One of the things I have consistently pointed out was that the so-called Housing Bubble was in reality two bubbles: Credit and Interest Rate.
We can define a bubble as a “trade in high volumes at prices that are considerably at variance from intrinsic values." By that definition, I’m not so sure Housing was a true bubble — the run up in prices, a doubling over the course of about 7 years, was actually a rational market response to interest rates being dropped to generational (46 year) lows. Trading volumes moved up, but proportionately so. Compare that with the Nasdaq, which doubled from October 1999 to March 2000 on a dynamic of a new paradigm. Trading volumes skyrocketed. When it was over, the Nazz had plummeted 78%.
House prices normally fluctuate in response to interest rate changes due t how they are financed. An example I used a few years ago: The first house I owned had a $300,000 mortgage. Back when interest rates were over 9%, the monthly payment would equal $2,632.71 (30 year fixed 10% mortgage). When mortgage rates plummeted, a buyer could finance a $500,000 purchase with a 6% fixed mortgage for a monthly payment of $2,997.75.
That example has the home price appreciating ~67%, but the monthly mortgage payments up only 14% (Source: Don’t Buy Housing Bubble Propaganda, 5/26/2005).
But this only explains some of the pricing run up from 2001-04. It does not explain the next phase of price increases. To do that, we have to understand how everyone in the lending community got so drunk on securitization they simply abandoned their traditional risk metrics and repayment concerns.
This drop in lending standards and absurdly easy credit is where things truly went awry: Despite the incredibly accommodative interest rates, lenders simply stopped being concerned about the borrowers’ ability to repay loans. My favorite example: California strawberry picker Alberto
Ramirez, who despite earning just $14,000 a year, was able to obtain a mortgage to buy a home for $720,000.
The assumption appeared to be that lenders could simply sell the mortgages to Wall Street to be securitized, without worries about delinquencies, defaults and foreclosures.
Since that abandonement of nearly all lending criteria, 173 major U.S. lending operations have "imploded."
You can see the decrease in lending standards over time: With each subsequent year of mortgage issuance, more and more homes began defaulting earlier in their ownership/repayment cycle. Have a look at the nearby chart — it shows the delinquencies in the non-sub-prime loans. These were supposed to be higher quality loans. Apparently, these loans also succumbed to a lack of traditional lending metrics.
The results speak volumes to where the bubble was.
Indeed, the destruction of mortgage lenders and capital is much more akin to the result of a bubble popping than the relatively mild decrease in Housing Prices so far. Credit was where the speculative mania was, and that is where the pain is being felt most acutely today.
We can also look at the Home Builders’ stocks as a speculative bubble; their share prices are now down nearly as much from their 2005 peaks as the Nasdaq was from 2000-02. They will not "bottom" until they clear out excess inventory, and see improvements in their cancellation rates.
Strangely, Houses themselves are more of an extended asset class than a true bubble. As we noted back in 2005:
"There
are bubbles in debt, credit and interest rates. There is the oil
bubble, the import bubble, the China bubble and the current account
deficit bubble. In short, we have a veritable bubble in bubbles.
Indeed, it is astonishing how many people who failed to either
acknowledge the tech bubble in the 90s — or at least failed to act on
it — now have no hesitation to declare real estate to be a bubble.
This despite their lack of expertise or past track record in spotting
bubbles on a timely fashion.The bubble du jour though is the
housing bubble. From Greenspan’s testimony to CNBC’s Housing special to
(uh-oh) this month’s Fortune magazine cover, it seems to be all anyone
wants to talk about.My position is that housing is not in a
bubble — yet. But it is an increasingly extended asset class that may
be subject to a significant correction in the future. But a 25%-35%
retracement is a very different situation than a bubble (recall that
the Nasdaq dropped 80%), primarily because there are very different
consequences for both homeowners and investors."
That thesis has been borne out by subsequent events.
How is this likely to play out over the next few years?
The well regarded Jeremy Grantham — the "G" in GMO — points out in his quarterly letter to
shareholders
that home prices are trading several standard deviations
above their "fair value." Grantham notes that the 2000 tech bubble
was statistically a 3-standard deviation, 100-year event. As his nearby
chart shows, House prices are also at 3 standard deviations from their
intrinsic values. In order to return to more appropriate levels,
prices need to drop 25% — or just stay flat for 5 years.
