Maybe not so nonsensical after all

How far will house prices fall? Implications from the latest WSJ survey.

About 5 months ago, I posted a figure depicting the impending resets on subprime mortgages, option adjustable rate and Alt-A ARMs. Resonding to one comment, another reader made the following observation:

…a fall of 50% in [valuations on residential housing].


I have to say that a 50% drop struck me as implausible as well. But I thought I would re-examine this view in light of recent developments, and what the economists surveyed by the WSJ say.

First, consider the OFHEO House Price Index (HPI). In Figure 1, I plot the historical (purchases-only) index (blue line), the average forecast as implied by the March WSJ survey (red line). I also include the high estimate and low estimates.


Figure 1: OFHEO seasonally adjusted HPI (purchases only) (blue line), mean forecast from WSJ March survey (red line), and “hi” and and “lo” foreasts (teal lines). NBER-defined recession highlighted gray. Sources: OFHEO, WSJ March survey, NBER, and author’s calculations.

The two year high estimate is from James F. Smith of Western Carolina University and Parsec Financial Management, while the corresonding low estimate is from Maria Fiorini Ramirez/Joshua Shapiro of MFR, Inc. So while the average forecast is for continued price decline, there is a wide dispersion of views. Figures 2 and 3 depict a histogram of percentage changes for 07Q4/08Q4 and 08Q4/09Q4, respectively.


Figure 2: Histogram of forecast 07Q4/08Q4 price changes, in percent. Source: WSJ March survey.


Figure 3: Histogram of forecast 08Q4/09Q4 price changes, in percent. Source: WSJ March survey.

The histograms indicate not only a lot of dispersion, but considerable skewness in the 08Q4/09Q4 forecasts. These latter forecasts are not distributed Normally, according to the Jarque-Bera test statistic, using a 10% MSL.

In figure 4, I plot a detail of the OFHEO index, in log terms, normalized to the peak equal to zero in 07Q2. This graph implies that house prices in 09Q4 will be 8.4% lower (in log terms) according to the average forecast. The worst case scenario depicts a 25% decline. For some perspective, the forecast of UCLA’s Ed Leamer — who predicted accurately the 2001 recession — is also plotted (green line). Despite predicting a less than 45% chance of a recession, his forecasts imply a 17.3% decline in the OFHEO HPI. (Goldman Sachs’s Jan Hatzius, who has been prominent in the debate over the impact of bank losses and deleveraging (discussed here), did not provide a forecast. Update: I’ve been given a Goldman-Sachs research report dated 1 April which projects a 18-20% decline in the Case-Shiller price index.)


Figure 4: Log OFHEO seasonally adjusted HPI (purchases only) (blue line), mean forecast from WSJ March survey (red line), “lo” forecast (teal line), and Ed Leamer/UCLA Anderson School forecast (green line), all normalized to zero in 07Q2. Source: WSJ March survey, and author’s calculations.

Now, even the worst-case price decline does not seem that disasterous. But as has been discussed on a number of occasions, the OFHEO HPI (in this case the purchase-only index) has some characteristics which makes interpretation difficult. Most importantly, it measures the prices of houses that are financed with conforming loans.

What would be of interest is to know what the forecasted decline in the OFHEO index implies for the Case-Shiller index of house prices, which could be construed as being more representative (for debate, see [1], [2], [3]). I’m going to take a particularly naive and atheoretical approach, and use the linear relationship observed between log differenced prices, viz.:

dcsxr t = -0.018 + 1.754(dhpi t) + 0.610(dhpi t-1) + 0.302(dhpi t-2) + e t

Adj. R 2 = 0.72, SER = 0.0108, DW = 1.515, smpl = 1991Q4-07Q4.

bold face coefficients indicate significance at the 10% level, using Newey-West HAC standard errors (lag truncation = 3). csxr is the log Case-Shiller 10-city index, hpi is the OFHEO log HPI (purchases only), and “d” prefix denotes a first differenced term.

