What Goes Up Must Come Down? House Price Dynamics in the United States [PDF file]

International Monetary Fund ^ | July 25, 2008 | Vladimir Klyuev

[seacapn]

This paper estimates the evolution of equilibrium real home prices in the United States and finds that despite recent declines, single-family homes remained 8 to 20 percent overvalued as of the first quarter of 2008. In the short run, the gap between actual and equilibrium prices does not exert powerful influence over price dynamics. Instead, that dynamics is driven by the inventory-to-sales ratio and by foreclosure starts in a highly inertial relationship. Taken together, this implies that price declines are likely to continue, including past the point where overvaluation is eliminated. The paper also finds that from the early 1990s onwards changes in regional home prices have been more synchronized than before, and that the recent movements in the average price index have reflected a nationwide housing boom, followed by a nationwide housing bust.

[seacapn]

[Note - the publication date for this paper reads 'July 1,' but it wasn't released until today]

I thought this was an interesting paper on the housing situation, and some possible future trends in housing prices. There are 14 pages of charts and data for anyone who wants to poke around the paper's methodology, but the conclusion is this:

In our best judgment, single-family home prices... were around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent... We find that the bloated inventory-to-sales ratio, high foreclosure rates, and the large degree of inertia in housing markets imply that recent price declines are likely to continue.

Basically, their conclusion is that housing is STILL overvalued, and we have around 14% left to fall before prices stabilize.

[ml/nj]

One should remember that the IMF is a de facto money printing organization.

ML/NJ

[seacapn]

The IMF itself is surrounded by controversy; the economists who write up working papers under the IMF are often quite sharp, though.

[ml/nj]

I guess I beg to differ. Only a whore would work for the IMF.

ML/NJ

[Proud_USA_Republican]

Seattle could fall 20% and it would still be overvalued due to all the regulation, anti-development and land use restrictions that the dems inacted “with good intentions” which helped triple home prices since the mid 1990’s. Did median incomes triple in the same time? No.
But according to the dems, everyone in Seattle is a rich 6-figure salary microsoft worker/liberal urbanite and ofcourse married to another 6-figure salary microsoft worker/liberal urbanite so we can all afford 400K + property taxes for a 800sq foot condo or hovel of a starter home in a ghetto neighborhood.
Recent analysis by the UofW economic department said this regulation added over 200K to the price of homes here over the past decade.

[seacapn]

Well, this paper makes a fairly concrete, testable claim. If housing prices drop 8-20%, the guy was probably on to something.

[nicola_tesla]

The median price of a house should be no more than 2-3x of the median annual pay - a 20% down payment, less depending on the interest rate.

By that measure, with median pay being about $43k and supposing an interest rate of 6%, the median house should cost no more than 100-120k, mortgage no more than 80-100k with a down payment of around 20-30k.

Do you think we are anywhere near there yet ?

[anonsquared]

Interesting chart - Figure 11 on page 22 - which shows the relationship between sales and inventory for sale of existing single family homes.

[meyer]

There is a boatload of data there. Of interest, from page 17 of the pdf file - the West and Northeast seem to have had a huge runup in price followed by the predictable fall (the data isn’t new enough to show this year’s price drop). The south and midwest maintained a bit more stability with a smaller runup. I think that Florida’s market mimics the wilder swings of the northeast and west. Not sure that the south will claim Florida as her own anyway. :-)

[ml/nj]

If housing prices drop 8-20%

Where? In Barack Obama's "community"?

Sure there are places that might be overpriced, but for most of them the dollar will decline faster than whatever correction occurs. Where I am prices are essentially level I think, and in NYC, they're still going up.

ML/NJ

[meyer]

Do you think we are anywhere near there yet ?

..I think we're a whole lot closer than we were 2 years ago!

[JerseyHighlander]

I’m just looking through the paper now, but I can tell you that even in Manhattan the prices are not rising more than 1% a quarter and certain residential market segments are seeing anything from 0.1% to 2% quarterly median price drops. Bear in mind that the analyst companies doing comps in NYC readily admit it’s hard to get good data on unit sales in Manhattan.

Anyway you look at it Manhattan’s home prices are going to fall, the number of layoffs in the financial (and media) sectors are in the several hundreds of thousands, and the market will need to adjust.