Why "only" a 25% correction, versus the nearly 80% whackage of technology stocks?
The main difference is intrinsic value. Outside of Love Canal or Detroit, house prices simply do not go to zero. You can always live in or rent out a house. Compare that with certain internet stocks whose only asset was a sock puppet.
~~~
Some people have complained that I am splitting hairs in distinguishing between home prices versus rates and credit as where the bubble lies.
But this is a distinction with a significant difference. A 25% correction in home prices would ultimately be tremendously Bullish for home builders, for lenders, and for the overall economy. As we have seen, price decreases generate real buying interest. It clears out the huge amounts of excess inventory (i.e., overhead supply). And it would kick off a virtuous cycle of economic activity . . .
>
Sources:
Fed Up
Jeremy Grantham
GMO, October 2007
http://tinyurl.com/2gx779
Median Price Chart Source:
National Association of Realtors, U.S. Census Bureau, GMO
7/31/07
Don’t Buy Housing Bubble Propaganda
Barry Ritholtz
RealMoney.com, 5/26/2005 2:04 PM EDT http://www.thestreet.com/p/rmoney/barryritholtz/10225437.html
Minorities Hit Hard by Foreclosure Crunch
May 3, 2007
Anthony Ha
http://hollisterfreelance.com/news/contentview.asp?c=213141
Grantham adds that regardless of whether the credit crisis is resolved, the following three issues are “near certainties”:
First, U.S. house prices would continue down toward trend over the next 3 years or so, and accordingly mortgage defaults would rise, mortgage re-financings would fall, and all of this would cause a steady drag on consumption, profi ts, and GDP growth.
Second, profit margins would decline globally with negative consequences for stock pricing.
Third, risk would be repriced on a very broad basis so that some time in the future we would see, once again, a normal or above-normal premium for high quality stocks and bonds.
The bubble was fueled also by a tax code (exacerbated by Taxpayer Relief Act of 1997) that favors owner occupied residential real estate over virtually any other investment. The RE bubble is the most visible result. The dead weight loss to the US economy is less visible but certainly detrimental to the creation if real wealth.
Barry, what I’m grappling with is whether the downward pressure on home prices is going to compensate enough, to off-set the inflationary pressures of lower interest rates and a lower dollar? Also when you mentioned that ~three years out this will create a boom for home builders, do the demographics support the demand side of the equation?
Casualties of those bubbles. SIV NAVs, …….in addition to truth.
http://ftalphaville.ft.com/blog/2007/10/22/8248/the-point-of-m-lec-for-desking/
3-6 cents on the dollar!!!!!!!!!!!!!!!!!!!!!!!!!!!
excerpt from naked capitalism…
“I got an email this morning from Janet Tavakoli of Tavakoli Structured Finance. She practically eats mortgage data for lunch. She says Countrywide may seem like it’s doing this out of the goodness of its big ol’ corporate heart, but really it has to do with the fact that recoveries on subprime loans are far worse than ever anticipated so far. Here’s what she writes:
“Last week I met with a major mortgage servicer of geographically diverse U.S. subprime loans. They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable.”
Tavakoli says the servicer has been selling loans for 3-6 cents on the dollar. What are the issues? Legal costs relative to the low loan balances are huge and delays are long. Values of the homes are nowhere near what they were, so they’re looking at negative equity.
In other words, Countrywide is saving its own skin, as well as saving home ownership. The company simply has to do this because there is no way it can survive otherwise. Obviously they are seeing the recovery rates and just don’t want to risk it. This is a pre-emptive strike”
I could not disagree more. I think you are dead wrong on several points in that article.
Awesome analysis, Wally. Very detailed. Any other topics you want to weigh in on?d
I must disagree with the statement about oil being a bubble. With other assets, like housing, we’ve had artificially low rates which created false demand for houses. Like you said, it’s been a somewhat rational response on the part of homeowners/investors to buy, buy, buy. They look at the monthly payment not the actual price.
On the other hand oil is NOT a bubble. A classic sign of a bubble is over-supply: like with the oversupply of Nasdaq stocks in the late 90s, and the oversupply of houses in the last 5 years. The run up in the oil price has failed to bring on supply. We are still pumping ~86MM barrels a day for the last 2-3-4 years despite a quadrupling of WTI and Brent. If the high prices brought on a slew of new capapcity and prices remained high then I’d call it a bubble. But we don’t have that.
