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XMFSinchiruna (26.53)

The Housing "Recovery" in Context



September 21, 2009 – Comments (27)

Investors turned giddy on housing-related equities last week after data recorded a sixth consecutive increase in housing starts to a seasonally adjusted 598,000 units.

This chart, however, provides visual context for where these data really fit into the long-term picture. [In previewing the post it appears to be cut off to the right, which affects formatting for the entire post. I will instead post this first chart to the comments section below.]

This uptick is of course a welcomed change of direction, but please consider that without the $8,000 first-time buyer credit these gains would not have been possible. If the program is extended as was being discussed last week, we can expect some momentum behind these improvements, but it's not natual momentum ... and therefore remains vulnerable to abrupt corrections. One has to wonder, furthermore, how many homebuyers are now buying because of the program that will A.) have a household member lose a job in the next year, or B.) were only marginally in a position to buy and therefore pose a higher risk of eventual default. I have the same complaint about cash for clunkers, BTW ... that enticement can lead people to overextend themselves. Everyone loves a deal, whether we can afford it or not.

I'm certainly not suggesting that home construction activity needs to approach pre-bust levels to constitute a legitimate and sustainable recovery ... not by any means! I'm simply reminding folks to consider the government's hand in the early stages of this reversal, and to think long and hard before deeming the improvement sustainable.

I will consider investing in a home a good deal once the mean home price measured in gold matches at least the 1980 low and the longer-term, pre-fiat historical baseline of about 100 ounces of gold. This is but one basis for my continued expectation for another 50% depreciation in USD home prices before this crisis will have found a true bottom.

I also consider it entirely reasonable under the circumstances to expect the ratio of median home prices to median income to return to the pre-boom range.



27 Comments – Post Your Own

#1) On September 21, 2009 at 10:36 AM, XMFSinchiruna (26.53) wrote:

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#2) On September 21, 2009 at 10:47 AM, dudemonkey (53.50) wrote:

Excellent post.  I like the idea of expressing housing prices in terms of gold.  That really helps factor out fiat currency shenanigans.

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#3) On September 21, 2009 at 10:58 AM, cmfhousel (92.20) wrote:


 What's the date on your price-to-income chart? I believe the ratio has indeed already come down close to pre-boom levels:


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#4) On September 21, 2009 at 11:09 AM, ReadEmAnWeep (86.74) wrote:

Good info. It does look like housing needs to go back to 100 ounces of gold.

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#5) On September 21, 2009 at 11:23 AM, portefeuille (98.82) wrote:

(from here)

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#6) On September 21, 2009 at 11:48 AM, AvianFlu (< 20) wrote:

As someone with 15 years as a Realtor, I can tell you that when prices inflate or deflate they eventually regress to a trend line that is about the rate of inflation plus 1%. So there is plenty of room for further deflation. Many houses that are bank owned have not hit the market yet. The repo process takes a long time there is also a lot of speculation that banks are intentionally holding the properties off the market until sales conditions improve. That may or may not be a wise idea.

Important concept: Whether house prices inflate or deflate, they typically overshoot the trend line when correcting. A smart and patient real estate investor can take advantage of that phenomenon.

As for me, I prefer investments that don't require outlays for heat, maintenance, utilities, and taxes.

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#7) On September 21, 2009 at 11:51 AM, leohaas (29.98) wrote:

Nice post. One question, though:

"This is but one basis for my continued expectation for another 50% depreciation in USD home prices before this crisis will have found a true bottom" (emphasis mine)

 - you like to calculate in gold
 - your chart shows we are now just above 200 ounces
 - the historical baseline is about 100 ounces
 - you are bullish on gold and bearish on the USD
don't you mean a 50% depreciation in gold?

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#8) On September 21, 2009 at 12:13 PM, XMFSinchiruna (26.53) wrote:


I tried to post another chart that failed to embed, showing the ratio dipping just below the 4-mark, while the historical average going back a couple of decades was just a touch over 3. Another data set showed We still have a bit to go on the affordability front before we can claim we're to pre-boom levels. 

The chart you post sets 1987 as the base ratio of 1. That's a very limited data set from an historical perspective. 

Here's a look from census data going back to the mid-70s.

This chart through October 2008 may be dated, but also shows how far we had to go before reaching the historical norm.

