IMF Report: Housing still way overpriced

Fascinating analysis from Vladimir Klyuev analysts at the IMF, titled What Goes Up Must Come Down? House Price Dynamics in the United States

I found the charts at the end of the report particularly compelling — they utterly demolish the calls for a real estate turnaround we heard last week from people who should know better.

Even if you do not want to accept the premise of the 4th chart’s — a mean reversion and overshoot — the first three charts make it hard to argue that we are any where near a bottom.


Price Index, Single Family Existing Homes



Real Home Prices and Rents



OFHEO Purchase Only Price Forecasts


Home Price Simulations



What Goes Up Must Come Down? House Price Dynamics in the United States
Vladimir Klyuev
IMF, July 1, 2008


What went up continues to go down
The Economist, July 26, 2008

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  1. Gerg commented on Jul 28

    That these graphs are not on a logarithmic scale makes me suspicious. The first one in particular sure looks like a plain old exponential growth which is exactly what we should expect to see.

    It’s an old trick to graph normal exponential growth on a linear scale and point to the recent history and say it’s out of whack with the long tail.

    BR: Out of whack with the long tail? WTF? Do you have any idea what the Long Tail is?

  2. Steve Barry commented on Jul 28


    Here is Shiller’s famous chart from the Times in 2006. It is inflation adjusted back to 1890. I have posted this several times since January. I’d love an official update from Shiller, but can’t find one or get one. From Shiller’s monthly data, which Barry posts, and the S&P website, I calculated the index in the chart currently stands at about 170. That implies another 40% drop or so.

  3. mephisto commented on Jul 28

    Hey Barry…who are the housing bottom callers of last week “who should know better?”

    Northern Trust?

  4. Sailorman commented on Jul 28

    Rent in chart number one is lower than it should be because many more people bought rather than rented during the last 9 years. I think the value of comparing two charts, both influenced by low interest rates in opposite directions, is minimal.

    If chart number 4 is accurate, won’t that predict Armageddon?

  5. Chris commented on Jul 28

    Here is a more updated Case-Shiller graph, zoomed into the last 20 years, with data up to June 2007:

    This also implies approximately another 40% drop, perhaps closer to 30-35% today. Of course I agree we will overshoot in real terms. Furthermore, this is the national graph; all bubble zones have considerably farther to drop. It is simply amazing how people can ignore this simple evidence when bottom-fishing.

    We will not bottom until it is generally believed by the public that housing only goes down.

  6. mark mchugh commented on Jul 28


    Chart four is frightening, and I would dismiss it as alarmist, if I could figure out who was going to provide the financing to stop the slide.

  7. JustinTheSkeptic commented on Jul 28

    mephisto, the bottom callers that I believe Barry is talking about are Barrons and CNBC guests.

    Great work Barry. I just wonder if the common citizen was this unaware of things back in the late 1920’s/early 30’s?

    Seems as if the shear magnitude of the problem is making most to misbelieve???

  8. CNBC Sucks commented on Jul 28

    Does anybody know if during the Great Depression, market observers looked and called for the bottom of housing, stocks, and other asset prices – except oil, of course, since that has clearly topped ;) – as much and as often as they do today? This is a serious question, I would like to know. My hypothesis is that the denial reflex in our society is so strong regarding every problem in our economy that the downward trends will be slower than other down economic cycles and thus so will the recovery. I am hoping we are in for something much more gentle than the Great Depression, but I find it disturbing so many people want to declare problems (whether its housing, financial system, energy, etc.) solved and rebury our heads in the sand.

  9. Steve Barry commented on Jul 28

    Great work Barry. I just wonder if the common citizen was this unaware of things back in the late 1920’s/early 30’s?

    They are not only unaware now, they have been fed the wrong information by CNBC and their guests. There was nothing remotely similar to CNBC in the 20s for the masses.

  10. S commented on Jul 28

    Averages are deceiving. Sab Fran is the canary int he coal mine. NYC where the prices are still outlandish has at least 20-30% with theat percentage increasing the more expensive the property.

