I updated my chart that compares the gains in Seattle’s Case-Shiller Home Price Index with consistent annual increases at various levels, and noticed that for the first time since 1997, home prices dropped below the level of 4% annual gains since 1990.
I’ve also added a plot of the Consumer Price Index for the Seattle metro area from the BLS on there for comparison. Local inflation has pretty much tracked between 3% and 4% annually since 1990, and home prices are still pretty far ahead of where they would be if they were just tracking inflation.
I would argue that Seattle is a very different place than it was in 1990, so I’m not sure that we’ll ever quite get all the way back down to the inflation line that we departed from in 1997. The housing bubble was an obvious, dramatic deviation from a level of home price growth that could be described in any way as sensible, but it isn’t clear to me that it’s reasonable to expect home prices in a growing metro area to only track inflation in perpetuity.
However, this chart certainly provides ammunition for those that argue that the real beginning of the housing bubble was in 1997, and we still have a long ways yet to fall. As of February, Seattle’s Case-Shiller HPI is 21% higher than Seattle’s Consumer Price Index (re-indexed to match the CS-HPI in January 1990).
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I’d be interested in seeing the same chart with the starting point being 1997, the last time housing prices matched the CPI.
Also, this doesn’t take into account interest rates (which I’m sure Tim is aware of due to his previous posts). I’m increasingly of the opinion that considering housing prices without considering interest rates is not the way to go (and again, Tim has used both factors in previous posts).
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I’ll stick with the Goldman Sachs call of 20%+ more by 2012. However, I will go one step further and say it will be past 2012 that we see this 20%+ number.
It will just take way too long to muddle our way through all the short sales and foreclosures.
Because we all know……………….They are all coming back…One way or another….People only remain stupid for so long.
**Caveat-A Fed intervention like we have never seen that will offer homeowners the ability to cram down their principle balances. Its happening already but not with the Big Boys!
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4% is a number that has been used in many markets around the world for long term real estate appreciation. It is not unreasonable to use this as a baseline in the Seattle market when one tries to anticipate what will happen over the next 10 years. Seattle is situated between mountains and ocean with several large lakes and many transportation bottlenecks. Restrictions on growth have significantly limited the number of new single family homes – which remain the default choice for young families. Just as baby boomers are beginning to retire, their children, the echo, are graduating from college. Seattle remains a significant draw for those with good education. I expect that it may take a while, but single family home values are likely to return to the 4% trendline unless we see significant drops in local population or increases in unemployment among the home-buying demographic group (where unemployment has risen but is relatively lower than less financially able groups through this entire recession).
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Keep in mind that even if the average turns out to be 4%, you’ll likely do differently depending on location and type of house (or condo). I really wonder about some of the neighborhoods built 2005-2007 or so, and how well they will hold up. Even ignoring design and construction issues, suffering through short sales or foreclosures for a prolonged time cannot have a good impact on a neighborhood, but I didn’t expect some of those neighborhoods to do well even absent the economic issues of the past 3 years.
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For you who think things like historic price inflation or affordability are good indicators of an impending bottom of this epic bubble burst with all the economic damage take a look at the NARs national affordability index.
First from from 1971 to Jan 2009:
http://economix.blogs.nytimes.com/2009/01/30/housing-affordability-at-record-high/
then plot Jan 2011 index of 191 to the historic graph, Oh wait, you need to imagine it since the graph tops out at 180…
http://www.realtor.org/research/research/housinginx
According to the affordability theory we should have bottomed out years ago. Didn’t happen.
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Different than 1990?
Yes, back then it was the number one Best Place to Live.
Now, 2 decades later its the 3rd most Miserable.
Therefore, prices should be lower than they were in 1990…much lower.
Detroit…here we come.
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Well isn’t that refreshing – back to normal?After selling homes for over 20 years – back in the old days normal appreciation was 4% – 6%.
Does that mean we are at bottom – I suspect we are near there, then we’ll over correct, thing swing back to reality.
I’m seeing some incredible deals in Bothell/Lynnwood. A very cute home 3 beds, 2 baths, 2 car garage, totally updated kitchen, granite counters, new cabinets and fixtures, carpets, etc., greenbelt lot – just went pending $147,000.
Dang, I could have sold that 3 times this week!
Edit to add link: http://www.redfin.com/WA/Lynnwood/1101-213th-Pl-SW-98036/home/2675327
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“Does that mean we are at bottom – I suspect we are near there, then we’ll over correct, thing swing back to reality.”
