Wednesday, October 31, 2007

S&P/Case-Shiller

The latest data from the S&P/Case-Shiller home price index were released yesterday, showing continuing weakness. I have produced a chart from the data, both the index (red line) and the annual percent change (blue line). Click to enlarge.

Data: S&P

From January 2000 to August 2007 (latest data) the total rise in home prices was 114%, i.e. house prices more than doubled on average. In the same time, CPI inflation rose a total of 22.3%. In the next chart we can see how much faster real estate prices (blue line) rose in the US versus inflation (purple line). Obviously this sort of real estate overpricing cannot persist, but the relevant question is: how will the balance be restored?

The mildest scenario is that real estate prices will gradually ease and then flatten out for a long time, giving inflation a chance to catch up. Given what we already know about mortgage defaults and MBS prices, this is highly unlikely. After the ongoing decline in housing transaction volumes (existing home sales and new construction) the next step will be significant price declines; as we know, in markets price follows volume. A hint came from Mr. Mishkin's paper mentioning a possible 20% decline in house prices, even if this came in the context of a monetary policy model.

Another scenario is to engineer a much faster increase in inflation but, as the chart makes clear, this is impossible given the size of the re-adjustment necessary. Anything that even approaches this rate of inflation acceleration would destroy the US economy and the value of the dollar.

So, what is likely to happen? In my opinion, prices will initially break from a combination of bank auctions, builder inventory clearances and speculators rushing to the exit doors. We have hints of the size of this initial price drop from isolated auctions already taking place: as much as 30% off from peak prices. I think that banks will soon feel ecstatic if they can recoup 75% of their loan principal and will increasingly pressure the market downward, in a rush to be first out of the door. (This is what the various ABX indexes are already telling us, by the way.) The second chart also shows that the pressure will not be contained to houses bought in the peak years of 2005-06, because the massive price imbalance vs. inflation started in 2000 - in effect, it is possible that even people who bought houses as far back as 2002 will be negatively affected, particularly in the areas that spiked up the most in price (CA, FL, NV, etc).

Thus, I see a 20-30% initial "break" and then a long period of price under-performance, perhaps lasting as much as a decade that will restore house prices to levels reflecting their utility as homes, rather than trading sardines.

16 comments:

DRPI said...

Hellasious,

What do you think of the validity of the inflation data supplied by BLS? I believe the many changes to their methodology over the years (substitution, weighting hedonics, etc.) have caused “official” inflation to be understated relative to “actual” inflation. My monthly living costs surely have gone up more than the CPI data indicates. Mr. Williams at Shadow Government Statistics maintains a data series of the different outcomes.

http://www.shadowstats.com/cgi-bin/sgs

Enjoy reading your work. Have a nice day.

DRPI said...

By the way, CR also has a good discussion on the behavior of housing prices.

SimplyTim said...

Hellasious,

Nice touch with reintroducing the sardine analogy. Yes, that has been a major money making trick - take a basic item and with various mechanisms inflate it again and again.

Tim

Anonymous said...

I enjoyed reading this post, thank you.

wawawa said...

What is up with Q3 GDP? It is very high?
Something does not make sense.

Edwardo said...

I live in a neighborhood with high home prices and as yet there hasn't been the kind of across the board collapse (or really any sort of collapse in home prices). One wonders if and when the upscale neighborhoods will see the price stickiness come unstuck, so to speak.

Occamsrazors said...

I just love this blog. Complex isses distilled down to their bare essence so that anyone can understand them. I started reading SuddenDebt a few months ago, and then got so interested I read it from start to finish. An education in itself.

Hellasious, I am finally bold enough to ask what may well be an unanswerable a question. When does the Fed cut its losses on trying to save the economy and start saving the USD? Will they have the will to do it when required? It seems to me Bernanke's actions and comments indicate that saving the USD is rather low on his list of priorities. Economy first second and third. USD last. By the time he decides to save it, it may well be too late and will have ridden it into the ground.

Hellasious said...

Firstly, thank you all for your kind comments - they are greatly appreciated.

On 3Q GDP, see the next post.

