As was noted back in October, graphs of the rise and fall of the Case-Shiller Home Price Index for a number of markets (e.g. San Diego and Seattle) is surprisingly symmetrical.
I’ll be the first to admit that this method hardly qualifies as a rigorous scientific analysis of price trends. The apparent relationship between the run-up and the decline probably has more to do with mass psychology than statistics and math, and it could just be a complete coincidence. However, I thought it would be interesting to essentially just mirror the price run-up to the July 2007 peak, and see where that would put approximate “bottom.”
Here are our basic assumptions for the Simple Mirror forecast:
- The HPI will continue to drop at roughly same rate that it increased leading to the peak.
- The rate of home price increases marked a notable change around January 2004.
- Therefore, January 2004 will be our baseline—the point to which we assume prices will drop.
Given these assumptions, here’s a rough picture of what Seattle’s Case-Shiller Home Price Index would look like through early 2011:
Using the Simple Mirror forecast model, Seattle-area home prices (as measured by the Case-Shiller HPI) will hit bottom sometime around early 2011, giving up just over a third of their peak values.
The overall decline in this forecast would put Seattle’s Case-Shiller HPI at slightly below 4% annual appreciation since the start of the index in January 1990, which incidentally is about where it landed in early 1997 at the end of a seven-year period of relatively stagnant prices following the late ’80s mini-bubble (for a long-term view of Seattle-area home prices check the post King County Home Prices: 1946-2007).
Sixteen months after Seattle’s home-price peak, this simplistic method for predicting home prices is off by less than two percent. Whether the trend will continue is of course anyone’s guess. I’d say it’s a lot more likely that we’ll see a pattern like this than the “V-shaped recovery” predicted by Monday’s inventory forecast.
Method 3: Simple Mirror Forecast (Summary)
Bottom Month: January 2011
Bottom Value: 35.3% off peak
Likelihood*: 20%
* Likelihood is a totally subjective value assigned according to The Tim’s gut feeling. Treat it accordingly.
Bottom-Calling Week on Seattle Bubble
- Introduction: Bottom-Calling Week on Seattle Bubble
- Method 0: Blind Optimism
- Method 1: Inventory-Based Forecast
- Method 2: Dollars per Square Foot Linear Forecast
- Method 3: Simple Mirror Forecast
- Method 4: Affordability Index Forecast
- Method 5: San Diego Lag Forecast
- Conclusion: So Where’s the Bottom?
“Likelihood is a totally subjective value assigned according to The Tim’s gut feeling.” I think you need to have your gut calibrated, The Tim; you need a gastroenterologist who moonlights as an aviation mechanic to have this done ;-)
Seriously, I see your trend lines, but I don’t understand why you don’t make anything out of the big change in the 2 fairly linear (but with different slopes) periods of 1990-1997, then 1997 (maybe February?) till March 2004. I know the internet boom did not really get started, countrywide, until summer of 1998 and I don’t know about the start of this boom in Seattle (earlier, perhaps). The “true” housing bubble could have started just before that, with an kick-in-the-butt in March 2004.
It is all speculation (what in the stock-broker business is called “technical analysis”, though it’s anything but! ) If it were technical, there would be some underlying analysis of the why’s for each change in a curve. I read your disclaimer, don’t worry, and I am doing the same thing.
However, imagine if the “normal” rate of increase in housing, incl. inflation, is the slope of the line between summer of 91 (“those were the best days of my life, oh yeaaahhhh, da da da da da-da, da da da da dah-da”, sorry) and early 97. I see a rise of ~ 10 % or so (6-7 %-pts. over 70) in 5 1/2 years, so only 2 % per year, very approximately (not worth counting compounding, which would bring the yearly just slightly lower).
Let me see, if that kept up till now, by this summer,, 18 years later, the housing index would be up < 40 % from summer, ’91, makinig it 26 points higher, putting it at a value of 93 or so, meaning 199 prices.
Only time will tell, but I stick by my 1 1/2 years ago assertion of a fall by 60% off the peak values of 2007. Yes, this is all rectal extraction, but “technical rectal extraction” ;-)
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oops, should be 1999 prices. Back in 199 AD, I think you could get a nice place on an olive grove on 20 cubits of land with raw granite countertops for 10 dinars, give or take a few sheckels. Plus, if you have a quarrelsome wife, there’s a flat roof that you could live on a corner of (Proverbs, forget which one).
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I will state, once again, that mirrors won’t work when you are facing an unprecedented economic situation.
