Monday, October 20, 2008

Home Prices Set to Overshoot?

The lack of attention on the foreclosures and the unwillingness to deal with anything more than banks is driven home by this chart (see below).

If we just take what we know from the Case-Shiller indexes (not the most comprehensive, but sitll good enough), and use those with a simple consumption-based model, it looks like the forecasts for another 15% decline in the overall index suggest that real-estate, if it bottoms there, will have overshot the downside.

From 1987-2007, PCE grew by about 6%. The value of housing stock arguably should be related to both PCE and to the share of consumption in the economy.

The black line, below, is the trend since 1987. It's affected by the last run-up in housing. Grabbing, instead, a "low point", say 2000, which pre-dates the distortion of the run-up and is obviously a "conservative" point on the line, one can draw two lines that estimate "normal" supply-demand trends, one at a "low" growth rate of 4% and the other at the historical rate of 6%.

Another 15% down from the July C-Shiller implies that the 'historical rate' line would be crossed in July of 2009, just eight months from now. Basing things at 2000 is already conservative, so points below that start to look like clear overshoot. Already, we are seeing signs of pent-up demand creation, with super-low new housing permits well below reasonable estimates of long-term demand for single-family housing.

The C-Shiller index futures are looking for just about a 10% decline, until next August (from the July index levels, the latest reading available).

Las Vegas-5%-10%-16%-13%-16%-16%-9%
Los Angeles-3%-11%-16%-12%-20%-18%-20%
New York-2%-5%-9%-10%-10%-12%-16%
San Diego-3%-11%-14%-13%-16%-16%-14%
San Francisco-5%-11%-14%-13%-16%-16%-14%

These futures have not been great predictors. More on that later.

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