In this case, oil price is a rationing mechanism. Not enough supply given the demand.
Great post. As a loan originator for 15 years I can say that these comments sum it up very well.
put me in the camp that thinks you’re splitting hairs. :)
if you think about it, a bubble is caused by people borrowing money at an exponentially growing rate. that’s the only way demand can rise fast enough to drive those prices.
but that’s also the definition of inflation: an increase in credit.
so at the end of the day, a bubble is simply just minsky-esque inflation. homes were mispriced due to inflation, as was credit risk; in other words: the credit/rates/houseing bubble question is moot.
however, prices of assets don’t have to move proportionally with the increase (or decrease) of debt. prices are a function of time preferences, not inflation.
therefore, homes at bubble prices can’t fall as far or as fast as equities, because homes are illiquid and have utility, whereas stocks are not.
that’s why i don’t agree with the 25% fall vs. 80% fall argument.
Barry, I think you missed to point out clearly a couple of your hidden points, as well as you may have misjudged the interest rate effect:
1) Apparently and Appalingly lower lending standards under the supervision of FED has the exact effect of Increasing the Buyer Pool. When there is a sudden increase in buyer pool with housing supply taking 1 year or so to catch up, the bubble cycle is created. The emphasis here is that — the artificial boosting of buyer pool due to lax lending standards, as well as historical interest rate.
This is really not a coincident, considering why Bush REPETATIVELY called for Home Ownership and American Dream after 9/11 and numerous chats with Greenspan, and Greenspan subsequently lower the interest rate to historical low (I am sure Greenspan knew the HOUSING is always the biggest economy driver of any country), and FED “accidentally” missed its legal duty to supervise the banking industry to allow lax lending standards, ALL these happen at the same time when RECESSION and economy need it most. Coincident??
2) Interest rate should not be considered as the Fundamental analysis in the intrinsic value of a home. Affordability, Locations, and Rentals are the most overriding factors. Interest rate can go up and down. For example, say 2 exact same houses — “A” cost $400K @ 7% fixed interest rate, while “B” cost $500K @ 5% fixed interest rate. Since the monthly payment is the same for both houses in the same location (I did not have time to do the exact mortgage math, but you got my point), are you saying they both have the same INTTRINSIC value??
No. The guy B who pay $500k is a fool, because if interest rate ever come down, guy A can always refinance to cheaper payments. Guy B is a fool that make the previous owner rich.
Good article Barry.
Two other things that you might work into your model:
One is the mortgage renegotiations going on between borrower and lending institution that fix payments at todays lower rates. This means that people waiting to buy until the market is literally swamped with foreclosures may be disappointed.
The other is that the credit crisis has led to lower ten year treasury rates. Mortgages are priced off the ten year. This makes conforming mortgaqes cheaper to borrowers and more attractive to investors.
Yes, real estate prices got out of line in certain parts of the country but all in all it is still the single best investment a person can make. Today is not the best time for a weak buyer to be involved but if someone has money and has strong credit it is as good as any and better than most times to negotiate a great deal. If one waits to long all the best deals will be taken.
There will be a virtuous cycle after this vicious cycle, starting in 2009-2011, but only the survivors will benefit, which likely doesn’t include most players enjoying the sunshine in mid-2005. There are more writedowns to come at the homebuilders; some won’t make it.
Housing bubble or no bubble. Not sure that getting the label right matters.
I do not disagree that home prices have a bottom and that bottom is not nearly as drastic as can happen in the stock market. 80% drops will not happen. Very unlikely that prices would even drop 40%.
However, the damage to individual wealth and therefore the economy is probably just as bad.
The problem is that on average 60% of homes are financed. Ergo a 30% drop in prices wipes out 80% of the owners equity. That makes them just as poor as an 80% drop in their stock portfolio.
(That 60% is a guess. I would love it if someone had some real numbers on that)
Taking this to a bigger picture. I still think that the housing credit crunch is just the tip of the iceberg.
The same will soon play out in every other credit market. Risk was underpriced, plain and simple on a large portion of each and every market.
Credit cards, leveraged buyout deals etc.
When those start to unfold the housing credit crunch will look like a cribbage game gone bad.