Here is what some of us have been saying for some time now.
“Worst Is Yet to Come:” Americans’ Standard of Living Permanently Changed
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INTERESTING GRAPHS TIM
You always have a way with graphical predictions, you remind me of Ross Perot’s federal deficit graphs. You have an open minded prediction method too.
Keep up the great work.
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What I like about this is that it is also basically saying that 4% appreciation is about right. And it is showing that this is true for San Diego. I’m new to the area, so I’d love to hear from some “old timers.” Did anything happen late 90′s that could justify a shift to 5% appreciation?
As a side note- I wonder if this mirror thing with San Diego will stop working. After all – you have to consider what was going on in the world when each city was in decline. Will current concerns over a global meltdown speed our fall? Will all this stimulus brouhaha slow it down?
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Perhaps a post on Obamas $75 billion housing bailout would be prudent today in addition to “bottom calling week” posts.
per the NYTimes…
“The plan would seek to entice lenders into lowering rates, and would offer homeowners a chance to shave thousands of dollars off their mortgages. The government would offer homeowners principal reductions of $1,000 a year for five years if they stayed current on their payments, and would give $500 to loan servicers if they modified loans before borrowers fell behind in their payments.”
http://www.nytimes.com/2009/02/19/business/19housing.html?hp
$75 billion for a non-starter. $1000 year principal reductions for 5 years? Great. So the person that paid 500k for a 1BR condo basically gets a 1% refund….over five years….and the lender gets a whopping $500 to attempt financial gymnastics with neg am liars loans. That’ll work. Let’s see what the mods are. I’m betting they’ll sucker the homedebtor into becoming a bonafide debt slave with a 40 year mortgage. Who cares what the interest rate is! It’s 40 freaking years of payments. OMG…I think I’m going to cry I’m laughing so hard. And that’s just the 1BR’s.
I think I already read something about “Stimulus Part III” coming to a theater near you too.
Generational Mortgages…here we come!!!
I’ll take the 100 year 1% please.
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Mirror, mirror, on my screen… who’s the best prognosticator in the land?
You know I like this one. As per the referenced posts, we don’t know why it works, but history has shown that it’s a fairly accurate predictor for where the bottom lies. But we need to view 1997 as the start, and look to 2013-2014 for the bottom.
I’ll be very curious to look back in 10 years and see what effect the current economic turmoil had on the final shape of this one.
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Here’s the White House ‘fact sheet’ for the Housing Bailout that EconE quotes above:
http://graphics8.nytimes.com/packages/pdf/politics/20090218factsheet.pdf
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I think Obama should simply reduce mortgeges by say 50% for all people that bought a house between 2004-2007 and that’s it. Easy way out. No problems. Just go to get some money rolling into the system.
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RE: Vicki @ 5 –
“Did anything happen late 90’s that could justify a shift to 5% appreciation?”
Here’s the best explanation I’ve seen for the nationwide 1997 increase in appreciation:
http://www.nytimes.com/2008/12/19/business/19tax.html
(I’m not trying to start a political discussion).
Note that this tax break is still in place, so it may exert upward pressure on prices from 1997 beyond today.
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Eager to see tomorrow’s “affordability index” forecast.
If I was betting on the Seattle Bubble Bottom-Calling Futures Market, I’d bet Tim puts 30% probability on the “affordability index” method, and 15% on the “San Diego lag” method.
Or will he be noncommital and give 20% probability to four different methods? We’ll stay tuned…
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RE: Interloper @ 11 – The SUSPENSE!
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RE: DaveyDave @ 8 –
“To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.”
Printing our way out of another crisis, one trillion at a time.
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RE: DaveyDave @ 8 –
Let’s have some fun with the PDF DaveyDave provided…
҉ۢ Neighborhoods are struggling, as each foreclosed home reduces nearby property values by as much as 9 percent.
Each home? 9%? I should be able to get a house for 99c in Sacramento then.
• No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.
Hmmmmm.
What was that Kary revealed in some recent thread? Something about half the houses on the MLS being empty? Aren’t there like 9 million empty homes out there? These aren’t “homeowner” homes. These are speculators homes.
Yup…no help for those folks.
And don’t forget about the fact that the banks have only listed 25% of the foreclosures so far. 75% still to come. Add those to the empties that Kary mentions. And don’t forget all the unlisted builder inventory of condo’s, townhomes, custom high end homes galore, and every flipper that has bought a foreclosure in 2008 to “gussy up & flip” but is now holding the bag yet the house isn’t on the MLS yet as the flipper is still furiously installing granite and cheap 3-strip engineered hardwood floors before it can be listed.
ok…back to the PDF
“The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000″
You hear that sellers. What that means is that when it hits bottom those $1,200,000 2 BR condos will only fall to $606,000 instead of $600,000.
