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The bubble has deflated. We believe housing prices are at or below historical trends. Prices are low relative to consumer income, relative to rents, and relative to long-term historical norms. Below, we look at historical norms: long-term price trends. The chart shows that peak-to-peak price appreciation in the previous real estate cycle was 4.1%.
In the following chart, we project this growth rate forward from the last peak (yellow line) to show how far actual prices varied from the norm during the “bubble”. Recent declines in prices have deflated the bubble so that prices are now in line with an estimated normal 4.1% rate of appreciation. Assuming some more decline, prices will be below historical norms by the end of this year.
This analysis is based on FHFA/OFHEO data, which lags actual market data by one quarter, and understates the volatility of market prices. “For sale” list price data (asking prices) have dropped faster and lower than the FHFA/OFHEO data, which is based on closing prices of sold homes. “For sale” prices are already showing stabilization—as noted elsewhere—and a strong bounce in some markets.
While pricing may be re-bounding, the question is whether investors are ready to enter the market. Much will depend on a variety of factors, including: whether they have cash or credit available, whether they have confidence that the price growth is sustainable, and whether there is demand for rentals in their marketplace. Access to the federal first-time homeowner tax credit is also a factor, and extension of hits program will affect the nature of the recovery.
The fact that pricing is at or below historical trend levels does not mean it can’t drop further. But it allows normal growth without downward pressure due to overpricing. Any volatility from this point forward is more likely tied to market supply and demand rather than momentum associated with too-easy credit and speculative frenzy.