  11. mephisto commented on Jul 28

    Justin…thanks, I’d forgotten about Barron’s and noted just recently that the Northern Trusters (Kasriel, Bangalore, et al) found positive surprises in the last batch of home data and thought maybe they were included.

  12. Martin commented on Jul 28

    Does this mean I should hold off on buying a house right now?

  13. John Borchers commented on Jul 28

    It may be incorrect to assume the housing bubble is over.

  14. DDK commented on Jul 28

    Martin — if you are buying a house you can afford that you intend to raise a family in, no it doesn’t. If you are buying a house as an investment, or a starter house and hope to move again soon, yes, it probably does.

    My wife and I are somewhere in the middle — which means we have been casually making offers on houses below market price for the past year, and will continually doing so until we get one. We understand we’ll most likely miss the bottom, but are OK with that — and we’re OK with renting for five or ten more years if we don’t land one at the right price.

    We don’t make insulting offers, though. That’s a waste of everybody’s time. So far we have been in the middle of the pack — below the people that don’t know how bad things are, and above the bottom-fishers. It’s a nice place to be — it means we’ll come out on top when there are nothing but bottom-fishers left, which can’t be tooooo far off from the market bottom.

  15. Francois commented on Jul 28

    “It’s an old trick to graph normal exponential growth on a linear scale and point to the recent history and say it’s out of whack with the long tail.”

    Does that mean that, in reality, house prices were sorta normal during recent history compared to the long tail?

    Not really, right?

    So, whether the data is represented in log or exponential, the relationship between recent prices and their historical averages (or median? Does anyone use median?) is still valid.

    Also, I think graph #4 may neglect several important factors:

    1) real wages stagnation, which has been persistent for so long that house affordability is worse than it appear to be. Non-existent wage growth may be just what shareholders and CEOs want, but one has to wonder how much good it’ll do to the economy without easy credit and tougher bankruptcy laws.

    2) Furthermore, add to wage (non)growth the flaming shame of ever increasing education costs, and ask yourselves who among first time would-be buyers will be able to purchase a home anytime soon without a drastic drop in home prices.

    3) Finally, should oil prices stay at > 100$ USD for a long time, who will want to buy a home in suburbia?

    I’d be curious to see what assumptions were built into their model.

  16. Observer commented on Jul 28

    Barry, I’m sympathetic to the views taken by the charts. But let me play devil’s advocate for another viewpoint which I suspect has at least a minor degree of merit. It focuses less on housing prices and more on rents and income: maybe rents are depressed because average incomes are depressed. Maybe the return to equilibrium will have less to do with housing prices falling, and more to do with wages and rents increasing. And corporate profit margins declining.

  17. david zaitzeff commented on Jul 28

    Question for you folks who have some knowledge and may be able to think ahead. Lets assume that housing is overpriced by 25-30% and is going to fall by that amount, unless the US hyperinflates, which I assume we aren’t doing at this time.

    Housing prices falling means that all those CDOs are going to fall in value, and so will the plain old home equity loans and the portfolio of every bank in terms of their mortgages. I could be wrong, but if housing prices fall by 25%, won’t that mean that every US bank will face a run and become insolvent? The FDIC would consume all their resources handling simply WaMu, and WaMu is likely to be soon, it seems to me.
    WaMu is only 1 of about 8000 banks or thrifts that the FDIC insures.

    I’d like to know where my reasoning is wrong.

  18. crash commented on Jul 28

    He is right but he is forgeting a very improtant issue. They have no choice but to come down. 45% of ALL NON CONFORMING HOME LOANS ARE IN CALIFORNIA, 17% FLORIDA.

