Halfway Through the House-Price Bust?

America may well be only halfway through the house-price bust; so says this week’s Economist:

Mr Bernanke’s maps use figures from the Office of Federal Housing Enterprise Oversight (OFHEO). Its statistics have broad geographic reach and track repeat sales of the same house. The monthly national index suggests average prices have fallen only 3% from a peak in April 2007, and the quarterly figures are still positive (see left-hand chart).

But OFHEO’s figures include only houses financed by mortgages backed by the government-sponsored giants, Fannie Mae and Freddie Mac. By excluding subprime and jumbo loans, they leave out the top and bottom of the market—where prices rose fastest during the bubble and where the mortgage mess was most severe.

Thus OFHEO’s figures probably understate the scale of the housing mess, particularly in states such as California and Florida. Another set of indices, developed by Robert Shiller and Karl Case and produced by Standard & Poor’s (S&P), a rating agency, includes all types of houses and, not surprisingly, show house prices rising faster during the boom and falling faster now. As of the fourth quarter of 2007, the S&P/Case-Shiller national index was down 10% from its peak, and an index of ten large cities had fallen by almost 16% by February. Although the Case-Shiller figures are not perfect—they miss many rural areas—they are a better gauge of price declines in big cities.

Note: As mentioned earlier this week, Fannie Mae data is ex-foreclosure, also.

The graphs say it all:

Changes in House Price by County





Map of misery
The Economist, May 8th 2008

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  1. Darin commented on May 10

    Hey, Barry, you should charge a subscription for the Big Picture. I know you might not like the sound of it, but what about adding your site as an extra for Real Money or something. Anyway, I would pay $100/year…Great work!

  2. Will Rahal commented on May 10

    Just as housing provides eternal hopes of bottoming, there are other economic indicators such as employment, exports, consumption and Business Investment, that provide a false sense of security to investors. This tends to happen as they rise/improve, just before or during significant economic recessions.
    See this graphically

  3. Elizabeth Tool commented on May 10

    About 5 years ago I was invited for dinner at a friends house when I arrived they were still in the middle of refinancing their home. I thought it was strange a mortgage person coming to your house and even stranger when they told my friends that in 10 years the interest rate would go up but they could “just call the company and tell them to lower it.”

    Another person I know a bought a house last August with an ARM. Now she is having a baby and wants to quit her job (She is the bread winner)who knows what will happen in 10 years.

    The point is that these are real people not stupid, dumb or bad they just don’t know. My niece’s parent in-laws have refinanced 3 times they have well over 20,000.00 in credit card debt and when her father in-law retired from a good Gov. job he got a 40,000.00 bonus and didn’t know he had to pay taxes on the money…is there any wonder that the next generation is a financial mess? Of course it is going to get worse!

    Personal finance should be taught in school in such a way that there is no question in anyone’s mind what revolving credit really means. Credit cards should not be allowed to advertise on t.v. or solicit anyone under 21 they are as bad as cigarettes.

    For those inclined to correct English usage and punctuation please feel free I need all the help I can get but be thankful that I know enough to edit out the “ain’t got none” and my personal favorite “that them there”!!!

    Mr. Ritholtz please ignore that person who suggested you start charging for your wonderful and informative blog. I have been reading your blog and the comments your readers make everyday since I discovered you and there is so much to learn. Y’all are so smart my Webster’s pocket dictionary has never heard some of the words you and your readers use…I had to go out and buy a bigger one!

  4. cinefoz commented on May 10

    Oil prices and related commodity prices are being controlled by people who have no competing interest in seeing prices lower for any reason. Follows is a definition for a concept that is quite common with respect to price fixing and collusion.

    Excerpt from Wikipedia for Conscious parallelism

    Conscious parallelism is a term used in competition law to describe price-fixing between competitors in an oligopoly that occurs without an actual spoken agreement between the parties. Instead, one competitor will take the lead in raising prices. The others will then follow suit, raising their prices by the same amount, with the unspoken mutual understanding that all will reap greater profits from the higher prices so long as none attempts to undercut the others.

    This practice, like most anticompetitive practices, can be harmful to consumers who, if the market power of the firm is used, can be forced to pay monopoly prices for goods that should be selling for only a little more than the cost of production. Nevertheless, it is very hard to prosecute because it occurs without producing any evidence of collusion between the competitors.

    I suspect the truly Stupid will read this and somehow confuse it with ‘peak oil theory’.

  5. km4 commented on May 10

    Halfway Through the House-Price Bust?

    Yes thats about right since on average US House prices are about at 2003/2004 levels.

    However, until we get to 1998/1999 housing prices the real US economy ( not the bullshit manipulated government stat US economy ) will stuck in the financial engineered muck !

  6. Winston Munn commented on May 10

    No wonder the Fed used FNM as FNM it seems will do almost anything to keep the plates spinning on top of the sticks.

    Russ Winter notes: “FNM has announced that they will give a $15,000 loan to borrowers with negative equity so that they can pay down some of their principal balance and therefore refinance into a new mortgage. First of all, this loan is not secured by the property but rather by the personal guarantee of the borrower.”

    And this:

    Fannie Mae announced that “a new refinancing option for up-to-date but underwater borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120% of a property’s value”

    Regardless of how many ways you try to put the genie back in the bottle, once he is out, he is out. And the L.A. Times summarizes it best:

    “U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, “teaser” interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities… We’ve knocked out all of [these pillars]… At current levels, the average American still can’t afford the average house. Despite the creativity of its new policies, Washington can’t alter that math. The only mechanism to restore balance… is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed.”


    Debt-backed gimmickery is a symptom of the last gasps of a dying Ponzi finance scheme.
    But the jig is up boys – we’ve fresh out of bigger fools.

  7. Lilguy commented on May 10

    I don’t know where we are in the real estate downturn, and I don’t believe the graphs or comments above reasonably support any estimation.

    I will believe we are half way through the downturn when:

    (a) the inventory of houses on the market drops by 2-4 months from its current excessive levels (about 11 mos.).

    (b) home sales prices begin to show some stabilization. The graph above shows they are declining at a steepening rate. When that rate slows rather than accelerates, we’re probably half way through.

    I think prices might stabilize next year. The overhang is simply too large at the beginning of this year’s selling season to believe they will stabilize in the next few months.

    It may take a year or two after prices stabilize before the excess inventories work themselves off.

    So we may be looking at a recovery in 2011-12. Probably not before.

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