The regression is not a perfect one, but CUSUM and CUSUMSQ tests fail to reject the null of no structural breaks. After the first year of residuals, the 1-step ahead and n-step ahead recursive residual tests fail to reject at the 1% MSL.

Using this relationship to project out the implied decline in the Case-Shiller index for the 2008-09 period yields the purple line in Figure 5.


Figure 5: Log OFHEO seasonally adjusted HPI (purchases only) (blue line), mean forecast from WSJ March survey (red line), log Case-Shiller house price index (green line) and implied Case-Shiller 10-city index based upon estimated relationship with OFHEO HPI. Case-Shiller index monthly data converted to quarterly by arithmetic averaging on unlogged data. NBER-defined recession highlighted gray. Sources: OFHEO, S&P, WSJ March survey, NBER, and author’s calculations (see text).

The combination of the WSJ mean forecast, and the observed correlation over the 1991Q4-07Q4 period leads to an implied 40% log decline in the Case-Shiller price index (34.7% in percentage terms). (If one uses a static-no lag specification, then the implied drop is 34.8% in log terms.)

(By the way, the above results pertain to the 10-city index. The 20-city index is only available from January 2000 onward. Estimating an analogous relationship (in log first differences, using 3 lags), yields an Adj. R2 of 0.78. The implied decline from the 2006Q3 peak is 38.3% in log terms. Hence, while the 20-city index runup is less pronounced than the 10-city runup, the decline relative to peak is essentially the same.)

I certainly don’t want to assert that house prices will decline by 40% in log terms. What is true is if (1) the mean forecast for the OFHEO HPI is realized, and (2) the historical correlation between the OFHEO and Case-Shiller indices continue to hold, then a 40% decline in 10-city prices is implied.

One corollary of this result is that only a slightly more pessimistic than average forecast implies a 50% decline in house prices as measured by Case-Shiller, relative to peak (the “Lo” estimate implies a 84% log decline).

In the same post I referenced above, I was admonished by one reader, to this effect:

…You must understand that when Menzie serves up one of his Dishes of Doom, the Doomsters dig in, adding their own special spices to the meal.

Never let it be said that I do not take into account readers views. Hence, in order to present the upside scenario, let me observe that if the “Hi” case (which in 07Q4/08Q4 is 2.2 standard deviations above the mean prediction) is realized, then the Case-Shiller 10-city index will be only 9.6% below peak (in log terms), and less than half a percent lower than what it was at 07Q4.

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44 thoughts on “Maybe not so nonsensical after all

  1. cthomson

    There are plenty of ways to bet on either scenario. Anyone out there willing to put his money where his alorithm is? Details of bets would be interesting. Otherwise any discussion is the usual wanker’s tea party. This is why most people now focus on Intrade and ignore the polls.

  2. DickF

    One question no one seems to ask is “Why shouldn’t housing prices fall?” Every fall in price means that more first time home owners can enter the market. Are we afraid of affordable housing? Can it only be created by HUD or some other governmental agency?

  3. Charles

    And, of course, if falling home prices didn’t imply falling net worth, declining employment, and weak wages, the view of the world in the comment immediately above might have some validity.
    Unfortunately, the real world being the real world, falling home prices have implications for potential buyers as well.

  4. sjp

    Thanks for the very interesting work, Menzie. It is notable that even optimistic work along this line points to a 10% fall

    DickF: As a person looking to buy my first house sometime soon, I for one am certainly happy with falls in house prices. But I am more flexible in my choices (try to buy, rent for the time being, etc.) than people who recently bought a house. These people will incur major costs to change their housing consumption or default on their adjusted mortgage. Maybe this is why people seemed concerned about the housing decline: the people for whom it helps are flexible enough to adjust should the decline not materialize; the people for whom it hurts are not.