    The Home affortability index.
    Median priced priced homes and median HOUSEHOLD income in California is still below 20%. The only other time was in 1988 when it droped below 20%. THEN THERE WAS A PRICE CORRECTION AND IT RAISED TO 40%. It stayed at 40% until 1997 when Alt A loans were introduced to help with over priced housing. It dropped to 12% in 2007.
    With conforming guidlines and modest help in loan amount size from fha and Fannie/Freddie – THE INDEX WILL HAVE TO CORRECT TO 35% TO 40%.
    The midwest index is 75%. So a minority of the loans performed were stated, high LTV yes but there is enough incomes to offset this. 5% correct max, that is why prices in the midwest have remained constant.

  19. Frank commented on Jul 28

    So if all of the displaced people from their foreclosed homes start renting, shouldn’t rents begin rising based on supply/demand? Notice the acceleration in rents during the 1975-1985 period. Perhaps the rents and home price lines begin to converge towards each other…just another perspective.

  20. Gerg commented on Jul 28

    Sorry, didn’t mean “long tail” to refer to the normal distribution. I just meant that visually it always looks like an exponential growth curve has a sudden spurt towards the end.

    The schiller graph is inflation-normalized which is fascinating. However I wonder how much of that is because of our official inflation numbers being understated for the last ten years. I wonder what that curve would look at comparing housing prices against a basket of commodities.

    For that matter the spike in oil prices should cause a spike in real estate, no? It takes a lot of energy to build a house and oil becoming expensive is expected to raise inflation which should show up as higher real estate prices too.

  21. david zaitzeff commented on Jul 28

    you are suggesting that I/we assume that every bank that has mortgage exposure Cal and Florida is at risk and those banks that have mtg only in the NE or Midwest are safe?

    Lets assume a price drop in Cal housing of 40%. How many banks go under; how does the FDIC fund their liabilities; what does that do to the national economy and housing prices in the midwest?

    the situation doesn’t look safe to me. It looks like the US gov will have to soon “bailout” the FDIC, and do other things that are inflationary, and then the yield curve will really and seriously invert and then, there will be the end of banking as we know it.

  22. Mark E Hoffer commented on Jul 28

    CNBC Sucks,

    see if this helps..

    *Interest-Only Mortgages, Then and Now*

    Interest-only mortgages? ARMS? Stratospheric valuations?

    These are strictly 2005 phenomena, right?

    Not exactly. Although Interest-only mortgages sound so 21st Century sophisticated, they didn’t debut anywhere near 2005. The truth is, they actually showed up before the most pivotal economic event of the last hundred years.

    That’s right, the Great Depression. A recent article in the Wall Street Journal had this to say: “Interest-only mortgages were the *standard mortgage in the 1920s*, but they disappeared during the Great
    Depression, and for good reason … the drop in real-estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since.”

    Like stocks, real estate was a speculative favorite of the Roaring Twenties’ investor. To control as much real estate as was humanly possible-to leverage their money to the hilt-these “can’t lose” investors needed a mortgage device to accommodate their aggressiveness. And interest-only mortgages filled the bill.

    IO loans provided easy entry into a house: You simply paid the mortgage interest, which freed the rest of your money for other investments. That part of the loan usually lasted five years or so, at which time you’d
    either refinance or stay with the original terms of the agreement. Those terms called for a reversion to a fully amortizing loan, except now on a somewhat accelerated basis.

    In other words, in the initial years of an IO loan, your money only went toward /controlling/ the property. Not /owning/ it.

    So what happened to these and other mortgages after the first Black Monday hit on October 28th, 1929? Three things:

    * First, just to survive, people withdrew their money from the banks
    en masses.

    * That meant banks severely curtailed their lending, and that
    included refusing to refinance any mortgages-especially
    interest-only-that came due. /And that was in addition/ /to
    calling loans in early/.

    * Without the possibility of refinance-and with all that lost income
    from all those lost jobs-Americans faced foreclosure, also en masses.

    But that was yesterday, right? It has no actual bearing on today. None whatsoever.