This chart is informative as well for anyone tracking Case Schiller.

I would expect median house prices to income ratio to at least reach 2.7 before buying interest could return in earnest absent government handouts.

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#9) On September 21, 2009 at 12:16 PM, floridabuilder2 (98.23) wrote:

Home prices aren't dropping another 50%...  in pretty much all the markets I track they are leveling out and that is including foreclosure sales.  When looking at historical data you are not taking into consideration financial products for buying homes.  There was a time when you needed at least 20% down to buy a home and that acts as a regulator on home pricing.  I could provide you an endless amount of data throughout Florida in which people today are buying homes with 2% down.  In fact the median down payment in most of the communities I am looking at is 10% down.

So if you are going to do a comparison of gold vs. housing, I would take into consideration leverage.  By the way I still see zero down puchases of homes today

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#10) On September 21, 2009 at 12:20 PM, cmfhousel (92.20) wrote:


Thanks for the clarification.  

Do you have a link to the chart showing we're just below the 4 mark? 



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#11) On September 21, 2009 at 12:24 PM, XMFSinchiruna (26.53) wrote:


No, I meant USD. :) I see a huge reduction in the nominal USD home price by the time this reflationary experiment in depression-dodging proves to be a disaster. Perhaps not 50% more in USD terms depending upon the timing of currency-driven inflation, but the purchasing power represented by today's USD home prices will be chopped in half by the time that price-to-gold ratio returns to the 100-ounce mark.

This is why I have advised my friends that express interest in purchasing a home to park their down deposit in gold and continue to await the double-whammy opportunity of cheaper nominal prices and higher gold prices before taking the plunge. The difference for those of my friends who listen will make the $8,000 enticement look like chump change.


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#12) On September 21, 2009 at 12:25 PM, cmfhousel (92.20) wrote:

I only ask because an updated price-to-income chart shows we're back to roughly 2001 levels, which would be about 2.8 on your chart. 

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#13) On September 21, 2009 at 12:26 PM, XMFSinchiruna (26.53) wrote:


I was just looking for it, but need to keep writing first. :)  Let me get back to you.

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#14) On September 21, 2009 at 12:40 PM, davejh23 (< 20) wrote:

floridabuilder -  I've seen home prices leveling out as well.  However, in my area, bank-owned homes are selling for around $66/sq.ft...or about 66% below our peak.  However, if you're going to discuss financing differences, you have to consider the possibility that mortgage rates could rise significantly.  Long-term averages are closer to 7-8%, and the low rates of the last decade have been abnormal.  Every 1% increase in mortgage rates decreases affordability by about 10%, so if rates increase to 10% in the future home prices could easily fall 50%.  This would put prices for existing homes FAR below the cost of construction though, and builders would probably stop building or start building MUCH smaller homes.

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#15) On September 21, 2009 at 12:55 PM, XMFPhila100 (91.79) wrote:

While this all may be completely rational, these are irrational times. None of this, for example, mentions the government's ability to artificially hold or increase home prices at current levels with things like tax credits, mortgage assistance, etc.

The very last thing the government/Fed needs now is for home prices to fall even further, as this would create more social discord and destroy consumer spending, so they'll do everything in their power to stop this from happening. This is real politik at its finest.

Whether or not you think this is the right thing for the government to be doing is another issue. Unless you elect a majority of libertarians into office, government support of home prices will likely remain in some form. So if you're waiting for home prices to fall to historical gold levels or some such thing, stock up on Cup 'o' Noodles now. You might be waiting for a long time. 

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#16) On September 21, 2009 at 1:00 PM, floridabuilder2 (98.23) wrote:


in most areas of Florida that I follow (I4 corridor Jax-Orlando-Tampa) the non-builder transactions are leveling off at $75 square foot.  This area probably was $125 in Jax, $150 in Orlando and $150 in Tampa so a 50% drop.  I agree that interest rates are another regulator on what people will pay.

Sinchy was making a point looking at macro data, but is always the case (as the bears found out the last 6 months) that is only 1/2 the story.  the combination of house size, the construction of a house, interest rates and financing add multiple layers of complexity.  That is why I take all macro data with a grain of salt, especially comparing home buying habits of the early 20th century to now

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#17) On September 21, 2009 at 2:24 PM, XMFSinchiruna (26.53) wrote:

The latest census data released earlier this month indicates median household income fell 3.6% in 2008 to $50,303. rather than quibble over 2009's impact on this figure, we'll just carry the 2008 number over with the assumption that it's abundantly optimistic.