  5. DickF

    Guess what? Falling home prices are just that, falling home prices, nothing more. If you bought a home to live in and your income supported your monthly payment you could actually care less whether the builders, speculators, and flippers are making more or less.
    It was rapidly rising home prices that got us into this mess. Let’s just let the market bring us back down to earth.
    But let congress get its talons into the mess and you will see the whole thing torn apart.

  6. Buzzcut

    I was a skeptic, too, until I saw home prices in my area were off 10% in the last year. Unlike San Diego, they didn’t go up all that much in the first place.
    So I can totally believe that home prices in a place like California will be down 50% before this is all over, barring any bailouts.

  7. gaius marius

    i’d be happy to chime in as a current-renter-future-buyer as well, nominating myself to speak for millions. there’s nothing “affordable” about housing right now.
    i’m in northwest suburban chicago, renting a wonderfully rehabbed four-bedroom house for $2000/mo. taxes come to $550/mo, so my equivalent mortgage payment would be just $1450/mo. using a 30y fixed @ 6%, what kind of mortgage can a guy carry with that? about $220k, funding a $270k purchase with 20% down.
    the property was bought by the current owner in 2005 for $459k. the place across the street is currently listed at $419k.
    paul mcculley recently made an excellent point about what must broadly happen to compel cash-heavy buyers into the housing market again — and that is “positive carry”. that’s where housing busts normally find a price bottom — when the capacity for an investor to rent the property out for more than he must pay to service the underlying debt is restored. that’s where buying makes a lot of sense.
    we are a long way from that point in chicagoland. i wouldn’t at all be surprised if menzie has the eventuality ballparked at 40-50%.

  8. mike

    I found forecasts from the Case-Shiller data to be very sensitive to the specification of the autoregressive process. I’ve found substantial differences even for models with very similar AIC criterion. Although I’ve focused more on the regional markets, not the nationwide market.
    My big worry with these models is that they treat upside and downside innovations symmetrically. This problem is exacerbated by the fact that the Case-Shiller history doesn’t have nearly as much history on the downside as it does on the upside.

  9. Footwedge

    I’m with gaius – we sold our home in the Mpls west suburbs a couple years ago. Partly because we could see what was on the horizon (even though the real bubble here was in upscale condos) and also because we are considering getting a place down south. In any event, as we make up our minds we are renting a lovely home in terrific neighborhood in the city for $2000/month. It was purchased for $385K in 05 and is down about $35k now. I agree with Dick F and others here that prices need to come down. Prices clearly ran far ahead of ability to purchase. Renting or owning should be a cold business calculation and until the buying numbers work in our favor we’re renting. I also agree with Mike Shedlock that a large part of this fiasco in the first place is due to gov’t intervention through the Fed and GSEs. And now they are going to help solve this? Heaven help us!

  10. TempusFugit

    How did a man drown walking across a river with an average depth of one foot? Averages can be deceiving.
    According to Zillow, my home has appreciated 100% over the last 10 years and is only a few percentage points off its top value. Moreover this is generally true in my affluent, older, built-out suburb near Chicago.
    So if the average house price decline is 50%, and prices here decline little if at all, then I would expect to see areas in the country with price declines near 100%. Will we?

  11. The Snob

    As you compare rents and mortgage rates it is worth bearing in mind that the two do not operate completely independently of each other. Should mortgages return towards more traditional standards of underwriting, more people will be forced into the rental market, which may push prices up.
    Anecdotally, where I live (Boston), rents have appreciated relatively modestly over the past decade; 10-30% in an area where home values moved by 50-150% in the same time, while incomes rose by 20-40%. The availability of jumbo 30-year loans at rates of 6% or less and very little money down supported this.
    The interesting element here is what happens if banks tighten underwriting by requiring larger down payments. Not many people have the 100k handy to put 20% down on a modest 500k condo, even if they could cover the payments. So they’re going to rent, and in a place like Boston, where building is basically impossible, you’ll have increasing demand and steady supply. My guess is that rents could rise to meet prices more than prices fall to meet rents.