[Publius6961]

BUMP!
For later

[ml/nj]

Anyway you look at it Manhattan’s home prices are going to fall

People have been saying that for two years. My daughter is looking to buy. I know what I'm talking about. It might be that there are areas or price levels that are softer but not for what she is looking. As for the economy in NYC, I suggest you see whether you can get a table for dinner tonight or tomorrow at any of the many hundred dollar a head restaurants.

ML/NJ

[nicola_tesla]

I don’t think so:

http://mrmortgage.ml-implode.com/

Fitch: Massive House-Price Losses in Non-Conforming Areas to Come

Posted on July 25th, 2008 in Uncategorized

Fitch Ratings, arguably the only rater with their act together other than Egan-Jones, just finished with its ResiLogic enhancements. Its new mortgage loss model will be released today. In it, its new National, State and MSA-level economic and house price forecasting will make their modeling ‘far more predictive and forward-looking.’ That is a nice way to put it.

BIG PROBLEM - This more micro look at the housing market in the 25 MSA’s that in the past have contained the most ‘non-conforming (Jumbo) lending, is coming up with massive house price losses in key areas with San Diego dropping as much as 47% over the next 5-years! San Francisco is looking at an additional 33%.

These are your heavy Alt-A areas. Fitch is getting ahead of the curve this time around. I have been telling you for a few months now that according to my proprietary data while subprime defaults are falling slightly, Alt-A defaults have been soaring in the past four months led by Pay Option ARMs. Prime defaults have also spiked.

Their estimates are dire, but I feel could still be on the conservative side given the absolute lack of non-conforming financing, massive supply, sales not picking up substantially this summer selling season, over 40% of all sales coming from the foreclosure stock, values only falling for about a year and defaults in Alt-A and Prime mortgages substantially picking up steam.

* The MSAs represent the 25 areas that have historically exhibited the most non conforming mortgage lending activity. ‘Some MSAs such as San Diego and San Francisco, CA are expected to experience home price declines by as much as 47% and 33% over the next five years, while home prices in MSAs such as San Antonio, TX are expected to appreciate by 7%, over five years,’ said Somerville. The home price forecasts are imbedded in the state and MSA level risk indicators and will be updated quarterly.

ResiLogic’s new model looks to be robust and takes into consideration many of the things that are top on my list of risks. The systems new capabilities include:

* Introduction of MSA and national macroeconomic risk multipliers;
* Ability to analyze seasoned loans and to take into account loan payment history and house price changes since loan origination;
* Additional penalties for loans originated with stated income or no income/no asset documentation programs;
* Additional penalties for loans originated with second liens;
* Reduced credit for loans with mortgage insurance

This new model will negatively impact Fitch’s loss assumptions and credit enhancement levels for Residential Mortgage Backed Securities. This is mostly your Prime and Alt-A RMBS and not the subprime, meaning if S&P and Moody’s update their systems, round 2 of the mortgage and housing implosion could kick off with Alt-A and Prime leading the way. - Best Mr Mortgage

Fitch will host a webcast next week to discuss its new U.S. RMBS modeling criteria (separate press release will follow). In the coming months, a commercialized version of ResiLogic (ResiLogic 2.0) will be made available by Fitch Solutions.

Contact: Suzanne Mistretta , Wen Hsu or Huxley Somerville , New York.

Media Relations: Sandro Scenga, New York, Tel: .

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.

Source: http://fitchratings.com/corporate/events/press_releases_detail.cfm?pr_id=

[meyer]

Interesting article, though it does relate specifically to areas with the greatest non-conforming lending. My experience here in the middle of the country is that price pressure is still downward in states with the weakest economies, but areas with lower unemployment seem to have more-or-less stagnant prices for now. My experience is specifically in Northern Ohio where I just sold and the Chattanooga area where I just bought.

Naturally, that means that the Cleveland/Akron area (where I just sold) is still in a downward trend while Chattanooga (which never had the big price bubble) is more level. Granted, there may have been a drop in value of a few percent in the 'Nooga market, but it is nothing like the 10-20% drop that is being experienced in depressed northern Ohio.

I do note a trend where lenders are tightening up requirements (down payment, mortgage insurance, etc.) and that was what I was referring to when I posted back at post #11. Standards should not have been loosened in the first place.

Back when I bought my first home, 20% down was the general rule, perhaps a little less with good credit. I put about 15% down and barely avoided needing mortgage insurance. I also had to work 2 jobs for about 5 years to have enough money left over to enjoy life. Many people today don't want to be bothered by having to work that second job.