    *Unless You Start Noticing The Eerie Similarities*

    Since real estate remains the sole surviving mania of the wild 90s, it stays the focus of investors. And that’s led banks, like Wells Fargo, to continue focusing on real estate investors.

    Back in 2001, Wells Fargo was the first to resurrect the interest-only mortgage. To hear the bank tell it, it wasn’t because people were desperate. “Actually, it’s almost the converse of that. Many borrowers want to take their additional cash flow and invest it one way or another,” observed Brad Blackwell, the national sales manager for Wells Fargo Home Mortgage…
    nice url..

  23. kerry commented on Jul 28

    You have to factor in the change in average house size and upgrades such as energy efficiency, a/c, etc. Over time I am sure things will go the other way re average size over time, but avg house size is 66%> 1970.


    BR: Yes.These larger homes are more expensive to heat, cool, maintain.

    So when you factor those things in, shelter has become even more expensive, regardless of price.

  24. Lord commented on Jul 28

    These seem realistic, about another 15% to fair value. An additional 15% to oversold usually comes about through inflation combined with price stagnation which at 5% a year won’t take long. 2009 or 2010 should be a good time to buy but it is probably not too early to start looking if you are patient and are looking for a good buy since the variance in sales is often 10%.

  25. kerry commented on Jul 28

    As of july for us total probably 5-10% to fair value based on my simplistic calculations. Unfortunately, my simplistic calculations are a lot better than most of the crap i read.

    California is a mess, but any idiot who bought in Cali after 2003 (and didn’t sell i guess) doesn’t deserve their probs but shouldn’t be surprised. I think when I was there they had a real estate agent in Malibu for every 50 residents.

  26. kerry commented on Jul 28

    Disagree. Figure 12 is gonna be off. I just wish I knew more about the issues, but anyone living in the US knows what these numbers are missing- consideration for size changes, upgrades, energy changes, urban renewal, etc. You also have to divorce the bubble markets from other markets.

    Man, how did I go from the bear to the bull?

  27. Lord commented on Jul 29

    I would say these are primarily about bubble areas as non-bubble areas only increased nominally in cost, so it is probably already a good time to buy in non-bubble areas, at least if they aren’t dominated by a declining industry like autos. It is only the bubble areas that need to or can adjust in price, though some of the non-bubble areas will have problems with inventory that only time and population growth can absorb.

  28. Jim D commented on Jul 29

    Fascinating, reading all these normally bearish comments talking about how housing isn’t as bad as all that.

    It’s as bad as all that.

    Let’s go take on a few of the greatest hits:

    “if you are buying a house you can afford that you intend to raise a family in,” (it’s ok to buy). That’s just dumb, but let’s address it: it seems probable that just about every house is going down 10% in price. That’s 30k, 50k, 100k in price. I don’t know about you, but it takes me a pretty long while to put that in the bank, it’d be a shame to waste it by buying in a declining market. Better to wait a year, and rent in the meantime. After all, sometimes you have to sell, even if you intend to live there until retirement – you’ll realize the loss if that happens, but even if it doesn’t, do you really want to waste six figures of cash unnecessarily?

    “non-bubble areas only increased nominally in cost”: In absolute terms, yes. But remember that in much of the non-bubble areas, population is declining, and economies stagnating. So it’s quite possible that the bubble kept prices unnaturally flat. Check rents – if it’s cheaper to buy than rent, you’re pretty safe. If not…

    “You have to factor in the change in average house size and upgrades”: Shiller’s price graph does factor that in. Also, the rent graph does as well. Sorry, nice try, though.

    “So if all of the displaced people from their foreclosed homes start renting, shouldn’t rents begin rising based on supply/demand?” : Yes and no. Never been in real downturn, have you? Think “household destruction” – kids move in with parents, people take on borders, immigrants return home, the number of independent households contracts. Already starting to happen.

    Look at that fourth graph. Now, look again. Now, imagine what’s going to happen when that graph comes true. Invest accordingly – wishing it won’t come true hasn’t helped so far, it won’t help now.

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