  12. GK

    Always remember that falling home prices hurt owners, but help first-time buyers who were previously priced out of the market. The purchasing power (and consumer confidence) of the first-time buyer actually increases.
    As time goes on, more young people enter the market, and can buy homes at lower prices.
    This may even translate to a slight increase in birth rates, as young people are more able to afford children.

  13. Anonymous

    The rental marketplace is determined by affordability, not by possible appreciation or “innovative” financing. Rents will hew closely to incomes, period.

  14. Elizabeth

    If prices fall 50%, then people will be reluctant to buy. You will not see a flock of first time buyers into the market. They will weigh the “advantages” of aquiring a property that will require maintenance and periodic repairs (roof, heating systems, siding, painting). They will not trust or remember that for a long time, home values showed moderate appreciation. That “moderate appreciation” tilted the rent/buy choice in the direction of buy. Remember what happened in certain areas during the run up – people thought home prices would go up indefinately until it all hit the fan? Reverse that psychology. If we truly have that magnitude of a correction, there will be both more landlords and more renters for the foreseable future.

  15. GK

    While the current real-estate induced bubble may unwind by 2011 or so, there are other Macro factors working against future appreciation even beyond 2011.
    1) Baby boomers will begin to retire and sell. Thus, sellers may outnumber buyers for another two decades.
    2) Places like California are undergoing a huge demographic shift, where white baby boomers are leaving, and Mexicans are moving in. This does not bode well for sustaining the demand of $1M+ homes. Plus, Mexicans will vote for leftist politicians, who will raise taxes and drive out businesses. CA home prices are thus doomed (even as NV, AZ, and OR will boom for decades due to Californian diaporas moving there).
    3) Technology will, slowly but surely, puncture the location premium. Homes in Silicon Valley and Manhattan are 3-4X the price of places 60 miles away. Advances in Telepresence videoconferencing, adoption of telecommuting within company policies, etc. will make a dent. We don’t need it to equalize, but it could reduce the Manhattan/Silicon Valley demand by 10%, which itself is a slice of demand these places can ill afford to lose.
    Thus, even if the present bust unwinds by 2011, I don’t see major gains in the 2011-2030 era either. Prices will merely match inflation, nothing more. In expensive areas, it will lag inflation.

  16. Tood

    “The rental marketplace is determined by affordability, not by possible appreciation or “innovative” financing. Rents will hew closely to incomes, period. ”
    Fully agreed. They will match incomes without a lag effect, as rent is more fluid in real-time market demand.
    One caveat I will throw in is that rents will match the income of the bottom 70% or 80% of people. The top 20% will always own homes, and their income gains may still be high while others are stagnating.
    This is why $1M+ home prices are not dropping. These people did not take out subprime loans, have diversified, multiple income streams, and did not buy beyond their means.

  17. Elizabeth

    1) Baby boomers are not necessarily going to follow the same patterns as previous generations. They will probably retire later (and certainly live much later).
    2) Poor Mexicans, certainly. But like every other wave of immigrants, eventually they start businesses, bet educated, etc. People who made it by hard work tend to be more conservative politically.
    3) Even with telecommuting, I would rather not live in Fargo, even if it is cheaper. Culture/education, socialization are strong reasons to locate in “popular” areas.
    4) Count on political disruptions in other parts of the world to send folks with bags of cash. The destination is usually California/NY/DC.

