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US Real Estate, Look Out Below

US Real Estate, Look Out Below



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Published by kettle1
An over view of the US real estate market and where it may be headed.
An over view of the US real estate market and where it may be headed.

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Published by: kettle1 on Feb 16, 2009


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US Real Estate Markets
Look Out Below
 By N.A. 1elttek@gmail.com
Pundits ranging from the well known CNBC host Jim Cramer to Smart Money’s DonaldLuskin to Alan Greenspan have called a bottom to the housing collapse and appear to haveneglected readily available public information that would suggest that they are all very wrong.
"the drop in U.S. home prices will probably end well before' early next year as the number of houses on the market diminishes, aiding an economic rebound."-Alan Greenspan, April 8 2008“I'm not here to tell you that home prices are at absolute bottom this very moment. But I canargue pretty persuasively that they might be. Or that they are close.”-Donald Luskin May 2, 2008“I am indeed sticking my neck out right here, right now,” Cramer continued, “declaringemphatically that I believe the market will not revisit the panicked lows it hit on July 15.”-Jim Cramer July 30, 2008
Between the US Census, Federal Reserve, and Case-Shiller data, one can put together a picturewhich suggest that the majority of main stream prognosticators continue to make call after callthat ignores historical trends and the current fiscal condition of the US and its citizens.Looking at the 90’s housing bubble gives some perspective to the current bubble. The 90’sbubble rapidly overshot the historical median for that period, peaked and then rapidly droppedbelow the median. This was followed by a long slow climb back towards the median value asseen in the Case-Shiller data in
 Figure 1
. This demonstrates a classic reversion to mean typepattern that has been seen in many markets and in many nations, including Britain and Japan inthe late 80’s and early 90’s.The current data for the US as a whole represented using the Case-Shiller Composite 10 dataset (
 Figure 2
) suggest that the current bubble began to form in 1998-1999. A sudden rise inthe index can be seen in the composite and in the NY area data set (
 Figure 3
). The growth of the housing bubble continued for about seven years, peaking both locally and nationally around2006.What amount of the growth seen in the last seven years has been sustainable and what mighthave driven it? If we look at the median income, both nationally and regionally, we see thatincome has remained essentially flat. Since income did not appreciable increase, then homebuyers were left with two choices. They could either borrow more money from the banks orthe prices of homes had to decrease. It is well known that numerous types of exotic financinghave been used for the duration of the growth phase of the current housing bubble. The effectof the housing debt expansion should be obvious in the home loan to household income ratio.
 Using data from the US Census, two versions of the household income to home loan ratio werecreated. The first version (
Figure 5
) shows the ratio assuming a 20% down payment on thehome, or an LTV of 80%. The second version (
Figure 6
) shows a ratio assuming a 0% downpayment on the home, or and LTV of 100%. While an LTV of 100% was probably less then50% of home buyers, it is still useful to see what sort of risks a significant portion of buyerswere putting themselves in.
“The survey covered people who bought and sold homes from August 2004 through July 2005.The association (NAR) said 43 percent of first-time buyers surveyed financed 100 percent of their homes, up from 28 percent two years ago when the trade group began tracking such figures”- Washington Post Jan 20, 2006 
By 2001 a clear trend of an increase in the household income to purchase price ratio is visible(
Figure 5
). Given that there was an increasing rate of buyers using exotic financing topurchase homes and that LTV was generally increasing throughout the growth phase of thehousing bubble, it may be helpful to look at (
Figure 6
) to get an idea of what sort of financialsituation a non-trivial portion of home owners may now be in. The data used to generate theincome to purchase price charts was the median purchase price data. So a home owner thatpurchased a home in the northeast with a traditional LTV of about 80% would be taking out ahome loan about four times their annual household income. By the peak of the bubble the datashows the loan to income ratio peaking between 6.5 and 7 times household income.History shows that during the last US housing bubble in the 90’s, people who were underwaterwere generally able to continue paying the house note and as such there was not a significantspike in foreclosure. Such a trend would suggest that in the Northeast region, the income toloan ratio of 4X is sustainable. The Peak value of 6.5 – 7 times household income is clearlyunsustainable as we are now reading about the growing “foreclosure crisis”. People boughthomes substantially outside their ability to financially support in the long term while countingon short term gains created from bubble driven growth to make up the difference.An additional view of the real estate bubble can be seen in home ownership rates. Thehistorical rate of home ownership tends to be between 64% and 65%. The current bubble haspushed home ownership to 69% while the nest closest high was 66% in 1983. This is asignificant difference in historical terms as can be seen in
Figure 7
.This collection of data alone is capable of putting forth a very strong argument for a brutalreversion to mean in the housing market. Virtually any argument that the bottom is near innational or even regional terms is specious at best. The recent housing bubble appears to bethe greatest housing bubble in the last 100 years. The only growth that has kept pace withhousing is the indebtedness of the US as a people and as a nation (
Figure 8
).The question at hand is how far we have to fall. The chart in (
Figure 9
) shows the currentCase-Shiller values for each of the twenty urban areas that are represented by the data set.
Note that the Case-Shiller data for Dallas TX does not begin until 2000 and there for does notreflect pre-bubble trends. The percentage data for the reversion to mean is located in (
Table 1
).While the percentage drops just to reach historical median values seem drastic, reversion tomea usual entails an overshoot. If history is any indicator, then the actual drop as representedby the Case-Shiller index could very well hit 80% from peak in a hand full of regions. If the90’s housing bubble is any guide then there is the potential for the overshoot to be almost aslarge as the undershoot.The timing of this event is really anyone’s guess. The last bubble bottomed out approximatelyas quickly as it overshot the median value at the time. However, Japans house bubble in the80’s is a demonstration that once the government gets involved in attempting to control andartificially support prices that most educated guesses are out the window. Japans housingmarket declined for 20 years. As the US government continues to encroach further into marketmanipulation the question is quickly becoming will we stabilize quicker then Japan did?
Table 1
% Drop Peak toMedian% Drop Current toMedian
AZ-Phoenix60% 29%CA-Los Angeles65% 45%CA-San Diego66% 45%CA-San Francisco65% 44%CO-Denver43% 37%DC-Washington63% 49%FL-Miami68% 47%FL-Tampa62% 44%GA-Atlanta27% 14%IL-Chicago47% 37%MA-Boston57% 49%MI-Detroit26% -12%MN-Minneapolis48% 33%NC-Charlotte32% 27%NV-Las Vegas60% 33%
NY-New York61% 55%
OH-Cleveland27% 16%OR-Portland50% 42%TX-Dallas8% 2%WA-Seattle49% 42%Composite 1064% 50%Northeast59% 53%South25% 0%Midwest32% 14%West55% 36%

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