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September 12, 2008

Case and Shiller: Agreeing to disagree?

The two economists behind the closely watched S&P/Case-Shiller home price index appear to have different points of view about where prices are headed.

The Wall Street Journal notes today that though Robert Shiller "is among those who think it will be some time before prices stabilize," Karl Case "thinks that the housing market may be near a bottom."

At its most recent reading for June, the Case-Shiller index was 19% below its July 2006 peak, and many analysts say the decline is far from over. The inventory of unsold homes on the market is still very high, they point out, and until that excess is absorbed, it is a buyers' market. Moreover, financial firms, hobbled by mortgage debt gone bad, are trying to rebuild cash reserves, making the firms less willing to extend loans to would-be buyers. ...

But in a paper presented before the Brookings Institution in Washington yesterday, Mr. Case argues there is cause for optimism. He notes that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months. He also says that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps.

Posted by Jamie Smith Hopkins at 9:20 AM | | Comments (13)


In both cases, though, neither believes that the bottom is here yet.

Also, they do not study Baltimore (unfortunately) and I have been tracking this market. Prices here bubbled after the other markets so they will deflate after them as well. It has only just begun here.

Does it necessarily follow that prices will drop later, if they rose later? Why?

In response to the above comments:

I think Baltimore (city) is a special case and cannot be compared to the other bubble cities.

Baltimore started with much of the city being undervalued relative to its potential.

Starting from such a low point, meant that even when prices doubled, they were not really twice as high since part of that increase just brought them to where they should have been earlier.

My own belief is that the Baltimore market will bottom out one year from now, at the latest. This prediction is somewhat dependent on the national economy, but I think we might actually reach bottom by next February and will see a pickup in sales (and prices) starting in the spring selling season of 2009.

There are just too many developments already in motion that will prevent a major slide in prices.
If interest rates remain low, the population increases and rising employment in the area will naturally put upward pressure on our market.

And one other thing to keep in mind; everyone talks about the prices falling, but remember that they first increased by 50-100% (or more).

If I was able to take $100 and double it to $200, I think I could live with losing $20-50. I'd still be better off than I was than when I started with my original $100. Apply this to housing prices and I think you'll see why much of this panic is misplaced.
Most people (except those buying at the top), are sitting on property worth much more than it was just 5 years ago.

Whether they have any equity or can make their payments is a different question related to how many times they refinanced the property.

Cycles come and go, but I still think Baltimore is in much better shape than most of the other metro areas that are tracked by the Case-Shiller index.

Mr. Chantker - the real estate investor?

BTW, the physicians are being sued when they mess up. Same thing with policemen, pilots, soldiers...I was just wondering if those "economists" making predictions are ever going to draw some consequences.

Good eyes January 1954.

So Mr. Chantker, as you are a real estate investor, could you possibly have an interest in this other than trying to pad your own pockets?

Also your argument that Baltimore was under-valued is specious. We are talking about TODAY and Baltimore is now one of the most over-priced regions in the nation. Check out John Burns Real Estate consulting.

This economy is looking more and more like Japan circa 1990. If that's the case, it's important to note that real estate in Japan still has not seen "the bottom".

Frankly, I don't see real estate investment being profitable for decades.

We esentially had access to unlimited credit over the past decade or so and blew it all on granite countertops and stainless steel appliances. God bless America!

But if there's one silver lining in this category 5 monster by which we are currently beset, it's that we might, I repeat might, learn our lesson this time.

Re: Chantker

I confess that I am not a native Baltimorean, so I may be missing something, but I fail to see any "undervalued potential" in Baltimore. From what I have read about the past of Baltimore, the city has not been undervalued since the 1950s. Not that I would want to buy there anyways... Just my two cents...

Any potential Baltimore city has, is being mismanaged by the city hall. Look at the harbor, with so much development, the harbor is being filled up. If you bought a place with a view in Fed hill and fells point, you're likely missing it now. At the same time, real estate taxes is choking home owners. Anyone I know with school age children move out to the county.

If you look at any area with sustained population growth and home price appreciation, there's economic and social basis for those appreciations. What's different in Baltimore now than 20 yrs ago? I don't mean to sound negative about the city, but a real change in economic and social landscape, not superficial stuff like night clubs and hotels is going to change things.

In response to a some of the comments:

1. I am a real estate investor and live in Baltimore City, but my prediction (guess?) as to when this market will turn around is not going to make me any money by posting it here. If you can tell me how that would work, I’ll gladly cut you in for a percentage of my profits.