  18. GK

    1) But Baby Boomers are still no longer first-time buyers. They may be slow to sell, but they are no longer buyers. Remember that they are all eager to eventually get the $500K tax-free gain.
    It still means the buyer/seller ratio will be worse than it was for the last 20 years.
    2) This is true of Indian, Chinese, etc. immigrants to California, but their numbers are much smaller than those of Mexicans. The low-income immigrants greatly outnumber the high-income immigrants. Indians, Chinese, etc. will merely result in Cupertino and Saratoga being islands of price stability within a broadly declining California market. A better immigration policy could change that, but I don’t think any of us expect that to happen.
    3) You are going by your own anecdote, which is not data. This is not the case for people who want 2 or more kids, and who want a 3000 Sq. foot house, or who want to get by on one income while the mother stays at home with the kids. Only 10% of demand has to migrate for the reasons I mention, for the high-priced areas to suffer.
    4) This, too, is less than before. For the first time in 40 years, many of the best and brightest from India and China no longer seek to come to the US, as there are ample opportunities to work for the same companies like Google, Microsoft, Cisco, etc. at home.

  19. Buzzcut

    Check out the Journal today. Front page article showing that the Boomers are already working longer than their predecesors. The housing crunch and market crash is not encouraging Boomers to retire.
    My old man is 62. I asked him about retirement, and he claims he hasn’t even thought about it. I’m pretty sure that he could have retired 2 years ago (he’s a mailman).
    It doesn’t seem to me that Boomers have as many hobbies or other outside interests as previous generations. They seem way more work focused. Will they ever retire? Would they want to?

  20. GK

    “They seem way more work focused. Will they ever retire? Would they want to?”
    Even if they don’t retire at 62, they will still either downsize their homes, or eventually die off. In any case, they are no longer buyers of residences. This makes the buyer/seller ratio far worse in 2010-2030 than it was in 1990-2008.

  21. PersonFromPorlock

    I’ve been saying for the last six years that if ‘affordability’ is defined as some set percentage of the dweller’s income (as it once was) then, absent a general increase in income, house prices must eventually retreat to where they were before the bubble.

    So I’ll go out on a limb and predict that house prices will eventually give up all of their gains from whenever they began to rise above that traditional percentage-of-income.

  22. Elizabeth

    1. Boomers may sell, but most retirees at the outset sell one home to buy a new one.
    2. Poor immigrants don’t remain poor – or at least not their children and childrens children …look at the history of the Irish, Scandinavians, etc.
    3. Double income with kids – still affordable. This has some wiggle room – but exurb schools are generally pretty poor quality – unless you want your kids schmoozing with Goober and Gomer.
    4. I stated political disruptions – if China, for example, which is still a totalitarian regime, unstabilizes, this may change. Ditto India (yes, its not totalitarian, but those Islamists may yet stir things up).

  23. GK

    1) Downsizing still puts downward pressure on housing. Baby boomers are fully past the time when they are increasing their square footage. They can only go down. Plus, some will sell to finance their retirement-home fees (or retire in Costa Rica, Thailand, etc). Furthermore, they will slowly die off..
    2) For Mexicans, this is not the case. They are poor even after 2-3 generations. You are still avoiding the inconvenient point that Mexicans greatly outnumber the immigrant groups that tend to be high income.
    3) Not always. Within an 80-mile radius, many choices of wealthy yet cheaper suburbs exist. Plus, the delta in price savings will can be diverted to private school.
    Are you saying technology has NO role to play at all, ever, in moderating the role of commuting distance on home prices.
    4) No chance for either China or India. Islamists have been stirring things up in India for 60 years, there is nothing different now. If this is what you are depending on for appreciation between 2010-30, that is a far-fetched hope.
    Plus, America does a poor job of letting moneyed people in ahead of poor illiterate illegals. If we are already not creating a policy to suck up India/China’s scientists and engineers, why will we do a good job of getting their wealthy refugees?
    There really are far too many factors working against the hope that 2010-30 will be a period of the same price appreciation seen from 1990-2008.

  24. John

    The population continues to increase, where are the 50 million additional people going to live? Just becase the Baby Boomers are going to die doesn’t mean that there will not be any purchasers. Not sure what you are thinking.

