How're we doing on Home prices (April 2012 edition)
Businessman Warren Buffet recently suggested that U.S. "single family homes" were a good buy. Prices have fallen and mortgage interest rates are low. Here's the Case-Schiller index of home-prices. (For original versions of the graphs shown below, see the excellent Calculated Risk graph gallery.)
Nominal prices: This graph shows the 10-city average and the 20-city average. The index dropped from its peak and has remained steady over the last 3 years.
However, if we look to the left portion of the graph, we'd ask: could prices fall further, closer to the flat level of the 1990's?
Real Prices: To get a better historical comparison, we should look at a "real" version. One way is to use the CPI to normalize the index. This gives us the next graph.
Since the CPI is significantly up since the 1990's we see that prices are very close to 1990 levels. A 10% drop would take us back to those levels.
[Note: Increasing house sizes are already accounted for by the Case-Schiller index, because it compares like sales across years.]
Price-to-Rent ratio: Another way to adjust nominal prices is to compare them to rents. This way too, we see that we're very near 1990 levels. Another 10% drop in prices would brings us to historically safe levels.
Also note: since the CPI is running at 2%-3% a year, a "real" drop of 10% over the next two years implies a much smaller nominal drop.
Units sold: Finally, this graph shows the number of units sold: existing homes and new ones. The drop-off is new homes has been far more drastic than the drop-off in existing homes. One can see that both have flattened out and the sale of existing homes is showing a signs of rising slightly.
Summary: After falling considerably, house prices are very close to 1990 levels in real and "price-to-rent" terms. In nominal terms, they appear to be flattening out. While they may easily drop a bit more before bottoming out, it seems a reasonable time to buy, in most places, if one plans to keep the house for many years. History of the last 4 decades would suggest that prices are not going to turn around and shoot up. So, there's no urgency to "buy at the bottom" even if it is too early for you. Rather, if you want to move into a home, and have been holding back thinking prices might drop further, there's little reason to think we have much further to go.
Caveat and Disclaimer: It's said that "all real estate is local". All the graphs above are national averages; local situations can vary quite widely. The above may not apply to specific situations, always do your own research. Also, Gary Shilling -- whose opinion I respect -- says house prices may drop a further 20%. (Added: Robert Schiller, Yale economist behind the Case-Schiller index was asked on CNN this weekend if it was smart to buy a house. His response was that in general he would not yet buy one as an investment, but if someone was ready to buy a house and live there for a while, they ought not to hold back thinking prices will drop.)
Previous posts: How're we doing (GDP Oct 2011), and How're we doing (Employment Feb 2012)
Nominal prices: This graph shows the 10-city average and the 20-city average. The index dropped from its peak and has remained steady over the last 3 years.
However, if we look to the left portion of the graph, we'd ask: could prices fall further, closer to the flat level of the 1990's?
Real Prices: To get a better historical comparison, we should look at a "real" version. One way is to use the CPI to normalize the index. This gives us the next graph.
Since the CPI is significantly up since the 1990's we see that prices are very close to 1990 levels. A 10% drop would take us back to those levels.
[Note: Increasing house sizes are already accounted for by the Case-Schiller index, because it compares like sales across years.]
Also note: since the CPI is running at 2%-3% a year, a "real" drop of 10% over the next two years implies a much smaller nominal drop.
Units sold: Finally, this graph shows the number of units sold: existing homes and new ones. The drop-off is new homes has been far more drastic than the drop-off in existing homes. One can see that both have flattened out and the sale of existing homes is showing a signs of rising slightly.
Summary: After falling considerably, house prices are very close to 1990 levels in real and "price-to-rent" terms. In nominal terms, they appear to be flattening out. While they may easily drop a bit more before bottoming out, it seems a reasonable time to buy, in most places, if one plans to keep the house for many years. History of the last 4 decades would suggest that prices are not going to turn around and shoot up. So, there's no urgency to "buy at the bottom" even if it is too early for you. Rather, if you want to move into a home, and have been holding back thinking prices might drop further, there's little reason to think we have much further to go.
Caveat and Disclaimer: It's said that "all real estate is local". All the graphs above are national averages; local situations can vary quite widely. The above may not apply to specific situations, always do your own research. Also, Gary Shilling -- whose opinion I respect -- says house prices may drop a further 20%. (Added: Robert Schiller, Yale economist behind the Case-Schiller index was asked on CNN this weekend if it was smart to buy a house. His response was that in general he would not yet buy one as an investment, but if someone was ready to buy a house and live there for a while, they ought not to hold back thinking prices will drop.)
Previous posts: How're we doing (GDP Oct 2011), and How're we doing (Employment Feb 2012)
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