The NAR has median home price at about $179,000 as of July.

This yields a current ratio of 3.5.

Certainly, affordability has come a long way from the peak, and these median measures are wrought with trouble as reliable means of analysis in a market so skewed by regional differences, etc., but ultimately I agree with this blogger that we still have some way to go.

Based upin the long-term data and my read on the looming foreclosure situation as both refinanced and new loans drift into distress, I am still targeting a ratio of 2.7 as a reasonable expectation for spotting a true bargain in real estate given in the context of a disruption of the scale we're experiencing. Of course, unknown factors include timing of inevitable interest rate hikes and the wild card of government stimulus, but even those actions have consequences relating back to the currency that those interested in timing a real estate purchase can protect themselves from. :)

Fool on!


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#18) On September 21, 2009 at 2:57 PM, leohaas (29.98) wrote:

Floridabuilder: welcome back here. I am looking forward to read your posts and comments again on CAPS. Your housing experience and how you write about it makes it worth following CAPS blogs (Unfortunatley, most of what our fellow CAPS bloggers write is bull0cks or utopian).

Sichurina, you are one of the few exceptions. I read your blogs as well, even though I don't always agree. Thanks for all your great work here on CAPS.

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#19) On September 21, 2009 at 3:56 PM, davejh23 (< 20) wrote:

"The NAR has median home price at about $179,000 as of July.  This yields a current ratio of 3.5.

Based upin the long-term data and my read on the looming foreclosure situation as both refinanced and new loans drift into distress, I am still targeting a ratio of 2.7 as a reasonable expectation for spotting a true bargain..."

Sinch,  Mortgage rates have been abnormally low for the last decade.  Since most buyers ignorantly buy based on the payment alone, I don't see us reaching this 2.7 ratio until mortgage rates increase significantly.  I personally believe that we could have a period of abnormally high interest rates, after which mortgage rates will settle around 7-8%...and that they'll never reach 5-6% again.  This will be good for those with large down-payments, and bad for those that don't know how to save (the huge majority).  Builders will be forced to stop building 4,000 sq.ft. homes, and will start building reasonable homes again...I think we'll see fewer luxury cars on the road in the coming years as well, as many of these purchases in recent years were financed with fake home equity.

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#20) On September 21, 2009 at 4:09 PM, AvianFlu (< 20) wrote:

I think I can explain why house price depreciation is greatly slowing and things may actually be picking up:

1) The fed is keeping rates artificially low, thus letting buyers qualify for larger mortgage amounts.

2) The fed is redistributing the wealth a la Karl Marx and taking money from people like you and giving it to "first time home buyers" in the form of an $8000 gift to buy a house. This drives up market activity and therefore prices. By the way, to qualify as a "first time buyer" you only need to have not purchased a house in the last 3 years. By that measure most of us are first time buyers.

3) Banks are delaying putting their repo houses on the market in hopes that the prices will start rising due to having less available inventory on the market.

 All of this points to an attempt to reflate the housing bubble. This will not work and merely prolongs the grief. This is a clear example of how the real estate market working on it's own is more likely to provide stability than well-intentioned central planning.

Ultimately, as inflation rears it's ugly head the fed will be forced to raise interest rates. As a result, housing will become less affordable and house prices will drop.

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#21) On September 21, 2009 at 4:43 PM, bullnada (< 20) wrote:


Would love to here your thoughts on the option arm and neg am loan resets this year here in cali. So many higher end homes with these loans.

Wont those loans do more damage than sub-prime?

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#22) On September 21, 2009 at 5:43 PM, AvianFlu (< 20) wrote:

I remember when I first got into real estate taking listings that had loans on them at 17%. They were negative amortization and even though the owner had lived there for 10 years they owed more than the original loan amount. Are we there again?