Whoo Hoo! I guess every cloud has a silver lining.
Don’t fret however. I haven’t seen a condo that sold for $1,200,000+ have a comp go for $606,000 yet. One (very) near carbon copy did however close for $765,000 a little over a week ago.
So…don’t go cutting your listings in half yet sellers.
30% to start should do.
Let’s move on…
“The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month* to sustainable levels.”
(*emphasis mine just this one time)
Read between the lines. Looooong time indentured servitude…ooops…I mean debt service. No principal reductions. Can’t do that…it would kill the derivatives market. You still want to retire don’t you? Don’t believe me? Read the PDF yourself.
Sorry ’bout that. Don’t really like having to be the bearer of reality.
Better lower those prices Mr & Mrs existing long time homeowners (and builders too for that matter) as you’ll be competing with the banks soon.
And guess what!
The banks won’t care what they get for all the foreclosures as the government already has their backs and will cut them a check for the difference. And it’ll happen in the best of neighborhoods also. Don’t believe me? You’ll see.
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1997 bubble start was from dot com money. I had friends rolling in enough to buy homes at that time. Really really nice homes by 2000. Seattle was one of the epicenters
All the stock options are underwater and expired by now I’m sure.
How are your techies stock options looking these days?
Thought so.
1997 prices here we come. I’ve seen it plenty in L.A. already.
And if you think the banks don’t want to sell at 1997 prices…think about it. They want us buyers to be able to “put that equity to work” and borrow more money.
The lower the prices, the more we can start borrowing against our homes again!
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RE: EconE @ 14 –
The fact sheet doesn’t specify anything about who would qualify for this program (home price or income limits), but their example homes are all in the $200k range. It’s possible that $500K 1br condo guy is excluded, and forget about the $1M+ range. Could you imagine the headlines on that?
I don’t see any way the housing market will ever stabilize until prices in bubble markets drop to levels people can afford (real affordability.. not what the banks tell people they qualify for). That will only be achieved with principal reductions, widescale foreclosure, or sellers biting the bullet on their failed investments.
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RE: EconE @ 15 –
1997 price levels, for what it’s worth, are what John Talbott is predicting in his book, Contagion.
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The Tim-
While I am not one that generally likes pretty charts and graphs, often coupled with a lot of hand waiving, I must admit that this is an interesting presentation. By using the C-S data set and looking at appreciation curves, you have made a point. I think there needs to be some other things outlined, such as inflation and wages in the area, but I suppose this might be part of your affordability presentation. Certainly long-term housing price appreciation cannot be sustained if all other things are equal–at some point there will be an equilibrium.
I guess the basic question becomes: What does housing price appreciation track? Is it reasonable to expect that housing price appreciation will track inflation over long periods of time? Then we could discuss how monetary policy affects inflation.
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RE: Cheap South @ 3 –
Given that the economy was running as least partly on fictitious wealth (along with some actual productivity gains) in the late 90s, and entirely so since then, this chart smells right. However, we won’t get back there in a straight line, thanks to the gov’t's fool attempt to prop up false asset prices. As a result, when we do get there, we’ll likely overcorrect to the downside.
But hey. Why let the free market have its inevitable way with ignorance, arrogance, and greed, when you can just drag the economic stagnation out for a generation before having another crash when you finally run out of bullets and hit capitulation and despair?
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“No principal reductions. Can’t do that…it would kill the derivatives market. You still want to retire don’t you? Don’t believe me? Read the PDF yourself.”
Spot on.
http://henryckliu.com/page173.html
“Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages. When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one is paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis.”
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RE: DaveyDave @ 17 –
With that in mind, does anyone know a way to get Zillow to show you that market value change graph going back more than 10 years? Sorry for such an elementary question, I’m new to digging things up on these sites.
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This bottom call seems to have the most appeal to me so far. Though this and the previous one are really just calling, “the point in time where the price returns to the forecasted fair value”. The bottom could be below fair value.
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[...] prediction is suprisingly similar to yesterday’s Simple Mirror Forecast, arriving at the same month for a bottom, with prices differing by less than five percentage [...]
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[...] ← Bottom-Calling: Inventory-Based Forecast Bottom-Calling: Simple Mirror Forecast [...]
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