. I like your writing style.

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  16. Jeff

    I saw you today at the Denver Board and was very impressed.
    A question that I had but did not voice is; If we have a seven month supply of inventory in the MLS today, which is not extreme, and you were clear that builders are still over building presently, at what level would single family home building make sense?
    I know that it is not simply a matter of MLS inventory that is the determining factor…your thoughts?

  17. robert groves

    bring back “RESOLUTION TRUST” instead of bailing out these banks and insurance company’s. … take them over, liquidate them, or sell them to a willing buyer. to start them anew

  18. natasenka

    Спасибо очень полезная и познавательная статья !
    Материал хороший и конечно жду новых статей 🙂
    Автору спасибо

    (English Translation): Thank you very useful and informative article!
    Material good, and certainly look forward to new articles
    The author thanks

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    I loved Home Prices – Are We There Yet?!

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    Russian to English translation: it was very entertaining to read

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    Russian to English translation: Very informative. Thank you.

  23. Susan McNeal

    What are your thoughts on what has been happening in the industry between Oct 2008 and March 2009?…came here looking for update from the last visit but found it is the same.

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    Translation: Russian » English
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    Translation: Russian » English
    Heh. interesting ..

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    Translation: Italian » English
    Very interesting! bravo

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    Valuable advice, take note

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    Translation: Russian » English

    Thank you very much! took too-useful.


  46. Chims

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    Translation: Russian » English

    Very interesting

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    Ценные рекомендации, беру на заметку

    Ценные рекомендации, беру на заметку

    Translation: Russian » English
    Valuable advice, take note

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    Translation: Russian » English
    It was interesting to read

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    Completely agree!

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    thanks for the article … Add to Reader

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    beautifully done! Thank you!

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    Translation: Russian » English
    Strange to see that people are indifferent to the problem. Perhaps this is due to the global economic crisis. Although, of course, difficult to say definitely. I have thought a few minutes before you write these few words. Who is to blame and what to do – it is our perennial problem Dostoevsky said.

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    Translation: Russian » English

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    Very interesting, but in the future would like to learn more about it. Very pleased with your article!

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    Translation: Russian » English

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    Translation: Russian » English
    it was very entertaining to read

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    Translation: Russian » English
    Very informative. Thank you.

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    Russian to English translation:
    Yes, I also noticed that

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    Added to your bookmarks. Now will you read much more often!

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    A very useful thing, thanks!

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    Translation: Russian » English
    How can I contact the author for posting a blog posting on your site and how much will it cost?

    1. tjones

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  69. Ilyas

    One should keep in mind when he or she buy a home in real estate, the neighborhood, price range, product type and specific location. The prices of real estate doesn’t remain same. It’s changing. So the whole responsibility on the realtors to inform the customers real price of a room.

  70. Daine Kirt

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  71. Anthony Smrke

    As a Real Estate practitioner in Canada , after reading your post with respect to the prognosis for Real estate in the US I guess we ought to count our blessings up here in the frozen north.

  72. Anthony Smrke

    As a Real Estate practitioner in Canada , after reading your post with respect to the prognosis for Real estate in the US I guess we ought to count our blessings up here in the frozen north.

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