Summary
It is frightening to continually be bombarded with news of falling home prices and falling values for just about every other asset class known to man. Many articles focus only on the price declines of homes without any consideration for the reasons why values are declining so much or when values will stabilize. An analysis of trends and history can provide some insight into this situation. Most people can handle bad news it is the uncertainty that is hard to deal with. A look at home price trends shows that the bleeding should stop in 2009.
Analysis
Americans have just wrapped up one of the worst years in financial history. For many people every investment they owned in 2008 lost value from stocks to real estate and the Case-Schiller Index showed that the 20 City Composite Index lost 25% from its peak in July 2006.
So when is the bleeding going to stop?
Unfortunately for residents of South Florida and New York, mainly Manhattan, there is still more pain to come. If you look back at the previous 20 years of housing price history as measured by the Case-Schiller Index some very interesting bits of information can be gleaned. If you separate the 20 year period into two 10 year tranches you will see that for the 10 City Composite Index that home prices rose at a meager rate of 2% annually from December 1988 to November 1998 (the 20 City Composite does not date back 20 years) and prices have risen 8% and 5% annually -even while factoring in the horrendous past year- for the most recent 10 years for the 10 and 20 City Composite Index respectively.
What does this mean?
Real estate values in certain areas need to have further price correction to bring pricing back in line with historical price appreciation trends. Miami, Tampa, and New York all show 10 year annual price appreciations of 8%, 7%, and 11% respectively. Let’s all hope that we do not go back to the price appreciation patters of the previous decade or we are nowhere near the bottom. There are many factors which are outside the scope of this analysis that would indicate that a normal level of home price appreciation is around 4.5% per year. To bring the Florida and New York growth rates back in line with historical norms these three markets could see continued deterioration of 13%, 8%, and 25% respectively.
Is there any good news?
The price corrections should finally be over in 2009! Many markets have already reached bottom and some have probably overcorrected. Phoenix values have declined 43% from the peak. The same analysis applied to Florida and New York when applied to Phoenix actually shows that home values have overcorrected by as much as 10%. It is a common phenomenon for markets to overcorrect when there is a bubble and the likely outcome is that Phoenix will experience nice home appreciation in 2010 when it “corrects’ the “overcorrection.”
