Housing prices have already declined 20% nationally and as much as -36% in Phoenix AZ, -36% in Las Vegas NV and -35% in Miami FL. These declines may just be the tip of the iceberg. Loose lending standards have caused a severe real estate bubble causing U.S. home prices to increase nearly 150% inflation adjusted from 1995 to 2005. The US real estate market had a much greater inflation adjusted appreciation than Japans housing boom during the 80's, and Japans market is still in a decline.
According to the Case-Shiller futures contract they are forecasting a larger decline in residential real estate. The Case-Shiller futures forecast a 34% peak to trough decline in residential real estate prices. Currently, the home price index has only declined 20% from peak to trough, which leaves an additional 14% of downside based on the futures price.
To clarify the Case-Shiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. The Case- Schiller futures are contracts that trade to forecast the future value of the Case- Schiller index.
Reasons why residential real estate may decline another 20%.
- Case- Shiller futures predict a further decline in home prices. I'm a big believer in using markets to predict the future. The collective wisdom of a crowd is much more accurate than an expert at predictions. Also when money is on the line, it gives you a lot of incentive to do your home work and make smart bets. Therefore I believe the futures market are a terrific barometer of things to come.
- Loan delinquency rates and foreclosure rates are on the rise. According to the Standard & Poor's residential real estate indicators delinquency rates for all loans increased from 6.35% in Q1 2008 to 6.41% in Q2 2008 and sub prime delinquency rates of 18.67% in Q2 2008. Foreclosures hit 1.19% in 2nd Q 2008 up from .99% in Q1 2008 with a foreclosure rate of 4.7% for sub prime in 2Q 2008.
- The Japanese real estate market increased 100% from 1980 to 1990, Japans housing prices are still in a decline and currently down around 40% from the high. See pic below. As a comparison the US house prices increased almost 150% in 10 years and are just 2 years and 20% into the decline.
- According to the U.S. Census Bureau data, the home ownership rate is starting to decline. Currently the home ownership rate is at 67.8% which is down from the 2005 peak of 69% home ownership. However the home ownership rate is still very high compared to the 64% average home ownership rate from 1985 to 2000. That 5% differential (69% peak-64% average) represents home owners who would not have qualified for mortgages prior to 1994, when lending standards were eased and are largely characterized as Sub prime. I think home ownership rates will revert to the mean and get closer to the historical 64% average ownership rate.
- Tight credit. The Federal reserve board loan officers survey, indicates increasingly tightened standards for residential mortgages, credit card loans and commercial & industrial loans. Asset backed security's and Mortgage backed security's issuance has fallen off a cliff. In October debt issuance in the US was down more than 89% YOY and at its lowest levels in the past 13 years. Also there is still a couple of billion dollars in auction rate securities that have been frozen for over six months.
- It is still much cheaper to rent than it is to own, at least where I live.
- The unemployment rate is up over 40% year on year and with all the big bankruptcy's and layoffs the unemployment rate is headed much higher.
See the many charts at http://ripetrade.blogspot.com/2008/11/home-prices-to-decline-another-20.html for a visual aid of why residential real estate prices will continue to decline.
For the reasons mentioned above I think housing prices have another 20% of downside risk. Even though the futures market suggest housing prices will only come down another 14% this would bring the median price of a home to near the same level of 2002-2003. One can easily argue that the current state of the economy is much more dire, than the environment of 2002-2003 which saw all time new high levels of liquidity and home ownership rates on the rise. Bubble markets get overbought from greed on the way up and they almost always end with over selling from fear on the way down.
Ripe Trade
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Developers of this website are former institutional brokers. We have transacted billions of dollars in stocks, bonds, options and earned millions in commission dollars from some of the most successful money managers and hedge funds.We are primarily market technicians and have been schooled in fundamental analysis via our institutional research sales background and quantitative stock screening analysis.
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