On the value of the dollar: it is the viewpoint of the Fed that this is the obligation of the Treasury department.

Regards

Anonymous said...

telefon tarife karşılaştırma
en uygun tarife
en iyi tarife
havalandırma
gizli kamera
izolasyon
çelik baca
paslanmaz çelik baca
doğalgaz bacası
Sohbet
iso 9001
iso 14001
Yangın Söndürme
yangın söndürme cihazları
yangın dolapları
yangın tüpü
izalasyon
ısıtma soğutma
isitma sogutma
Aspirator
Aspiratör
Vantilatör
sohbetim
turizm işletme belgesi
turizm belgesi
turizm yatırım belgesi
Chat
sohbet odası
sohbet sitesi
türkiye sohbet
tr sohbet
tüm türkiye sohbet
arkadaş sohbet
türkiye sohpet
kızlarla sohbet
kızlarla sohpet
muhabbet
muhappet
kızlarla çet
çet
Gizli Kamera
türkiye çet
çet sohpet
mırç
mirç
türkiye mirc
mirc
muhabbet
Sohbet Sitesi
Chat
Sohpet
Yangın
yangın güvenlik
yangın söndürme sistemleri
yangın tüpü dolum
yangın merdiveni
yangın çıkış kapısı 
Hava Soğutma
Hücreli Aspiratörler
Fanlar
Radyal Körükler
Toz Toplama
Soğutma Kulesi
Klima Santraller
Malzeme Nakil Vantilatörleri
iso 14001
iso 14001
iso 22000
iso 22000
haccp belgesi
haccp belgesi
ikamet tezkeresi
yabancı çalışma izni
yabancı personel çalışma izni
yabancı çalışma izni
yabancı personel çalışma izni
ohsas 18001
ohsas 18001
iso belgesi
iso 9001 belgesi
ohsas belgesi
ISO 9001
Teşvik Belgesi
Çocuk Bezi
Hasta Bezi
Makyaj Malzemeleri
Makyaj Temizleme Mendili
Kişisel Bakım
kolonyalı mendil
Islak mendil
Dudak Koruyucu
Temizlik Ürünleri
Göz Kalemi
Diyet Ürünleri
Süper Site
driver
Güvenlik Kamerası
Islak Mendil
Kolonyalı Mendil
Kolonyalı Mendil
JoyTurk
driver ara
web tasarım
Güvenlik Kamerası
paketleme
Kamera
Kamera Kurulum
Tatil
Tatil Köyleri
Turk tourizm
Turkish tourizm
Turk holiday
Turkish holiday
Turkish travels
Turk Travels
Tatil Yerleri
Tatil Beldeleri
Perde
Perde Modelleri
Kamera
Epilasyon
Emlak
Yaşam
Tatil
Video
Cilt Bakımı
video
süper
perde
jaluzi perde
stor perde
dikey perde
perde modelleri
perde
jaluzi perde
stor perde
dikey perde
perde modelleri
magazin
haberler
spor haberleri
video
eğitim
Giyim

Guaranteed SEO company said...

Shanghai Fashionorganic makes
Bamboo Clothing,Bamboo fabric ,
Hemp clothing,Organic Cotton,
Organic cotton clothing,Hemp Sandal
Soybean clothingVinyl Bag
Vinyl Packaging
laser engraver which is also the perfect choice for stamp making.cnc router
Super file encryption,folder encryption,A powerful and easy-to-use program for encrypting and protecting your data

Guaranteed google results said...

Shanghai Fashionorganic makes
Bamboo Clothing,Bamboo fabric ,
Hemp clothing,Organic Cotton,
Organic cotton clothing,Hemp Sandal
Soybean clothingVinyl Bag
Vinyl Packaging
laser engraver which is also the perfect choice for stamp making.cnc router
Super file encryption,folder encryption,A powerful and easy-to-use program for encrypting and protecting your data

bath lifts said...

We review the bestonline poker bonus
online poker rooms
online poker guide
poker room reviews
poker sites
and so on.
We offer the highest quality flowers melbourne from around Australia at excellent prices
onlinecasino.com - online casino reviews
with best online casino,
usa online casino, strategy, news!

access ramps said...

