ABA Banking Journal - August 2008 - (Page 56) briefing The Economy MARK VITNER Senior Economist, Wachovia ADAM YORK Economic Analyst, Wachovia How far will housing prices fall? WE ARE REPEATEDLY ASKED HOW FAR HOUSING PRICES paring home prices versus rents is that there is a financial WILL fall and when home prices will bottom out. The trade-off between owning and renting. Moreover, the answers to these questions are complicated. The current implied rent can also be interpreted as the income stream to a homeowner. housing slump is without preceEven using these guideposts dent, both in terms of breadth Median Home Price Relative to Income is limited, however. Owners’ and magnitude. In addition, 3-Month Moving Average, Seasonally Adjusted 7.5 7.5 equivalent rent is only availhome prices are measured severable back to 1983 and many al different ways and the magni7.0 7.0 popular home price measures tude of price changes varies conbegan even later than that. siderably. 6.5 6.5 For all the difficulties in proThe most popular home price jecting a bottom, some reasonmeasures are the Office of Fed6.0 6.0 able approximations can be eral Housing Enterprise Over5.5 5.5 developed from the benchmarks sight’s (OFHEO) House Price we have established. Our numIndex, the S&P/Case-Shiller 5.0 5.0 ber one takeaway is that home National Home Price Index, and 70 74 78 82 86 90 94 98 02 06 prices will likely bottom some the Median Existing Home time between mid-2009 and Price, published by the National Median Home Price Relative to Owner's Rent mid-2010. A simple average of Association of Realtors. All Index 1983=100, Seasonally Adjusted all the price measures puts the three are currently down on a 1.5 1.5 peak-to-trough decline in home year-to-year basis and the pace 1.4 1.4 prices at between 22.2% and of decline in some series appears 29.2%. to be accelerating. 1.3 1.3 The required price decline [Detailed descriptions of each 1.2 needed to bring prices back in index are contained in the full 1.2 line with owners’ equivalent version of this article, which 1.1 1.1 rent is also much larger than appears in our digital edition, 1.0 1.0 what is needed to bring prices accessed from www.ababj.com.] back in line with per capita Estimating how far prices will 0.9 0.9 income. One possible explanadecline is more art than science. 83 85 87 89 91 93 95 97 99 01 03 05 07 tion is that the home price data The housing boom was without has been more skewed by the precedent in the modern era. Two popular benchmarks that have worked well at identi- parts of the country where home prices soared, while the fying the extent at which housing has become overvalued rent data is more reflective of the nation as a whole, where in past regional housing busts are housing prices relative rents have been much more moderate. In addition, the to per capita income and housing prices relative to the housing boom itself tended to restrain rents, as renters owners’ equivalent rent component of the Consumer Price became homebuyers. As far as timing goes, it looks to us that at least one-half Index (see charts). Another relationship that has worked well at gauging of the peak-to-trough price decline has already occurred and the extent housing has become overvalued is a comparison that we should see an outright bottom either late next year of housing prices to housing rents. The rationale for com- or in the first part of 2010. BJ 56 AUGUST 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/pdfs/HowFarWillHousingPricesFall.pdf http://www.ababj.com/subscribe.html
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