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#23) On September 21, 2009 at 9:18 PM, floridabuilder2 (98.23) wrote:

avian, banks are not delaying putting REO on the market, what is happening is #1) it is becoming burdensome to close these deals because the banks are so screwed up internally (overwhelmed) and I have heard a number of realtors saying that the banks are screwing people out of commissions so now realtors are steering clients away from foreclosures.  Now this is Florida, so who knows about other regions. 

bullnada, as long as new housing stays historically well below the norm, interest rates remain extremely low and people are able to still today get 2% loans then the market can absorb the continuous stream of defaulted properties.  many of the ultra bears predicted a nose dive to purgatory, but i've always seen a really bad recession (not depression) in which we just kind of hobble along.  I think people would be shocked if I told them in a lot of A and B submarkets land prices for finished lots have doubled in the last 9 months.  I try not to look at the big macros that get tossed around on CAPs but what is going on at the transactional level.  There is a lot of private equity now moving into the land market and there are a lot of investors moving into the housing market, buying and renting.

Europe has had high unemployment for years and there are plenty of wealthy people, Japan might have had a lost decade,  but there are a lot of wealthy people there too.  In the end the macro numbers will look ugly, but as I said a year ago 9/2008 investing all the way down to the bottom and up... you will make far more money then hiding in a bunker.

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#24) On September 21, 2009 at 11:09 PM, AvianFlu (< 20) wrote:

You make a lot of good points. I would add that I have heard many of the repo properties have been trashed and it takes time and money to get them put in a marketable condition.

Normally I would agree that investing down to the bottom and up is a good idea. I have done that in the past with good results. However, I would argue that things are different this time in that the government is in an expansionist frenzy and will rob corporations of a larger percentage of their earnings, thus leaving a lot less for the shareholders. I point to companies like Ingersoll-Rand who have left the US for good in an effort to look out for the best interests of their shareholders. Also, the US is too risky due to the inflationary policies of the fed, whose recent behaviour is jaw-dropping and disastrous. It is prudent to take evasive action, if possible, to minimize exposure to the effects of rampant increases in the money supply. To me this means limiting exposure to US currency and also to US equities.

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#25) On September 21, 2009 at 11:19 PM, tonylogan1 (27.67) wrote:

FB – Good to see you back... I beg to differ, but the banks are not “overwhelmed” regardless of what they say. They were not “overwhelmed” when they needed to sell the houses in the first place… They just hired on more staff because it was profitable.


If foreclosing was more profitable than pretending to be overwhelmed and moving slowly, then the banks would be hiring people left and right to process the foreclosure paperwork.


I agree houses are not going to drop 50% nominally, mostly because the government will not allow that to happen, as they are currently on the hook for Trillions. They will come up with a way to print and there is no way national median house price goes under $100k again in my lifetime. I think it may still hit the 100 oz of gold measure though. (I’ll just be sure to have 100 coins lying around just in case)


One more note I’ll throw out there… There is a large group of buyers that have either learned their lesson on housing the hard way, or managed to avoid the bubble and will not get suckered into buying an overpriced house while prices are falling. Pretty much everyone that wanted to buy an overpriced house managed to already do that between 2004 and 2008.


Where I live (California), if you are under 30 and a “homeowner” you are likely a sucker (or at least kinda feel like a sucker somewhere in the back of your mind). You can’t convince reasonable renters out here that it is smart to spend over 50% of income on housing, and we will not do it! Starting to feel ranty…

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#26) On September 23, 2009 at 10:02 AM, SnapDave (46.84) wrote:

If you believe gold is worth 2000 (or USD worth half) then the ratios would indicate house prices are about right.  I don’t see houses going down another 50% except in a gross overcorrection.  But what do I know?  I’m not betting either way. 

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#27) On September 23, 2009 at 5:13 PM, floridabuilder2 (98.23) wrote:

Avian, my best man and best friend lives in china and is an aussie... so i always have a plan b ;-).... in the meantime a lot of interesting developments have taken place since March, I probably should have blogged some of them, but I have never worked harder in my life than I have in the last 6 months..

tonylogan, let me clarify, not banks in particular being overwhelmed but specific departments...  do searches on REO positions and FDIC positions... there just aren't a lot of qualified people to work through these assets

as far as prices continue to fall and people not willing to buy, we still have population growth, we have destruction of old stock housing such as the city of detroit and we have very favorable lending conditions (again I am seeing a lot of 2% down loans)...  i think you will have demand at least in florida when you are under 100 a square foot... and builders can now make money under a 100 a square foot...

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