Ok, let’s see if I got this right, first we get to the bottom and then we over correct? I’m lost, Is that some realtor defined bottom that occurs before the real bottom?
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RE: patient @ 8 –
Or did you mean that we reach the bottom soon and then bounce back from it to an usustainable level in an upwards over correction?
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By patient @ 9:
Caused by everyone fleeing the stock market, bonds, the dollar! :-D
I’ve pointed out repeatedly in the base how in the late 70s early 80s prices did relatively well despite rapidly rising interest rates, which you would think would cause prices to drop. Part of that probably was people seeking an inflation hedge, and as I’ve mentioned more loans back then were assumable, so the loans themselves had some value.
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1996 is when they changed the tax code and exempted your house from capital gains. That’s a lot of incentive to put your money in real estate. It just compounded from there.
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Oh, and another thing.
Back in 1990, Seattle home prices were much MUCH lower than national average.
This is what lead to the California Horde moving north because they could sell their already inflated homes for 3x what a Seatle home cost.
Now the situation is completely reversed. CA is dirt cheap. The moment any jobs open up in California, I would expect reverse migration to occur en masse…
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RE: Pete @ 11 – But before then most people just used the roll over to avoid the tax.
I wish more people had sold because of that change–I could have obtained a few more commissions. ;-) But a lot of people wanted to become landlords with the original house. Even a tax free sale didn’t entice them.
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By Real World Express @ 12:
I don’t think that was true, but we were much lower than California.
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Inflation number is underestimated, since it doesn’t include food or energy, two necessities (thanks Nixon). Also, Clinton added the “Substitution and Hedonics” trick in the 90s, which made the CPI even more underestimated. Both sides of the aisle made sure that number became useless.
The CPI is really an artificial number used to make us ignore the loss of affordability not only in real estate (although that is reversing), but in many other areas (energy, food ?).
I don’t think the real estate market is affected by hedonics (hence this trick doesn’t apply), but it does care about energy and food prices (hence the other trick of removing those doesn’t apply here either). Therefore the CPI is only very loosely connected to the real estate market.
That been said, interesting correlation …
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It would be nice to add the affordiblity index to the graph
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Why not track price-income ratio? That has proven to be a powerful and accurate measure of the endpoint of valuations in Californian markets. Also look at rental yields on condos. If you’re getting above 10% gross on a good quality stock, that’s not a horrible deal…
Haven’t visited here for a while. I might peruse through some comments on this blog from 2007 and 2008 and laugh and laugh and laugh… When getting advice from commenters on a blog like this one, I’ll have to look at the track record a bit more closely.
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By jesse @ 17:
Hi Jesse, I’ve made quite a few posts here recently that include incomes in the equation. Here are just a few:
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Yep, this has gotta be close to the bottom. Question is, if you can’t even get a job at McDonald’s, how are you going to afford that house?
It is now as hard to get a job at McDonald’s (percentage wise) as it is to get accepted at Stanford/Harvard/Yale/Princeton. Yep, a yield rate of just over 6%, one out of fifteen applicants. Is it a strange world, or what? What does it say about the economy though? Little tid-bits our government’s current delusional statistics fail to capture.
http://www.zerohedge.com/article/mcdonalds-hires-62000-turns-away-over-938000-applicants-minimum-wage-part-time-jobs
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I’m surprised nobody’s mentioned the economic numbers got worse today.
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011 (that is, from the fourth quarter to the first quarter) according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 3.1 percent.”
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp1q11_adv.pdf
“In the week ending April 23, the advance figure for seasonally adjusted initial claims was 429,000, an increase of 25,000 from the previous week’s revised figure of 404,000. The 4-week moving average was 408,500, an increase of 9,250 from the previous week’s revised average of 399,250.”
http://www.dol.gov/opa/media/press/eta/ui/current.htm
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RE: Macro Investor @ 20 –
BTW — 2% GDP is considered a recession… so we’ve got that going for us. Not much payback for $2 trillion a year in stimulus and 0% short-term interest rates.
Now let’s use the ShadowStats inflation estimate of 6%, instead of dot gov’s 2.2%. That gets us to -2% GDP.
Now both parties are promising to cut $4 trillion over 12 years. That reduces GDP another 2.2%… so we’re at -4.2%.
Speak up if you still think it’s a good time to buy a house.
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By Pete @ 11:
Actually that change went into effect in May 1997, which does correlate quite well with when Seattle’s CS-HPI started to deviate from tracking the rate of inflation.
