Anders Geertsen Ph.D
Contributing Writer
instructor@mywealth.com
It’s that time of the month again – to revisit the fresh Case Shiller data. As I wrote a few weeks back, Case Shiller is one of the most reliable measures of developments in the housing market. That’s because it measures repeat sales, so you get a consistent set of houses and can measure at what prices they sell and how it changes over time. (You can find the data here.)
*****Question of the Week! *****
(Don’t miss it….Chance to Win a Free Investing Course by Emailing Me Your Answer. 5 Names will be Randomly Picked and named as winners. So here's your question: The Social Security system is in very bad shape and there will have to be major changes made to this system. What changes do you think should be and will be made to Social Security? A) No change B) Privatization C) Semi-Privatization D) Eliminate Social Security E) Complete Socialism
The new Case Shiller numbers came out last week and for the housing optimists they were not encouraging. The price drop actually accelerated from December to January, and the 20-city index is now approximately 30% below its peak in 2006.
Many people (especially real estate agents) think that “now must be the bottom”, as they have thought for the past year or so. But anyone who bought a “bargain” in the spring of 2008 is now sitting on heavy losses. A 30% drop is a lot, but unfortunately the housing bubble in the past decade was so momentous that it will take an equally momentous decline to correct prices and come back down to historic norms. Take a look at the chart below (of the 10-city Case Shiller data, going back to 1987) and tell me if you really believe the price drop has stopped now!
.bmp)
Let’s take a deeper look at one market in particular: San Francisco. In my article a couple months back, I predicted that San Francisco, which was then at index 135, would fall to index 125 in the February Case Shiller data. But San Francisco fell down to that level already in January, one month ahead of my prediction. So if anything, the housing crash in the Bay Area is accelerating, and the latest month-to-month drop is around 4.5%, significantly more than the 3% decline it had clocked in the months prior.
So where does this leave us? As I’ve said before, Case Shiller numbers need to come down to 2000 levels. In certain states and metro areas, they are already there. You can now buy a house in Michigan and Ohio for prices that are at mid-1990’ies levels. So if you live in that area and currently rent, and you have a sound financial situation and money set aside for a down payment, I would look at what’s on the market and start shopping around. You may find a house for sale that would cost you less per month (in mortgage, taxes, maintenance) than it currently costs you to rent.
Check out our personal finance course to learn more about managing your finances how to build a cushion of savings and purchasing a home.
Moreover, if you’re looking in Phoenix, Dallas and certain other areas (look for those where the Case Shiller index is less than 120), you may be able to find a bargain foreclosure. The catch here is that prices are dropping so violently in some areas (Phoenix, Las Vegas) that even if the market has now reached fair value, prices are almost certain to overshoot to the downside. What’s more, the employment outlook in Phoenix and Las Vegas continues to decline which will put additional pressure on prices.
However, apart from Michigan, Ohio and a few other areas, it is still too early to buy.
Most parts of the US are still overpriced (e.g. San Diego, Miami, Boston, Chicago, Seattle, Portland) and some are even ridiculously overpriced (New York, Washington, Los Angeles).
It is an easy bet that if you buy a home today in New York or Los Angeles, you will be sitting on a significant loss a year from now, and probably even 5 years from now. Prices in those cities need to fall another 30% on average before they reach fair value.
Last year I predicted a peak-to-trough drop in the Case Shiller index of approximately 40%, from a peak of 206 to a trough level around 120. (Recall that the index is fixed at 100 in January 2000, so that would put it back to 2000-levels, adjusted for 2% annual inflation). At the time I made that prediction it was a very bearish view (most bets were around 25-30% drops).
However we have now already dropped 30%, and the price decline is only accelerating.
The current Case Shiller reading (January 2009) is 146, so by my estimate the index has another 18% to fall. Lately, analysts across Wall Street have gotten much more bearish, and my prediction now looks almost optimistic (several analysts expect Case Shiller to drop 30% from here, for a total peak-to-trough drop of over 50%). For a well written analysis (that expects a further 34% decline, going back to 1997-levels).
The bottom line is that prices are going lower, and in many areas they are going a lot lower. Unless you live in Michigan or Ohio (and a few other areas) you are almost certain to lose money if you buy a house now. The good news is that with the speed of the collapse, it won’t be long before housing becomes affordable again. If you wait a year or two, you may have some very good buying opportunities coming your way.
Contributing Writer,
Anders Geertsen Ph.D.
