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Why home prices will not stop falling when they hit the long term trendline



April 24, 2009 – Comments (5)

I have seen the argument made that once housing prices reach the long term trend they will stop falling.  I don't understand the stupidity of some people.

By definition the trend is in the middle.  If it was the bottom then it wouldn't be the trend it would be the bottom and the trend would be higher.

5 Comments – Post Your Own

#1) On April 24, 2009 at 11:03 PM, edbbear (< 20) wrote:

The trend line for housing is a chart of inflation adjusted prices for housing over a period of time.  The WSJ printed Shiller's chart today going back to 1890.  This is not an average over a set number of years.  The index is set to 100 starting in 1890 and it shows a pretty level trend from that period until about 2000. 

Certainly, when bubbles burst prices might come down below normal or fair value.  But it's not a given.  Personally, at this point I can't see prices falling much below the trend line because the government keeps propping up home values and everyone has to live some where.  We'll of course just have to see what happens.

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#2) On April 25, 2009 at 5:56 AM, saunafool (< 20) wrote:

everyone has to live some where

Oh, yes, the "everyone has to live somewhere" argument for home prices.

They don't have to own the place they live in. There is so much excess supply on the market, plus something like 3 million foreclosures coming onto the market this year, plus 500,000 or so new homes being built, plus rental vacancies quite high. There is no reason to buy until it is much cheaper than renting. It depends on where you are, but prices can fall a long long way in the former bubble cities.

Take San Francisco. At the height of the bubble, Bay Area median prices were $780,000 with a median household income of about $72,00. 11X median income! So what if prices have fallen 30%. The median house is still 7X median income. Prices could legitimately fall another 30% and they'd still be very expensive (5X median income) compared to the rest of the country (2.5X median income).

Furthermore, the deflation mentality is just kicking in. Here's an exercise. Go to the New York Times rent vs. buy calculator

Enter monthly rent of $1000. Then, assume whatever house you are going to buy will appreciate at 7% per year. Enter an interest rate on the mortgage at 5% and leave the tax rate and rental increases at the default numbers. How expensive does the house need to be before renting is better than buying for more than 5 years?

Using a wildly inflated estimate for home price appreciation (7% was typically used as a "conservative estimate" during the bubble years and was published as the long term historical trend by the National Association of Realtors) we find we can justify paying WAY TOO MUCH for the house.

In this example, buying is better than renting after 5 years, even if the house costs $600,000.

Now, do the same thing by assuming 0% price appreciation for the house. Now, what price does the house need to be to be a better investment after 5 years?


Now, assume the price will decline by 2% per year and rents will decrease 2% per year (the deflation mentality).


Mind you, my numbers are not too far from where the bubble cities were in buy vs. rent numbers. I had a friend living in a neighborhood where houses at the peak were selling for $700,000 and very similar houses were renting for $1400 per month. The rent barely covered the property tax!

No, prices will not hit bottom until it is cheaper to buy than rent. For that, there is a long way left to decline.

sf (housing bear for many years)

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#3) On April 25, 2009 at 6:16 AM, KamranatUCLA (29.53) wrote:


I agree with you 100%. I never bought a house...even back in late 90s when I could have afforded to buy a condo in southern california I still did the same calculations that you are doing and said to myself: forget it.

Back then the condo was $360,000 which I think was very expensive considering it was just a 3 bedroom condo in Santa Monica.

Now a 1 bedroom is $560,000. That 3 bedroom I was talking about is now 1.2 million.

This is the thing I don't understand. Do those places ever get sold?

Why would anyone pay $560,000 for a 1 bedroom apartment when he/she can rent one right now for $1400.

I am renting now for more than 10 years, my lanlord has risen my rent every year for 10%. I started at $990 in 1999 I think and now I pay $1450.

So back in 1998 no one could convince me to buy and now I am not convinced to buy..why?

1) Property taxes.

2) Maintenance, water bill (included in most rents)

3) Deposite gone.

4) Realestate commision paid. (money you will never get back and at 2.5-5% it's pretty high)

5) Interest on Loan is still high ( OK, it's tax deductible, but what if you don't have any income or steady income)

6) Long-term. I am renting for 10 years and I like this place. I like it because I know I can leave it any moment I like with 1 month notice.

Like I said there is something fundamentally wrong with this system because the amount of rent and the house prices don't match...many of the houses that are put for sale for decades here in Santa Monica are just for show...rarley someone will bite the bate...maybe an out of towner, but $530,000 for a 1 bedroom apartment in a 25 year old building with no view...give me a break.

This is just decoration price! I was shocked as you can imagine when I saw this price for that 1 bedroom just 2 weeks ago...and I laughed because 1) no one would buy it at that price 2) if someone buys it he has to be retarded.

So yeah...Suanapool...good and realistic post. I guess home owners don't like your post but you are smart and they are not! 

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#4) On April 25, 2009 at 10:52 AM, ralphmachio (< 20) wrote:

Nice of sauna fool and Kamran to point out the only market that I know of where you get a better long term deal renting than buying! The only way to make money buying and renting real estate is to claim a loss after 8 years!

Then imagine how a house that four friends and I could build over the course of nine months somehow comes out to over 500,000$ BEFORE the 3 1/2 X mark-up from the loan. Who wants to have a 30 year mortgage? Is that what we're calling freedom these days? Sure, have the American dream, it will only cost 30 years of your life, no big deal... Not to mention  taxes on something you never really own, EVEN if you do pay it off! It can be taken at any point, for very little reason, for very little compensation. We also see how in an emergency, your house can be invaded by police, or soldiers who can then remove you from that house, and disarm you as in Katrina, giving most Americans a false sense of security about their house and their rights.

 I was born here, and I've lived here for a while, but I don't identify with 70% of the rule-happy sheep that are the governments cheering section.  Buying a house is like marrying the government!  I'd say that is a risky move to make with the divorce rate on the rise, and our government in it's current state of affairs. 

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#5) On April 26, 2009 at 2:49 AM, KamranatUCLA (29.53) wrote:

ralph...I couldn't agree more.

I was born in Iran and I am always shocked how people here don't care about their houses. Maybe that's why we have weak communities, crimes, people moving all the time, non-stable teens who go city to city and end up messed up as adults, alienation and so on.

Back in Iran...even during the BIG ISLAMIC REVOLUTION houses were untouched. Houses are very respected all over the world except here. It's intersting how a revolution in Iran didn't affect the house owenreships but here banks play with people all they like.

MY father is jewish and my mom is muslim. we had a huuuuge house in Iran we 2 pools a car elevator that would end up in the living room so we didn't have to go up the stairs and the revolutainries didn't bother us at all. My dad was scared that they take teh house away from us but they didn't.

We should have something like that here. Buy a house cash and it's yours forever with no property taxes.

I mean it's crazy how you can work and work and work all your life and if you have a little car accident they can take your house away even if you have insurance (happened to my cousin, the other person had a broken hand).

Houses should be offlimit to should be a place of peace and once you own it it should be yours forever. If Iran can do it why not us???!! 

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