I may spend some time this weekend to see if there’s a similar pattern in any of the other Case-Shiller markets…
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This is a very interesting and useful chart. It almost makes me laugh to look at this and think back at certain points in time when I remember RE experts proclaiming “now is a great time to buy.”
And that little dip on the chart that represents the point where Ardell called the bottom is starting to look mighty silly.
I just can’t get over the slope of the line these days. Those who predicted a return to free-fall after the tax credit expired turned out to be correct. From the looks of this particular chart, a return to 2001 prices doesn’t seem all that far fetched considering the extreme distortions that have taken place in the marketplace and economy. However, one chart does not make a market, so it’s a wait and see.
A lot of people are talking about inflation, but it can be an entirely different beast, if a wage spiral doesn’t accompany the price spiral. Our current situation is starting to look more and more stagflationary, which doesn’t bode well for housing. As pointed out above, initial claims shot up again. Where is all the money and bank loans going to come from to clean up the foreclosure mess, let alone pay double the 1997 price for non-distressed properties?
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Tim: I hope you don’t mind me marking up your chart. If so, I’ll remove it. It’s been a long crazy 4-year slide.
http://housingcorrection.com/images/Case-Shiller-wCPI.jpg
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RE: Jonness @ 24 – Hah. If I didn’t want people doing stuff with my stuff, I wouldn’t put it online. ;^)
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A recent piece on the radio had an economist addressing the “4% historic appreciation” theory. He used the example of the still existing and used 500 year old homes in Amsterdam. If any of those homes sold originally for $1; today, the historic 4% annual appreciation would make it worth $461 million. He laughed and said that they command a premium; but not anywhere close to $1 million.
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RE: Cheap South @ 26 – And those 10,000 year old caves would have had to have sold for well under a penny.
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RE: Cheap South @ 26 – I agree that exponential gains in perpetuity don’t really make any sense, but I’m not sure it’s entirely fair to compare a city that’s been flourishing for 700+ years with one that was only first settled 150 or so years ago.
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This is the most bullish post I have seen from you Tim. Must be Spring is in the air.
BTW, I guess I am the only one who doesn’t get “Mirrored Decline.” Please explain.
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RE: expatom @ 29 –
From Merriam-Webster:
I find it quite odd that people have been accusing me of being a “bull” lately. I have quite consistently said that I expect prices to fall a bit further, then stay flat for five years or more. How is that in any way bullish?
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With Apple and Google leaving Microsoft in the dust (“Windows Phone 7: Welcome to 2008″), and Boeing heading to Chicago and South Carolina, I’m not sure I see the unfettered optimism for double-digit appreciation anytime soon in the Emerald City, especially since even after the recession, housing still costs a zillion dollars. I don’t mean this as some anti-Seattle trolling post; I really just don’t see what is powering $400K-$500K-$600K homes.
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By Still Anonymous @ 31:
What are you talking about, according to Todd Britsch of New Home Trends, double-digit appreciation is coming back next year!
He said that in October 2008, but considering how little building has been going on the last few years, I’m sure it’s even more true now! Right???
Heh.
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By The Tim @ 30:
I shouldn’t speak for others, but I think that people are saying you now sound bullish relative to many of your prior statements, not bullish in an objective sense. I’ve noticed it too. You’re moving with the cycle. Of course, if you’re really selling out, it is the most brilliant prior placement since Obama’s parents placed that birth notice in the Honolulu paper.
FWIW, you’ll always be a bear to me.
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Tim,Great chart!
By 1999 the market was pretty hot, so 1997 is not a bad starting point. In the long run, home prices will revert to the mean and grow in correlation with inflation, wages, and rents. It would be very interesting to see the correlation between average wages, CPI, and rentals if it were available somewhere. However, I would be surprised if it would alter the above graph by much.
Although you use interest rates in your calculation of “affordabillity” in the Housing Affordability post, I would argue that interest rates have only a short-term effect on house price fluctuations. Just as the stock market is a voting machine in the short run and a weighing machine in the long run – housing votes (purchases) are influenced in the short run by interest rates, but the true value of a house is not related to interest rates. Example, a new television set costs $500. You can buy it for cash, or you can put it on the credit card. Either way, the real value of the television has not changed. Or, pick a non-productive asset of your choice.
One question – If we accept that historical data is the best indicator of future trends, why is it so hard for us to believe that home prices can drop by as much as they’ve increased? In other words, a willingness to take on ever increasing levels of debt increased home prices. Why wouldn’t a similar level of reluctance to take on debt decrease home prices at the same rate? For example, an annual 4-6% inflation adjusted decrease in prices over the next 10 years?
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