  25. syvanen

    For those people living in neighborhoods that are holding on to their peak value as of today should realize that housing price declines work at different rates. Here in California the prices started going down in the Central Valley (probably down about 20% by now) and worked slowly towards the coast. There remain a few markets that have yet to lose value. However, the decline will happen the wealthy suburbs of Chicago as well. If there was only 100% appreciation over the last ten years the declines will not be as great as the expected 50% that will hit California.
    For those who want to see the future in your area look at changes in the medium house prices. Since declining sales begin at the bottom during a price decline, one might see an increase in medium prices in the face of lowered volume. That is happening in San Francisco.

  26. jm

    Before the bubble began, the home ownership rate was much lower — especially among the younger age cohorts, among whom it bottomed out around 1993 (IIRC) — there was no glut of vacant homes, and the personal saving rate was only just starting to decline from its historical realm of near 10%.
    At bubble peak, the ranks of those not owning a home had been so exhausted that to keep the game going it was necessary to give mortgages with zero or near-zero down payments to anyone who could fog a mirror. In fact, it was necessary to give multiple such mortgages to many such people, as
    about 40% of the sales were explicitly stated to be for “investment” or “second-home” purposes, and we know that a significant fraction of the “owner-occupancy” sales were in fact not so.
    Today, the home ownership rate is still well above historical average level (again, especially among younger age cohorts), there is a glut of vacant homes, and the personal saving rate has been near zero for years.
    So there is far more supply, and far less unfilled demand. And lenders are going to start requiring down payments again, so people without savings are not going to be in the market.
    And real incomes are hardly higher than they were at the start of the bubble.
    So why should real prices not be substantially lower than they were at the start of the bubble?

  27. Matteo

    Very interesting Menzie. In the interest of shameless self-promotion, I am posting a link to a presentation based on earlier work of mine with some predictions for the OFHEO house price index based on an estimated Dynamic Stochastic General Equilibrium model of the U.S. economy. The title of the presentation is “Lessons from the Recent Housing Market Cycle” and the url is

  28. Elizabeth

    1) Many boomers are not downsizing – in fact once the kiidies are out of college, they have been building their dream homes.
    2)There are many middle class/wealthy Mexicans (1st, 2nd & 3rd generation). Some stay poor, but many are way thriftier and harder working than natives. Again, commentators said the same things – we were facing a permanent underclass via the waves of Irish, Scandinavian and Eastern European immigrants.
    3) The exurbs (notably Modesto, Stockton, inland Orange County) are precisely the areas really tanking in this market. People with kids want to live in areas with good schools – you go too far out of the MSA and the pickings are slim – even private schools.
    4)You are looking a a static model – the only thing constant in this world is that things hit the fan. China is especially ripe for this given the totalitarian nature of the gov’t and the impending disruptions due to the sizeable gender imbalance.
    What I’m saying is that projections based on current data are fine, but economics is not a pure science in the way of chemistry or physics – the future is influenced by a host of factors that are difficult if not impossible to predict because it involves human beings. But generally, if you bet on everything going to heck in a handbasket permanently, you are bound to be wrong.

  29. Footwedge

    Many great and thought provoking arguments here. As one of those babyboomers( just turned sixty) I can only say that I will certainly be working longer than I might have planned. Part of that is due to need and part due to preference. I think, however, that there is one large fallacy about my cohort that will come ot light in the next ten or so years and that is this supposed store of wealth that we are so eager to use in our dotage. I am certainly middleclass or what passes for it anymore and don’t expect to eat dog food, but I absolutely do not – and could not – plan on building a dream home or take exotic cruises whenever we want. I am just one example – and perhaps a poor one – but what equity we have we intend to husband for important things – like golf. Kidding aside, I just don’t think that when put to the acid test of a difficult economy for perhaps the next ten years that many of us babyboomers will really have as much in the way of real wealth as everyone thinks. Maybe that’s why we are working longer – we already know that something doth smell in Denmark.

