April 7, 2011

Seeing the housing market with 20-20 vision

Some predicted a housing bust before it happened. Some of those people even predicted a big one. But most Americans, including those who should have been minding the store, went blithely along under the assumption that prices would not take a sharp U-turn.

This makes me wonder what we're not paying attention to now that we ought to be zeroing in on -- good trend or bad.

There's so much noise, it's hard to focus. Foreclosures. Robo-signing. Mortgage terms potentially changing. Mortgage-interest deduction potentially shrinking. The economy trying to right itself. What's in store for mortgage rates. How prices compare with incomes. How prices compare with rents. Federal budget cuts on the one hand, BRAC on the other.

It's all so much easier when you can throw on the 20-20 hindsight glasses.

But hey, give it a shot anyway. Here's your question of the day: How do you think the housing market will change in the next few years -- assuming you foresee any change -- and why?

Will the results be better or worse for most of us?

The last question of the day asked accidental landlords -- people renting their former homes because they can't afford to sell -- how the rental business is treating them. Interesting discussion, including advice from chappy10, an on-purpose landlord:

"If you're only getting enough to pay mortgage, taxes, and insurance, you are LOSING your money renting. You need a COMFORTABLE margin--I'd say 20-25%, minimum, to make up for wear and tear. Even if it's not for 5-10 yrs in the future, you need to do roof repair, buy new water heaters, change the locks and deadbolts, have the HVAC serviced, etc."

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (8)
Categories: Housing forecasts, Housing history, Question of the day

June 21, 2009

Housing downturns of the past (ouch)

You can't always predict the future by studying the past, but it's not a bad idea to know what's come before. With that in mind, the Federal Housing Finance Agency has put together a report about previous boom-and-bust cycles in the states and metro areas that have been down this road.

The conclusion: It takes a while to get back to where prices were before they started falling, at least if you're accounting for inflation.

FHFA’s Metropolitan Statistical Area and Division (MSA) indexes suggest that the time from peak to trough tends to be about 3¾ years, whereas the median recovery period (from trough to prior peak) was 6⅔ years.

The agency offers words of caution about trying to apply this to the current situation, noting that differences between the price escalation this decade and previous ones could make for limited "applicability." Take a look at the warning, because it seems to me to imply that this downturn could well be worse:

The economic drivers of price increases during the boom period in the early 2000s differed from the drivers of prior market booms, and the magnitude of recent price increases has generally been larger. Also, ... most of the larger historical downturns were caused by sharp increases in unemployment rates and shocks to personal income.  Although the U.S. economy has experienced such conditions in the last year, those factors were not among the precipitants of the latest downturn, which began in 2006, well before the financial crisis erupted in the third quarter of 2007 and the recession began in the fourth quarter of 2007.

So what were some of the previous boom-busts? Texas offers one example. It benefited richly from the 1970s oil crises. But when oil prices fell, so did Texas employment -- and Texas home prices. And this was no 10-year recovery, either:

Prices peaked in the first quarter of 1982 and then declined steadily.  Prices bottomed out in the first quarter of 1997 after losing 33 percent of their value.  Texas’ real estate prices have yet to fully recover and now are roughly 15 percent below their prior peak.

You read that right: Twenty-seven years after its housing downturn started, Texas prices are lower -- in today's dollars -- than they were in 1982. I'm guessing that helps explain why the state isn't (as of yet) seeing a dramatic decrease in prices in this national downturn.


A postscript about inflation:

The report -- "A Brief Examination of Previous House Price Declines" -- tries to account for the rising cost of living by adjusting prices for inflation. This acknowledges that a house worth $300,000 today is less valuable than a house worth $300,000 five years ago, since you can't buy as much food, gas, etc. with the $300k nowadays if you convert it into cash. It's good to know how prices have changed in today's dollars if you want to compare housing to other types of investments.

On the other hand, plenty of homeowners just want to know if they can sell their home for at least as much as they bought it for. And if they do sell, they generally plan to convert any extra cash into a down payment for another home.

That's partly why I'm conflicted about adjusting historical home prices to reflect today's dollars. Two other reasons: The Consumer Price Index includes the cost of housing, and not all economists think the CPI accurately measures the rising cost of things.

But this new report uses the CPI-minus-shelter, so it's not (cue sigh of relief) adjusting home prices with a measure that includes home prices.

Posted by Jamie Smith Hopkins at 1:18 PM | | Comments (0)
Categories: Housing history, Housing stats
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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.
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