When do house prices bottom?

[cowboy]

I see a lot of different opinions on the subject of house values. Here's mine.

The following chart shows the average home value in ten major cities over the last 20+ years. Trendlines showing the linear trend and upper and lower bounds suggest that the market has corrected nearly as much as it should, and will bottom within the next quarter.

Home Values.JPG

But we all know that trendlines can be misleading. Logically, we can assume that home prices should stay relatively constant, when adjusted for inflation, and some argue that this is a better metric by which to measure home values. The chart below displays historical home values adjusted for inflation.

Inflation Adjusted Home Values2.JPG

From the above chart we see that home values may have room to fall. Assuming that home values can fall to their previous inflation adjusted low, and projecting values to continue falling at their current rate of depreciation, home values may not bottom for another 18 months, as shown below.

Inflation Adjusted Home Values.JPG

But more than inflation comes into play with home values. Home sizes are larger, and interest rates are lower now than ever before. Ultimately, in my opinion, the real determinate of home value is the amount that people are willing to pay for a home relative to their monthly income. In this regard, interest rates play a huge role in home prices.

The following chart shows historical home values adjusted for both inflation and mortgage interest rates. The circled portion is projected, and it forecasts that home prices will reach historical adjusted lows by mid to late summer, barring anything else unforeseen in the economy.

RateAdjustedHomeValues.JPG

So there you have it. In aggregate, I expect home values to bottom in the third quarter. I could be wrong - and I often am - but that's my take on things for what it's worth.

[KillerDog]

I see a lot of different opinions on the subject of house values. Here's mine.

The following chart shows the average home value in ten major cities over the last 20+ years. Trendlines showing the linear trend and upper and lower bounds suggest that the market has corrected nearly as much as it should, and will bottom within the next quarter.

[ATTACH]31[/ATTACH]

But we all know that trendlines can be misleading. Logically, we can assume that home prices should stay relatively constant, when adjusted for inflation, and some argue that this is a better metric by which to measure home values. The chart below displays historical home values adjusted for inflation.

[ATTACH]34[/ATTACH]

From the above chart we see that home values may have room to fall. Assuming that home values can fall to their previous inflation adjusted low, and projecting values to continue falling at their current rate of depreciation, home values may not bottom for another 18 months, as shown below.

[ATTACH]32[/ATTACH]

But more than inflation comes into play with home values. Home sizes are larger, and interest rates are lower now than ever before. Ultimately, in my opinion, the real determinate of home value is the amount that people are willing to pay for a home relative to their monthly income. In this regard, interest rates play a huge role in home prices.

The following chart shows historical home values adjusted for both inflation and mortgage interest rates. The circled portion is projected, and it forecasts that home prices will reach historical adjusted lows by mid to late summer, barring anything else unforeseen in the economy.

[ATTACH]33[/ATTACH]

So there you have it. In aggregate, I expect home values to bottom in the third quarter. I could be wrong - and I often am - but that's my take on things for what it's worth.

Ummmmm, your little charts are cool.

[RobinFinderson]

There are also two other issues that can continue to drive prices well below the rates for adjusted inflation -- access to credit, and unemployment.

[Color Me Badd Fan]

I see a lot of different opinions on the subject of house values. Here's mine.

The following chart shows the average home value in ten major cities over the last 20+ years. Trendlines showing the linear trend and upper and lower bounds suggest that the market has corrected nearly as much as it should, and will bottom within the next quarter.

[ATTACH]31[/ATTACH]

But we all know that trendlines can be misleading. Logically, we can assume that home prices should stay relatively constant, when adjusted for inflation, and some argue that this is a better metric by which to measure home values. The chart below displays historical home values adjusted for inflation.

[ATTACH]34[/ATTACH]

From the above chart we see that home values may have room to fall. Assuming that home values can fall to their previous inflation adjusted low, and projecting values to continue falling at their current rate of depreciation, home values may not bottom for another 18 months, as shown below.