As any good real estate investor will tell you, you make your money when you buy (i.e. your profits are calculated based on today’s market). I never buy for appreciation; for me that’s just icing on the cake. Whether I buy rental property or a house to fix and sell to a homeowner, the rate of return, under current conditions, has to be 5 to 10 times better than a CD or I wouldn’t take the risk.

Many people are in trouble today because they were counting on house prices going up at the same rate for the foreseeable future. That plainly can’t happen (unless we have hyperinflation).

It’s unfortunate, but most people have a very short-term outlook and believe that what is happening at the present moment will continue along the same path without changing much. That type of thinking worked well until about 250 years ago when the industrial revolution picked up the pace of change until now things move so rapidly that sometimes it is hard to keep up.

2. I said that Baltimore was undervalued (in relation to other cities) in the recent past and I think that many people are still selling Baltimore short. But that fact will help me to make more money because it means less competition for the great deals that are out there. I won’t go into the long list of reasons I believe that Baltimore has a bright future, but if you do the research I think you’ll see that the facts have more positives than negatives for the long term.

3. I do agree that nearly all the problems in the metro area are caused by the politicians who are either ignorant of basic economics or more interested in seeing how much they can grow their bank accounts at the expense of the taxpayers. This perspective boils down to whether you believe politicians are stupid or evil. I leave that distinction to the individual reader.

4. I disagree that our economy is like Japan’s, since at one point, I remember reading that the land under the Emperor’s Palace was said to be worth the value of the entire real estate of California. We may have had some overvaluations, but I doubt that they were that extreme in Baltimore. We did see that type of insanity in the stock market and the result is that the NASDAQ is currently at 2261 (less than 50% of its 2000-2001 high of 5000). But that’s because the value of a stock can go to zero and that almost never happens to a piece of real estate.

You're free to disagree with me on any of these points, but as they say on the evening news, "time will tell."

This phrase "the land under the Emperor's Palace is worth more than the State of California" was, of course, braggadocio on the part of Japanese speculators who bought into the bubble hook, line, and sinker. It was never true.

In fact, this current asset bubble is actually worse than Japan's.

And of course, Maryland is no exception:

In fact, if you look at the official numbers published by the MRIS, the median home price in the Baltimore metro area rose roughly 130% between Q4 1999 and Q3 2007. That's more than double. Median income at the same time rose about 15-20%.

So the asset bubble was worse here than Japan. In addition, all the other pieces seem to be falling into place for a decade-long Japanese-style stagnation.

1) We've got the huge asset bubble and subsequent crash in the worst bubble regions with a slow, steady decline in the rest of the regions.

2) We have the corresponding financial crisis with bank failures and the Federal government propping up insolvent banks. In turn, we have skyrocketing national debt (the Fannie and Freddie buyout alone will add hundreds of billions to the national debt).

3) While everyone's still talking about "inflation", it looks more and more likely that deflation is a much larger concern. Of course, deflation was the primary factor in the decade-long stagnation of Japan.

The best case scenario that we can hope for now is for inflation to pick up. If prices and incomes can rise quickly, falling home prices and incomes will link up much sooner. If not, then get ready for Japan 2.0.

But if you look at the prices of commodities and oil, you'll see that it's not happening...

Who would have ever thought when the Berlin Wall was falling that the American empire would not go out in a bang, but would rather fizzle out in a cloud of granite and stainless steel?

P.S. If the Treasury allows one of the big banks to fail, all bets are off and we may be headed for 1929 instead.

Oops - messed up on my second link above.

The most expensive housing markets in the country are NY, SF-bay, LA and Washington. In each case, there's a real economic engine supporting those prices. NY is the financial sector (we'll see what happens in the future). SF-bay is the silicon valley. LA is the movie and entertainment industry and Washington of course is the government. Everywhere else either did not have a bubble, or inevitable bubble deflation (think Miami). The fundamental vibrancy of any region is the economic base. This point is some how lost on the Baltimore government and the "real estate investors."

Economy is not about selling stuff to each other and taking "profit." Real wealth has to be created with goods and services that beats the competition. This is inescapable. The only possible saving grace for Baltimore is the Hopkins biotechnology park, which may or may not take off. And I don't mean a bunch of venture that burn out in a couple of years, but real companies that become profitable. Here's where policy makers can make a difference. But I don't see any action from the city level that's even aware of this.

On Tuesday, September 9 Integrated Asset Services, LLC (IAS,, a leader in default management and residential collateral valuation, released its IAS360 House Price Index for July 2008. The monthly report, which includes the most current and granular data available in the industry, showed a 0.9% appreciation in house prices on a national level in July, and a -11.4% decline from July 2007 to July 2008.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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