The Long Life Span of a Housing Downturn

20070602_charts_graphic_2

 

Graphic courtesy of NYT

Interesting graphic from Floyd Norris this morning in the NYT (above) from the article The Long Life Span of a Housing Downturn:

Excerpt:

"The trends in home sale numbers are similar, however. In the first
couple of months after the peak, sales did not slip as much in 1989,
but by the ninth month they were off about as much as they are now,
with new-home sales particularly hard hit.

One thing that was
very different at the 1989 peak from the one in 2006 was the trend in
the number of homes being offered for sale. When prices peaked in 1989,
the number of homes for sale was already declining, and it continued to
fall for some months, perhaps reflecting decisions by homeowners to
hold on and wait for prices to come back.

In 2006, however, the
number of homes for sale rose as the peak neared, and the latest report
shows that more than 4.1 million homes were for sale at the end of
April, the largest number ever. That included almost 3.6 million
existing homes, also a record high."

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Source:
The Long Life Span of a Housing Downturn      
FLOYD NORRIS
NYT, June 2, 2007
http://www.nytimes.com/2007/06/02/business/02charts.html

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What's been said:

Discussions found on the web:
  1. critical thought commented on Jun 2

    so, looks like in the worst case, in 1989, houses fell about 8% in value? That’s it?

    It depends on the market, but, here in chicago, I guess I should just drop anchor and finally buy a place. . . if the drop is only 8%, then, what’s the big deal.

  2. Frankie commented on Jun 2

    Agree, critical thought.

  3. Gerardo Esquivel commented on Jun 2

    The problem is that this housing downturn is not similar to the one in the early 90s. Instead, it is more similar to the crisis of the 1980s. Calculated Risk has several posts on this.

  4. Estragon commented on Jun 2

    critical thought – “so, looks like in the worst case, in 1989, houses fell about 8% in value? That’s it?”

    A couple of points to keep in mind:
    1. Inflation was running hotter in 1989, so an 8% drop felt worse in relative terms.
    2. More importantly, the 8% national figure masks some very significant regional differences. For example, I remember the Texas market being a disaster in the mid to late 80’s (oil bust) while California and New England were doing fine. California and New England had declines in the mid-90’s while the Pacific Northwest was booming.

    In other words, looking at 8% as “worst case” is wrong.

  5. S commented on Jun 2

    Your equity is levered 5:1 assuming a 20% down payment. If your home declines in value by 10%, and for whatever reason you find yourself in a “must sell” situation, half your equity gets vaporized.

  6. Estragon commented on Jun 2

    S – The other half largely bites the dust as well in transactions costs.

    OTOH, if you’re staying in the same market, the house you’re moving to may have dropped by more than 10% ;-)

  7. TKL commented on Jun 2

    Yeah, what’s the big deal? Why not buy a depreciating asset with borrowed money and hold it for an 8% loss, all the while: (a) throwing away 2% to 3% a year on taxes and insurance, for a total loss of about 15%; and (b) foregoing the opportunity to invest the money, which even in the safest instruments would give you another 10% to 20% during the long slide down. In other words, it’s no big deal as long as you don’t mind wasting about 30% of the purchase price. (Disclaimer: Results will be better or worse depending on your local real estate market.)

  8. Dennis O commented on Jun 3

    “so, looks like in the worst case, in 1989, houses fell about 8% in value? That’s it?”

    Read the title. That chart shows the annual change – not
    cumulative change – so while the the worst performance was 8% in a single year – the cumulative negative performance over the slump was far greater than that. It is the entire area under zero.

    Just eyeballing it, I’d guess it’s closer to 15 % total negative returns from 90 to 96.

  9. Dennis O commented on Jun 3

    oops. actually, it appears I an the one who needs to read the title… I overlooked the chart on the bottom. 8% cumulative loss it is.

    Well, I guess that doesn’t sound too bad, but I can’t think of any asset I’d buy – especially using leverage – if I was pretty sure it was going to go down. And when I can control the same asset for half the carrying cost (AKA “renting”) and then buy at a lower price in a few years – I’m not sure why I wouldn’t

  10. TKL commented on Jun 3

    In case anyone’s still reading these entries, my earlier post should have recognized the cost of renting. That’s a big omission. Safe to say you’ll pay about 5% per year to rent, making your total loss more like 10% to 20% of the purchase price. (In normal times, the cost of renting would be closer to the cost of ownership, which is about 10% per year when you include mortgage & taxes & insurance & maintenance. But these are not normal times.)

  11. UncleAnon commented on Jun 3

    This is another example of lazy malarky posing as useful information.

    If home prices are lower in areas affected by Katrina and that drops the ‘average’ sales price in the entire US how does that affect the actual value of a home anywhere else?

    They might as well be using global housing prices or North American housing prices consisting of trends in Canada the US and Mexico combined for all the useful information this article gives us.

    Does anyone really care about this kind of ‘truthiness’? It is nonsense.

    It is like mistaking the average income of the people in a room when Bill Gates walk in with money that can actually be spent by the average person in that room.

  12. lewis commented on Jun 4

    Curiously, I bought a house in June 1989 as an investment property. Looking at the chart you might think this a terrible time to have bought, but not so. Prices had declined and I got some freebies (the real estate agent found me a tenant prior to my buying the house). I paid about $165,000 for the place, its been rented with only three months empty due to tenant turnover, and today is worth around half a million and the current tenant seems to be a permanent fixture.

    So buy low, sell high works in real estate too, and none of these charts will persuade me from my real life experience. I expect housing prices to remain depressed for a while, especially as interest rates move higher, curiously in an economy that seems to hitting on all but two cylinders (res real estate and manufacuring jobs disappearing overseas).

    I think the expression the best time to buy real estate was yesterday remains true, as long as yesterday wasn’t 2004-2006 or in a true bubble area (Calif/southern Fla), because people who buy at the peak of any bubble always have so much more to recover. For the rest of us, the worst really is over, as real estate is so tax advantaged an investment that it is only a function of time before that big old increase on the right of the chart comes along again, and you don’t want to miss out on that. It is one SWEET ride.

    Lewis

  13. Greg0658 commented on Jun 4

    Was talking to a lady this morning. Prop Tax bills in todays mail.

    Her $20,000 home in ’89 had $250 in taxes a yr. Today its over $3000 because of TIF’s and government costs of doing our business.

    Almost related, not same TIF. Our Wal-Mart is building a Super. It was anounced they were to get $9M in sales tax rebates to build a $15M property. Then when they move they’ve got about a 20yr old building to put on the market for sale or lease – to a non competitor naturally.

Read this next.

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