There’s a little bit of looking at the trees here and not the forest. Housing nationally can drop much more than 25% for a very simple reason: the economic environment surrounding it. As the collapse continues, and consumers pull in their horns, and the stock market fades, and we face a series of derivative-based explosions, and credit tightens considerably, and unemployment goes up, and the dollar trends down, and inflation turns into stagflation or possible deflation, etc., you have a macro environment that will basically cause demand to drastically drop (as it will for a lot of things) and mortgages will get increasingly harder to get, at least at terms that the vast majority of applicants could afford. The drop in the wealth effect from housing and stocks and the increase in unemployment that will naturally occur in a contracting economy will subsequently drive down rents, also. Houses will not retain value because they can be rented, they will eventually shed more value.
This will not end happily for a lot of people. Holding onto somewhat rosy outlooks based on relatively recent ‘past performance’ is, I think, an analytical mistake. Some people who have consistently scoffed at the past predictions of subprime containment are now applying the same thinking to housing, and it’s just as wrongheaded.
The current macro situation has all the makings of a serious 5 to 10 year trough, and not just in housing, but in every component of the economy. The domino or ‘vicious cycle’ effect has not even really begun at this point.
Good post, Barry. I tend to think it is actually understated: The other shoe to drop is a secular rise in long-term interest rates that will occur once the $ starts declining against Asian currencies.
I am not sure if I understand the future playout correctly. It seems like it is estimated that housing will be good to go in roughly three years. At the same time, you have given a chart that shows an echo boom of resets on option ARMS in the 2010 and 2011 period. The current lowering of interest to stave off a recession and the weak dollar strategy should serve to drive the inflation hawks wild, and result in rising interest rates. If over the next three to five years we have stable or declining house prices and rising interest rates, then aren’t these option ARM homeowners in the same trouble as the current subprime homeowners: namely, faced with refinancing when they have no new equity and need to make a higher payment as you explained in describing the credit and interest rate bubble?
In the case of national aggregated stats such as the ones in the post, I agree with Barry.
However, in the full-on bubble zones like So Cal. Housing is in a bubble, unexplainable by interest rates and price drops will be greater than the national average.
Barry
Interesting, but I do not think you can lump all the real estate in the entire country together and accurately describe it by one term. Rather, it is more accurate to acknowledge that there were areas of the country, Kansas City comes to mind, that did not experience the exponential increase – despite the low interest rates available – while others, e.g., Florida, Vegas, Arizona and California went off the deep end.
Similarly, your analysis fails to address the role of the speculator who helped pump helium into the above referenced markets. While some of those speculators could fall under the credit/lender portion of your analysis, some had solid credit/lending histories and were simply too late to the party as they bid up the properties while chasing fools gold.
Tim
When housing drops enough some foreign sovereign-wealth fund will step in (directly or through an approved proxy) and have a field day buying up our homes for 50% off and renting them back to us. Buffet’s sharecropper society will be a reality as we buy our goods from them, send our taxes to them (interest on debt), and pay them to live in our houses.
Fun.
“The main difference is intrinsic value. Outside of Love Canal or Detroit, house prices simply do not go to zero. You can always live in or rent out a house. Compare that with certain internet stocks whose only asset was a sock puppet. ~~~”
True, a house’s value in and of itself, does not go to zero. But if you can’t live in it as your primary residence or rent it out for the amount that is owed on it for mortgage AND taxes, then the value becomes negative. It becomes a liability to your net worth. Once the value of a stock is zero you don’t owe additional monies but with a house that is still possible.
Barry,
If your analysis of housing prices as a reaction to interest rates was correct, shouldn’t we see major moves in the pricing data when interest rates are at generational highs? Do we have reliable residential RE pricing data from the early 80s?
While relative monthly costs matter, the real question is the affordability index is so out of whack that a five year flattish period with a reversion to historical return patterns ceterus paribus would mean that in 20 years that the $700K house would appreciate ihn real terms to something like $1.2M. Lets remember that $700K house five years ago was 350K and five years before that probably 290K. So I ask this question: given the fiscal position of the United states and the general consensus that rates are being artifically subsidized by multiple forces (flows, securitizatione tc..) which will abate and the trend in incomes which are laggin well behind actual inflation with downward pressure, how does the math work?
Again, pernicious asset inflation has subtly undermined the Quality of Life of the untied states for at least the next generation at which time the country will fail to govern the world’s transaction.
Gen X plus will pay more for there homes and have less for the rest.
In short, Gen X/Y pays the bills for the profilgate self indulgent flower children.