We review the bestonline poker bonus
online poker rooms
online poker guide
poker room reviews
poker sites
and so on.
We offer the highest quality flowers melbourne from around Australia at excellent prices
onlinecasino.com - online casino reviews
with best online casino,
usa online casino, strategy, news!

Anonymous said...

A片,aio,av女優,av,av片,aio交友愛情館,ut聊天室,聊天室,豆豆聊天室,色情聊天室,尋夢園聊天室,080聊天室,視訊聊天室,080苗栗人聊天室,上班族聊天室,成人聊天室,中部人聊天室,一夜情聊天室,情色聊天室,情色視訊,美女視訊,辣妹視訊,視訊交友網,免費視訊聊天,視訊,免費視訊,美女交友,成人交友,聊天室交友,微風論壇,微風成人,sex,成人,情色,情色貼圖,色情,微風,聊天室尋夢園,交友,視訊交友,視訊聊天,視訊辣妹,一夜情,A片,A片

情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,按摩棒,跳蛋,充氣娃娃,情境坊歡愉用品,情趣用品,情人節禮物,情惑用品性易購,A片,視訊聊天室

免費A片,AV女優,美女視訊,情色交友,免費AV,色情網站,辣妹視訊,美女交友,色情影片,成人影片,成人網站,A片,H漫,18成人,成人圖片,成人漫畫,情色網,日本A片,免費A片下載,性愛

A片,色情,成人,做愛,情色文學,A片下載,色情遊戲,色情影片,色情聊天室,情色電影,免費視訊,免費視訊聊天,免費視訊聊天室,一葉情貼圖片區,情色,情色視訊,免費成人影片,視訊交友,視訊聊天,視訊聊天室,言情小說,愛情小說,AIO,AV片,A漫,av dvd,聊天室,自拍,情色論壇,視訊美女,AV成人網,色情A片,SEX,成人論壇

情趣用品,A片,免費A片,AV女優,美女視訊,情趣用品,A片,免費A片,日本A片,A片下載,線上A片,成人電影,嘟嘟成人網,成人,成人貼圖,成人交友,成人圖片,18成人,成人小說,成人圖片區,微風成人區,成人文章,成人影城,情色,情色貼圖,色情聊天室,情色視訊色情網站,一葉情貼圖片區,做愛,性愛,美女視訊,辣妹視訊,視訊聊天室,視訊交友網,免費視訊聊天,美女交友,做愛影片

av,情趣用品,a片,成人電影,微風成人,嘟嘟成人網,成人,成人貼圖,成人交友,成人圖片,18成人,成人小說,成人圖片區,,情色,情色貼圖,色情聊天室,情色視訊,情色文學,色情小說,情色小說,色情,情色電影,aio,av女優,AV,免費A片,日本a片,美女視訊,辣妹視訊,聊天室

情趣用品.A片,情色,情色貼圖,色情聊天室,情色視訊,情色文學,色情小說,情色小說,色情,寄情築園小遊戲,情色電影,色情遊戲,色情網站,聊天室,ut聊天室,豆豆聊天室,美女視訊,辣妹視訊,視訊聊天室,視訊交友網,免費視訊聊天,免費A片,av女優,av,成人電影,成人,成人貼圖,成人交友,成人網站,自拍,尋夢園聊天室

wow gold said...

If you wow gold were in wow gold any doubt buy wow gold that the buy wow gold God Wars cheap wow gold Dungeon was cheap wow gold challenge enough wow power leveling for you, wow power leveling look no further power leveling than the giant power leveling demon, K’ril wow gold Tsutsaroth. Once buy wow gold thought of as cheap wow gold nothing more world of warcraft gold confirm his existence.

世界のさんぺい said...

出会い
出会い
セフレ
メル友
人妻
出会い
出会い系
メル友
セフレ
人妻
恋人
不倫
セックスフレンド
出会い
ご近所
無料出会い系サイト
出会い系サイト無料
無料出会い系サイト
メル友
出会い系
人妻
出会い
結婚
童貞
セフレ
スタビ
援助
ギャル
熟女
メル友