[ATTACH]32[/ATTACH]

But more than inflation comes into play with home values. Home sizes are larger, and interest rates are lower now than ever before. Ultimately, in my opinion, the real determinate of home value is the amount that people are willing to pay for a home relative to their monthly income. In this regard, interest rates play a huge role in home prices.

The following chart shows historical home values adjusted for both inflation and mortgage interest rates. The circled portion is projected, and it forecasts that home prices will reach historical adjusted lows by mid to late summer, barring anything else unforeseen in the economy.

[ATTACH]33[/ATTACH]

So there you have it. In aggregate, I expect home values to bottom in the third quarter. I could be wrong - and I often am - but that's my take on things for what it's worth.

Good analysis. Two more things to look at, price to income ratios and whether it's cheaper to rent or buy the same house. But price to income ratios don't really control for low interest rates.

[Color Me Badd Fan]

There are also two other issues that can continue to drive prices well below the rates for adjusted inflation -- access to credit, and unemployment.

I think there is more than sufficient access to credit right now. It just isn't the same access that existed in 2005. If you have the income and the credit score and a decent down payment, you can buy a house. It really isn't much more difficult now than it was, say, 10 years ago or so.

A huge portion of the unemployment is being caused by the housing downturn. If prices stabilize, then people will start buying homes again and all of a sudden unemployment goes down. Sales are already ticking up quite a bit in a lot of the former bubble areas.

[TripletDaddy]

I read in the LA times this past week that average home prices were starting to approach a realistic ratio to the average income in Los Angeles, suggesting that we are somewhat close.

The one thing that always made me wonder whether the bottom was truly near was the fact that housing prices were still way above what people could afford. However, in some parts of LA, the ave price has dropped to the mid 300s.....well within the buying range of many incomes in LA. other areas are still grossly overpriced.

[KillerDog]

I read in the LA times this past week that average home prices were starting to approach a realistic ratio to the average income in Los Angeles, suggesting that we are somewhat close.

The one thing that always made me wonder whether the bottom was truly near was the fact that housing prices were still way above what people could afford. However, in some parts of LA, the ave price has dropped to the mid 300s.....well within the buying range of many incomes in LA. other areas are still grossly overpriced.

I recently saw an LA neighborhood with an average income of $116K and an average home value of $700k. Still needs correcting by that measure.

[cowboy]

Good analysis. Two more things to look at, price to income ratios and whether it's cheaper to rent or buy the same house. But price to income ratios don't really control for low interest rates.

This graphic, mortgage debt service as a percent of disposable income, is a little scarier. This suggests that, while house prices may bottom within 12 months, the economy is going to struggle for a while until the consumer can get healthy enough financially to begin spending again.

Mortgage Debt Service.JPG

[Color Me Badd Fan]

I read in the LA times this past week that average home prices were starting to approach a realistic ratio to the average income in Los Angeles, suggesting that we are somewhat close.

The one thing that always made me wonder whether the bottom was truly near was the fact that housing prices were still way above what people could afford. However, in some parts of LA, the ave price has dropped to the mid 300s.....well within the buying range of many incomes in LA. other areas are still grossly overpriced.

On a related note, my brother who's a lieutenant colonel (and a doctor) in the Air Force, is trying to decide between going to San Antonio or Edwards Air Force Base. If it's Edwards, he's zeroed in on Acton, CA. He says the median income looks pretty affluent and the median price has gone down to $400k He knows that Lancaster and Palmdale are crack havens so he's willing to drive the extra miles if Acton is okay. It looks like it's midway between Santa Clarita and Lancaster.

Is Acton okay? I know it's not Newport or Capistrano, but is it more Fontucky or is it more a place like Thousand Oaks? He's also curious if a $400k median for that area is still overpriced.

[TripletDaddy]

I recently saw an LA neighborhood with an average income of $116K and an average home value of $700k. Still needs correcting by that measure.

Oh, absolutely. I was referring to the same issue. There are definitely bubbles within bubbles, so to speak.

However, in other areas, housing prices have dropped back to where the ave price of a home is within reach of the average income.