Don’t forget that the destruction of nasdaq created a serious liability issue for the Fed Govt who can’t even afford to foot the bill for social security let alone inflation edjusted medical expense. What becomes of those poor boomer folk staring at their now halfed 401Ks. Wa la inflate the housing market, then the commodities market then the equities market. Look at the consumer balance sheet data put out by the Fed and the calculation becomes clear: consumer wealth as we know is virtually fully in housing and equity/penion plans. The fed has been palying a dangerious game of inflating the balance sheet of consumers toggling between the stock market and the housing market. The consumer balance sheet needs to be written down and market to market. Kudos to the point about price move and equity relationship. Watch that.
The Fed/Gov’t is not benevolent
Excellent comments —
Many of you point out the local nature of some of the more bubblicious areas — Socal, Las Vegas, Southern Florida — you are more correct than not. (I was speaking more generally about national housing as a bubble).
Here’s the million dollar question: How much from the peak do you locals think these markets will correct ?
A rep from the Republican party told me in the fall of 2000 “housing” was going to be pushed and pushed hard. The tech revolution was over and the overspending due to the Y2k scare. They needed something for the Bush Presidency and housing had “underperformed” during the Clinton era.
We have to remember, the 2001 recession was basically a manfacturing recession. It was driven basically by the typical early decade bust in manufacturing as overcapacity from the long expansion. But the recession was not felt as bad as earlier recessions because the borrowing continued which supported consumption and growth. No matter what rates are, that can only continue for a extended period. The fact is, devaluing the dollar will end the global boom. It will make building overseas unprofitable and force a ugly manufacturing bust in the BRIC nations. That will spread the the US and hurt growth and consumer spending. Housing may settle down once the un-historical excess is wipped off, but the global recession won’t be great for housing either. It is just how it gets here and whether by 2015 the debasement worked to restoring US exports and manufacturing growth.
to answer Barry’s last note, as a regular reader of calculated risk, I can tell you that calculated risk himselfe and thoughtful (in my view) commenters on that site regularly predict a minimum of 25% to 30% *real* declines from peak, and quite a few predict 40%.
Good post, but I think that Oil is a different story. I think the falling dollar is playing a large role in the price of oil, geo-politics, good old fashioned supply and demand (world growth), and good old fashioned speculation. These don’t seem like a bubble.
There is a lot going on in this post and I think there are multiple issues that could be split up to divide and conquer the subject matter.
«One of the things I have consistently pointed out was that the so-called Housing Bubble was in reality two bubbles: Credit and Interest Rate.»
The Big Picture is that ”something” happened in 1995 that fundamentally changed some trends, as most ”financial” trends up to 1995 seem to have a slope, and those after 1995 a trend slope that is much much steeper. There was another big change in 2001-2002, but not quite as marked. Consider for example a totally steady company like PG (and the S&P and NASDAQ) over the past 35 years (linear, pre-inflation for see more clearly):
http://finance.yahoo.com/q/bc?t=my&s=PG&l=off&z=l&q=l&c=&c=%5EGSPC&c=%5EIXIC
What epochal change happened? Well, my clue is your October 20th comment on margin debt:
http://bigpicture.typepad.com/comments/2007/10/margin-debt-gro.html
which has a very similar shape. This to me suggests that money and credit have become vastly cheaper and more available starting in 1995, with an extra dose in 2001, and that this wall of free money has just been hitting in turn different asset classes (we have had stock, bond, house, raw materials ones) driving them into bubbles. Of these the bubble in USA gov bonds has been perhaps the most extraordinary and less noticed.
So far this wall of money has had two main outlets: higher asset prices in the west and higher salaries and consumer prices in China and India. Ah and of course a third: breathtakingly high USA gov bond (and dollar) prices.
So it will take either deflation or inflation to readjust the balance between the real and financial economy. Given the number and political power of debtors I suppose inflation is going to be it, as many signs indicate.
Latest is that the UK government has proposed capping by law the indexing of a large category of pension payments to 2.5%/y saying this will result in massive savings over the next few decades for the large businesses that owe such pensions. Uh oh.
Two items that may or may not be details:
1. The bubble areas that will get hit hardest, as a percentage of total asset value, are disproportionately large. If 1000 homes get foreclosed in Wisconsin at $200k a pop, and 1000 homes get foreclosed in San Diego at $800k a pop, the net impact on GDP is quite different (although the relative impact to each community might be similar).
