A Closer Look At The Second Leg Down In Housing

Posted By on June 28, 2010

By Barry Ritholtz

By using traditional metrics: Whether we are looking at U.S. housing stock as a percentage of GDP or Median income versus home prices or even ownership versus renting costs, prices remain elevated. Indeed, we see prices remain above historic means.

Consider price relative to income. From 1977 to 2010, the median U.S. home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. It’s the same with home prices relative to rentals, or housing value as percentage of GDP.

jmotb062810image001

Further, we should not assume that prices merely mean revert back to historic levels. What usually happens when markets get wildly overvalued  and a ~3 standard deviation price move sure qualifies — is they get resolved not by reverting to the mean, but by careening far beyond it.

We can look at numerous other factors. Employment, inventory, REOs, credit, another wave of foreclosures. etc. But the bottom line remains that prices must revert to a sustainable level, and we simply aren’t there – yet.

Yes, government policies temporarily stopped prices from finding their natural levels. Now that the tax credit has ended, and most mortgage modifications are failing, the prior downtrend in price is likely to now resume.

Neither the Bush nor the Obama White House understood this. The assumption has been that if we can modify mortgages or voluntarily refrain from foreclosures, the residential RE market will stabilize. Through a combination of mortgage mods and buyers tax credits, the government has managed to create artificial demand and keep more supply off of the markets for a short time. But as we have seen, that fix was at best temporary.

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