Housing, we are not there yet


Amid horrible foreclosure data in the press this morning (and warning that the states legislation is fudging numbers by delaying foreclosure procedures), easy macro-analysis sheds some light on what is to come. Consider the "reverting to mean" that is going on above. Consider that the bell curve started in 2001, so is a very recent event, a bubble really, nothing but a bubble.

If the bubble stabilizes at +1 standard deviation, this is good news. We got 5% downside on the housing market on top of 15% so far so about $160B further damage on the banking system. Well below the FED shock absorbers. All good, we are close to bottom.

If the bubble reverts to mean, we got another 15% to go, to get back to 2001 levels. That is $1T of banking damage. At the FED shock absorbers. Bad but we might make it.

If the bubble overshoots on the way down, at -1 SD, then all bets are off. We are talking about $2T and there is nothing the FED can do. It is game over. In my opinion this scenario is a function of credit, if credit evaporates (M4) then we may be looking at an overshoot.

When a bubble can kill the system, the system deserves to die? In any case, we are not there yet, I am ignoring calls of housing bottom, it is the least plausible scenario.

Comments

Anonymous said…
Clever way to scare... where is the inflation adjustment? Why do you expect the home price to a mean. I bet that this would not look so bad if it were inflation adjusted
August 15, 2008 at 3:36:00 PM PDT
Anonymous said…
No wage inflation for the vast majority of people in the US ...which is the foundation for home prices.

In Austin, TX we had a mini-version of this bubble-bust in the 1980s. Prices fell to 80x monthly rental income (except for some exceptional property in exceptional locations). The economic conditions then were much better than now... declining interest rates, much less debt, 3% unemployment in Austin, etc...

I fully expect to be able to buy houses with 20% down (which will be the minimum except for govt loans for primary residence) in most US suburbs at this number (80x monthly income value) by 2010-11. BTW, rents will fall due to the over supply of housing (particularly oversized McMansions which probably will need to become multi-family to afford the energy bill).

80x monthly income value means that a house that will rent for $3000 will cost $240K. This will be a really good deal IF rents and the area have stablized. Normal prices are about 120x which will be where the recovery heads to.

Oh, by the way, 8% to 10% 30 year interest rates are coming back too...

The wildcard next decade for the housing "recovery" will be fuel prices and availability for civilian use. I expect this to steepen the curve, with town and city quality property recovering or stablizing quicker and exurbs becoming worth a lot less (unless said exurb is wealthy or supports some type of mining, major agricultural processing or other rural economic activity).
August 15, 2008 at 9:27:00 PM PDT
adt43wt342 said…
Anonymous,

There was little inflation in the 2001-2006 timeframe... so these are pretty much in real terms... Also since the bench is income and income follows inflation (except now) then you factor it in.. Argument rejected.

Pierre,

a further 20% down would wreak serious havoc on the banking system. With M4 down it will be tough to recapitalize. Not sure the FED can do anything but I would expect serious backstopping action leading to the election or right after.
August 16, 2008 at 9:06:00 AM PDT
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