When Will Housing Hit a Bottom?

By: Anthony Smith

Have you wondered how much longer this real estate downturn can last? Or how much further real estate prices can decline due to the credit crisis? I have; but I could not find any hard data to support Wall Street speculation so I did my own research and what I found is we still may have a ways to go. I believe that the housing bottom, which is obviously inevitable, may be close but I do not believe we are there just yet and I have compiled the data to support this theory.

I began my research by going to the US Census Bureau and reviewing median home values from 1940-2000. I found that real estate from 1940-2000 has appreciated at roughly 6.4% per annum when unadjusted for inflation (2.3% per annum when adjusted for inflation) with the median home price in 2000 at $119,600. Then I took a look at the most recent median home value report issued by the National Association of Realtors. According to their website, the median home price when adjusted for inflation was $195,900 in February of 2008. Finally, I researched what the average annual inflation rate was from 2000 to February of 2008. According to InflationData.com, inflation has been approximately 2.8% per annum from 2000 to 2008. The aforementioned data has put in place the frame work to analyze the how much further real estate prices could decline during the credit crisis; and more importantly, how close we are to the housing bottom.

To determine where median home prices would be if they were to follow historical trends we have to take the annual appreciation when adjusted for inflation (2.3%) and add it to the average rate of inflation for the years 2000 through 2008 (2.8%). When we do this we get an annual growth rate of 5.1%. We then use the median home price in 2000 as our present value, 5.1% as our annual growth rate, and the current median home price as reported by the National Association of Realtors as our future value and calculate the number of years for this action to take place. This calculation equals approximately 10 years. One additional calculation would show that current median home prices should be roughly $178,000 to be in line with historic data.

So what does this mean?

There are a couple of ways to interpret the data. One could say that median home prices will remain at current levels for approximately two more years (2010). The other argument would suggest a further price decline of at least 8.7% before we come close to a housing bottom. Either way you look at it, we have experienced 10 years of appreciation in 8 years...using current facts and figures. I am of the mindset that prices will continue to decline throughout the short term for the following reasons:

*The current credit crisis is making it difficult for potential borrowers to obtain financing to purchase a house
*Buyers are sitting on the sideline waiting for housing prices to decline further before they buy...which in itself is causing prices to decline further
*Buyers are sitting on the sideline waiting for interest rates to decline further before they buy....which again is causing prices to decline further
*We have a number of foreclosures and bank-owned properties flooding the market which is increasing the supply of homes for sale while demand sits on the sideline
*Consumers spending reports show that consumers are putting off large purchases until the market as a whole show signs of improvement

In conclusion, I find it most notable to mention that Historic Housing Vacancies and Homeownership according to the US Census Bureau is actually in line today relative to the historic norm. Interestingly though, there is speculation that the supply of homes in the US is exceeding the need for housing when the data would suggest otherwise. The reason for the decline in housing prices is due to a substantial increase in houses for sale and a drop in demand for buying coupled with recent speculative prices and sloppy underwriting.....obviously. Warren Buffet has said that the markets tend to overshoot in both directions. This could suggest even greater than 8.7% pricing declines before a housing bottom. However, when taking into considering the current state of the market, current mortgage rates and motivated sellers, the data would suggest that 2008 just may be the best year since the US Census Bureau began compiling housing data to purchase real estate.

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