  30. Elizabeth

    Footwedge – a lot of boomers have inherited/stand to inherit from the parents. Not everyone, but I imagine the effect is significant. Does anyone know of projections/studies on the effect of these intergenerational transfers?

  31. GK

    I am not suggesting any ‘gloom and doom’. I am saying that 2010-2030 may merely have 2-3% annual gains in home prices, unlike the 5-8% gains seen from 1990-2008.
    Thus, owning a home becomes a much poorer investment decision for the next couple decades.

  32. GK

    Your points are still flawed.
    1) An anecdotal assumption, nothing more. Plus, the ‘dream house’ notion is done by people around the age of 50. Most Baby boomers will be far past that point in the 2010-30 period. People above the age of 70 do not upsize their homes, they downsize.
    2) You are hugely overestimating the likelihood of the present crop of uneducated Mexicans assimilating. Do you seriously think that Mexicans in California and elsehwhere will achieve income parity with whites by 2030? Surely you jest.
    There are far too few Indians and Chinese to pull up the average income to offset the Mexicans pulling it down.
    3) Not the prime areas. I ask the question again :
    Are you suggesting that advancing communications technologies have absolutely NO role to play in moderating the difference in prices between locations?
    Silicon Valley today maybe can command a 4X multiple over exurbs. By 2020-30, maybe that premium will only be 2X to 2.5X. Still a premium, but less than today.
    Monterey, Santa Cruz, and Carmel, all desirable beach communities, yet actually cheaper than Cupertino, Sunnyvale, Mountain View, etc. due to their far distance from Silicon Valley jobs. Advancing technologies could move a lot of Silicon Valley mid-level workers to these beach communities, boosting their values and lowering those of the expensive SV towns.
    4) That is too far fetched. If anything, a major upheaval in China could tank global stock markets for such a long time that US wealth, and Real Estate, fall further. Depending on upheaval in China to attract wealthy refugees to INCREASE CA/NYC home prices seems too far fetched. The opposite seems more likely.
    2010-30 will be an era of just 2-3% annual appreciation, not the 5-8% seen from 1980-2008.

  33. GK

    “The population continues to increase, where are the 50 million additional people going to live? Just becase the Baby Boomers are going to die doesn’t mean that there will not be any purchasers. Not sure what you are thinking.”
    Those are SOME buyers, but not enough. The ratio of buyers to sellers will not be zero, but it will not be as favorable to the sellers as it was for the last 20 years. Hence, lower prices.
    Plus, most of the population growth is in Mexicans and their children. Sadly, they are going to have lower incomes than the white Baby Boomers they are replacing. Hence, prices can suffer due to lower incomes of new buyers.

  34. Footwedge

    A related thought on telcommuting – or working virtual as it is called at my company. I work for a lg national healthcare company and we have a lot of folks working virtually. I have a somewhat unique point of view on this but I wonder about the future of the whole telecommuting fad. It certainly works for certain types of business but are those the businesses of the future? I’m not suggesting that we all go back to work in factories but I really wonder if the whole service industry/knowledge based job thing is practical. I think it has been an aberration caused by the unique circumstances for the US in the last 30 years i.e. we decided that we would think while others sweat. I am personally doubtful that that model is going to work going forward. By the way, IMHO working virutal is over rated from both the employer and employee perspective and I do it now.

  35. Elizabeth

    My comments ar not flawed – I see an overall 3-5% appreciation vs. the gloom and doomers 50% depreciation. My points were made to counteract the 50% +/- decrease projections.
    I lived in So Cal for several years – yes there are poor Mexicans who remain poor, but some were fabulously wealthy, and many in between – again, the same arguments were made against immigrants a century or so ago, but couched in less politically correct language. Debates regarding the low IQ levels of European Jewish immigrants, etc. I do not believe the Mexicans will remain a permanent underclass.
    Regarding telecommuting – I telecommute part of the week, but with school aged children, its not feasible to live so far away from work – I can’t afford the time to commute 2-3 hours each way. Monterey, Santa Cruz, etc are not really family communities.
    Regarding international shocks – instability will be the driver for this – how many Hong Kong citizens invested in housing in the US as a safe haven/toehold prior to UK’s lease expiration? Quite a few. Small relative population.