These neighborhoods with a cost factor of 8-10x ave income....they still have a ways to go, no doubt. I think they are slower to turn because the people that live in those homes have a false sense of reality when it comes to home values.....which is why they bought the home on a limited income to begin with.

[TripletDaddy]

On a related note, my brother who's a lieutenant colonel (and a doctor) in the Air Force, is trying to decide between going to San Antonio or Edwards Air Force Base. If it's Edwards, he's zeroed in on Acton, CA. He says the median income looks pretty affluent and the median price has gone down to $400k He knows that Lancaster and Palmdale are crack havens so he's willing to drive the extra miles if Acton is okay. It looks like it's midway between Santa Clarita and Lancaster.

Is Acton okay? I know it's not Newport or Capistrano, but is it more Fontucky or is it more a place like Thousand Oaks? He's also curious if a $400k median for that area is still overpriced.

I am not familiar with Acton. Flystripper may know more about that part of SoCal....he doesn't live there, by any means, but he lives closer to that neck of the woods. I live down in South County, so I am more attuned to OC neighborhoods.

I will say that $400K right now for living out off the 14 seems kinda high. A couple in our ward just moved out and bought a home in Mission Viejo for about $490....and that is in Mission Viejo. Again, Stripper can probably speak more accurately to home values out past Santa Clarita way.

Funny you mention San Juan Cap. We were looking at a place there a few months ago. I love that area. Close to Newport, close to Doheny, close to work. Perfect.

[Color Me Badd Fan]

I am not familiar with Acton. Flystripper may know more about that part of SoCal....he doesn't live there, by any means, but he lives closer to that neck of the woods. I live down in South County, so I am more attuned to OC neighborhoods.

I will say that $400K right now for living out off the 14 seems kinda high. A couple in our ward just moved out and bought a home in Mission Viejo for about $490....and that is in Mission Viejo. Again, Stripper can probably speak more accurately to home values out past Santa Clarita way.

Funny you mention San Juan Cap. We were looking at a place there a few months ago. I love that area. Close to Newport, close to Doheny, close to work. Perfect.

The numbers on Acton are quite a bit different. For example, the average income in Acton is $89k. The average income in Lancaster is $61k. I don't know anything about that area, but I do know that Lancaster and Palmdale blow. Acton looks like it's in the hills and could be like Thousand Oaks in that there are horse properties and things like that. Of course, it's also significantly farther away from LA so the incomes aren't as high.

I told my brother though that the entire inland empire just sucks ass and I don't know if that particular place is more inland empire or more of a nice suburb where people sometimes have big plots (2 acres) of land- like Thousand Oaks.

[MarkGrace]

Cowboy, give me some insight into when we'll see the bottom of the market in Seattle. Prices seem depressed right now, and I'm hoping they'll stay that way long enough for us to buy (probably 12-18 months).

[Color Me Badd Fan]

Cowboy, give me some insight into when we'll see the bottom of the market in Seattle. Prices seem depressed right now, and I'm hoping they'll stay that way long enough for us to buy (probably 12-18 months).

Don't look for prices to spike up anywhere in the foreseeable future. You'll be more than fine in 12-18 months. The best case scenario for the economy is that prices will stabilize at their current levels and languish there for a while. More likely then not, the prices will go BELOW their historic levels.

I bought in October 2008, I've been working since late 2005. I made the conscious decision in early 2006 not to buy for awhile. I still ended up buying a little early, but my wife and I just had our first kid last year and my wife was really chewing at the bit to finally go out and buy something. Our house cost 2/3 of what it would have cost in 2006. Prices have continued cratering on more high level homes because not enough people make the money to buy these types of places. But with houses in our range, the prices have stabilized a bit.

[RobinFinderson]

Faith and I are looking to buy some time soon as well. If my college finally offers me a full time position for the coming Fall (perhaps unlikely because of the economy, but possible, because I am part of a growing department), we plan to buy. I have been hearing something about some kind of new tax benefit/credit for home buyers. What do people know about this?