2. That 25% fall makes certain assumptions about the coming years which may be wrong: the supremacy of the American standard of living, the role of the US economy and the US dollar in the world, the willingness of foreigners to finance our excesses, our ability to stiff said foreigners time after time (two words: Rockefeller Center).
This second item might not hit in the next 2-5 years, but it will hit in the next 10 – just as all the boomers retire.
Unfortunately Barry, you just don’t get it – along with the rest of the pundits on Wall Street.
The real issue in Housing is what I call “Maximum Differential”. That is the maximum difference between Housing Prices and Wages.
That point was reached a few years ago. From there, either Wages have to rise substantially, or Housing Prices have to fall substantially.
While it is certainly true that low rates and lax credit artificially stimulated demand, those effects are on the surface and at the margins, masking the real underlying problem of “Maximum Differential”.
Many, including you Barry, are looking to those superficial matters and missing the substantive issue at the core.
Unfortunately, China and India, to name the majors, have a natural cap on wages here. With ratios in the area of 20:1, wages are going nowhere fast. Unless and until protectionism becomes the order of the day, that will remain so. Thus only falling prices will address the problem.
Recently a homebuilder sold houses in a tract at ½ the price they sold just 1 year earlier in the same tract – a 50% haircut.
That will become the norm, not the exception. How many people are going to continue paying a loan at double the value of their home ? Not many once they realize those prices are the norm.
That is why all this so-called “Bailout” talk is pure B.S. The FED can’t and won’t do a thing about this problem – they themselves created it for three purely political reasons: (1) To drive the stock market; (2) to drive the economy; and (3) to drive tax revenues. By the time things get really bad, Bush will be long gone.
You watch how short Bernanke’s tenure is – and how ugly things get with him. History and Politics are going to grind him up.
Unfortunately, the problems in housing are just beginning.
This post can’t even begin to talk about the 1 Trillion plus in bad paper, not yet marked to market, in relation to this.
When housing prices fall 50% plus then you can expect to see the so-called “bottom”.
Homes coming to the market through foreclosure will outpace building of new homes for years to come.
When it is all said and done, this will go down as the worst housing bust in the history of the US.
You Barry and the rest of the pundits on Wall Street will, like those in 1929, be badly discredited.
Remember this post, and what I’ve said – as it rings sadly true with the passing time.
Lots of predictions there, Carlos.
Meet you back here in 5 years to see how you did . . .
My compliments on a brief highly cogent article with no mistakes. This is rarer than we’d want in public discourse.
Mortgage debt *doubled* from 2000-2006, increasing over $5T.
“Affordability” innovations like zero down (or even 100+% LTV!) combined with neg-am/pay-option and “stated income” was the force on the pump blowing this credit bubble up.
The rate reductions 2002-2003 was the first downstroke, but speculator flippers doing their thing and the three-card monty mortgage finance system kept the bubble inflation going right through 2005.
I fully believe this whole thing was engineered to pump the economy up, ISTR Greenspan is quoted in 2004 saying that the housing sector was the best effector the Fed had in driving its monetary policy into reality. Plus no doubt party operatives like Rove read the polling data and saw how “home ownership” was another solid deme for their party, and strengthening this was a good lever in their striving to create that “permanent majority” thing they were working on. . .
Oh, as a quasi-Georgist I should also make the point that the 2001-2003 tax cuts were another pump-primer in the scheme of things.
Odd how land values (at least in areas where non-marginal land is in constricted supply) tend to absorb every surplus dollar an economy has. Seeing rents shoot up to the stratosphere 1997-2001 in the SF Bay Area was an eye-opener to me, but it was only later that I discovered an economic philosophy (geolibertarianism) that could adequately “unpack” the insidiousness of it.
House prices have already dropped more than 25% in quite a few areas of California. Price drops should be about 50% from peak, and realize that the peak occured at different times in different places.
Barry ,
Carlos does make some good points as others have that you need to look at affordability indexes and cost ratios of renting and buying. It’s easy to show that these have been out of wack since 2000. I think the affordability index for Cali just before this blew up was like 11 percent. that means 11% of the population of Cali could afford the median priced home. Buy to rent ratio’s were like 300% or more.
Figure what they SHOULD have been without the NAR kool-aid and that hould give you an idea based on location how much of a haircut to expect with probably some over correction. Easy math really.