  36. GK

    OK. I was never among the 50% downward crowd. I just think 2010-30 will be 2-3% appreciation, vs. your 3-5%. So we intersect at 3%.
    That is still a major correction on current prices, if one takes into account Cost of Capital. If we assume Cost of Capital is, say, 6-8% from 2010-30, then a 3% appreciation rate for 20+ years does, in fact lead to a 50% loss in real value when cost of capital is taken into account.
    2008 : A selected CA home is $1M. The average income for that town is $100K (10% of the home price). The S&P500 is 1350.
    2030 : The same home is now $2M. The average income for that town is now $300K (15% of the home price). The S&P500 is now 6000.
    Do you generally agree with the 2030 scenario?

  37. Elizabeth

    I project the cost of capital will be lower. If not, the appreciation will be greater – with the caveat that appreciation will be significantly greater along the West Coast as well as some parts of the East Coast, and probably significantly less in the Heartland and Rust Belt (location, location, location) – again, returning to a normal appreciation pattern. As you remember, before the bubble, the middle of the country with few exceptions, significantly lagged even the rate of inflation.

  38. GK

    Why would cost of capital be lower?
    And if so, won’t mortgage rates also drift lower, permanently.
    Thirdly, while East and West coasts can certainly command large premiums above the interior, keep in mind the distinction between HIGH prices and RISING prices.
    SF and NY, perhaps can justifiably command, say, 10X the prices of Ohio or Texas.
    Perhaps 10X can become 12X.
    But can it go to 15X? 20X? I don’t think so. Salaries in NY and SF are not rising at greater rates than Ohio or Texas, outside of a few special sectors that don’t have a lot of people.
    The MULTIPLE cannot rise forever. 10X forever may be possible 10X going to 20X, 30X, etc. cannot.
    Increasingly left-wing governments making taxes higher and higher in NY and SF are also a downward burder. For the first time, CA population growth now greatly lags NV, AZ, etc.
    “As you remember, before the bubble, the middle of the country with few exceptions, significantly lagged even the rate of inflation. ”
    And I am saying that the Coasts are due for this to become their fate as well.

  39. Menzie Chinn

    mike: Returning to the technical aspects of establishing the relationship between the OFHEO HPI and Case-Shiller 10-city index, I think if one were to extend back the sample to 1987 by using the standard HPI, one could then encompass two episodes of downward trending, at the cost using a perhaps less appropriate OFHEO index. Haven’t tried it — do you know of anybody who has?

  40. James E.

    The 76 million and declining Baby boomer population, will become net sellers of real estate. First they cannot live forever. Second with high energy (heating and cooling) insurance,and property taxes combined with a lower income, selling will be their best option.
    Thirdly the twenty-somethings are staying home,renting, and house sharing, with no plan of home ownership, unlike us Baby boomers who mostly bought our first homes in our 20′s.

  41. Elizabeth

    Toured houses with DH this weekend as a lark – Bellevue, which is a suburb of Seattle – lots of $4-5M dollar houses being built and bought – the $1-$2M range are tear downs or major remodels (not liveable in as is) on 7-8K square foot lots. These are not waterfront, not next to Bill Gates, any many don’t have views to speak of.

  42. Shiloh

    If the market corrects…without artificial props, SD could return to 1998 prices and flat appreciation.

  43. Rich Oven

    To Tood:
    Having lived in both L.A. and Fargo, I can honestly say that Fargo has by far a higher educated public, and with three colleges in town there is always a very well done cultural event or sports activity to watch. The only thing L. A. has over Fargo is if you aren’t tough enough to handle winter, or so conceited that you must “be from the coast.”

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