Today’s NYT has a column by David Leonhardt, titled The Bears and the State of Housing (I’m referenced but not quoted directly). Leonhardt offers a new(ish) framework to evaluate Housing, regardless of whether you “lean bearish or less bearish.”

The column’s framework asks if housing is a luxury good –  one “that societies spend more on it as they get richer?” Or is it an essential necessity — more like food and clothing — that seems to cost an “ever smaller share of consumer spending over time?”

It is an interesting way to look at Housing. I am not fully convinced this is the proper framework, but I wanted to point out a few elements worth considering, and clarify others.

First, we must note that Housing can be a variety of things: Shelter, or an investment, a basic staple, or a luxury item. A $100k rural ranch has very different characteristics than a $750,000 suburban manse or a $2 million townhouse. When we discuss housing, we must remember that it is not only local, but very specific to each unique property. (This was part of the problem with the securitization of mortgages — it is very difficult to homogenize US housing, and the attempt failed in part for that reasons). The bottom line is we need to be cautious in generalizing housing — all houses are not all things to all people.

Second, I do not see Housing as 30% over-valued by my favorite metrics. (The article implies that number from Case Shiller data). It might yet fall that much as we mean revert, careening wildly past fair value — but that is not my expectation. An overvaluation of 5-15% has been my number since Q1 2010, and we don’t even have to drop that much — we could simply go sideways for a decade (or longer) and allow inflation to work off the excess.

Third, let’s remind readers why I believe the 1970 – 2000 housing boom was aberrational.
It was not merely tax breaks and falling interest rates, but a massive bond bull market. Mortgage rates did not simply fall, they were driven down by two/thirds, from over 15% down to under 5%. With Fed rates now at zero, this simply cannot occur again — unless we see a wild spike to 1982 levels and 15% mortgages (and what would THAT do to prices);

What other factors made that period so unusual? Consider these elements:

• Post WWII suburb creation was occurring; Baby-boom demographic was surging (both are now over);

• Rampant credit expansion has ended; (De-leveraging is now occurring).

• 3 decades of decreasing credit cost powered (in part) Real Estate appreciation;

• The 18 year bull market in stocks goosed wealth creation; it provided ready cash for RE purchases; (Unlikely to re-occur again any time soon);

• The RE top of 2006 pulled forward a decade or more of future returns; (Its now only four years since the top);

• When rates eventually start going higher, it will be a a headwind to price appreciation;

• From 2001 – 2007, new home building far outstripped new household formation; (we are still saddled with supply in excess of households);

• Home ownership rates increased from 62% in 1960 to 69% as of 2005; Its now 67% (Source: Census Data);  (Ownership rates are going down as those who bought homes they could not afford move back to rentals); 

• Traditional metrics — Median income vs median home price, or Housing Equity as a percentage of GDP or Rent vs Own — still show housing as 5-15% overvalued;

• Over-building overwhelmed demand with Excess supply;

Last, and perhaps most important, people pay for Homes with income from jobs. If over the next few years, we continue to see a sub-par recovery, with job creation lagging, and real incomes falling, then all Housing bets are off.

To sum up — I do not believe that Housing has bottomed yet, but I suspect — hope is probably more accurate — that the worst of the collapse is over. I expect no sort of bounce back anytime soon; Housing is likely to see no real gains for the next few years, and might simply drift for as much as a decade (über housing bears think much longer).

The most bullish thing I can say is the 33% collapse form the highs is over; Hey, you gots to live somewhere, and it might as well be in a place you like.


The Bears and the State of Housing
David Leonhardt
NYT, September 7, 2010

See also:

The WSJ in 2009 looked at a related issue, pitting less bearish analyst Thomas Lawler versus more bearish Yale prof Robert Shiller: Outlook for Home Prices Clouded by Spat Over Historical Trends.

Category: Credit, Media, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “NYT: The Housing Bear Case”

  1. Further, I do not think of all the uncertainties, the “Housing market is the most confusing of all” to be the case.

    Rates were lowered to unprecedented levels; Lending standards were abdicated do to private sector securitization. Millions of unqualified buyers became temporary home owners.

    That is unwinding now. Previous pricing ratios are the likely mean reversion.

    I do not see this as uncertain — it is the likleiest scenario.IMO

  2. ironman says:

    The 5-15% current overvaluation Barry indicates looks to be about correct – here’s an analysis with a graph showing the median housing price vs median household income for the U.S., covering data from 1967 through 2008 (and into 2009 for the housing data.)

    On an interesting side note – the expiration of the $8000 first-time homebuyer tax credit is showing up with some rather sudden adjustments (declines) in housing prices in a number of markets. As a result, we may be closer to the pre-bubble valuation trend lines than many realize.

  3. Robespierre says:

    Housing still has ways to go (down). To me the signal that we have hit bottom will be when there is no more talk about housing “stabilizing”, “most affordable”, etc. Another sign will be when there is no longer so many TV shows that still peddle housing as an “investment”. As long as “flip this house”, “housing virgins”, etc TV shows are popular housing will continue on its way down.

  4. Maseratij says:

    The cost for household expenses to the American family has gone from 16% to 34% in the last 40 years. The money that is allocated for owning a home is not spent on vacations or time with the kids (ie. not at work).

    The concept of luxury or staple is a sliding scale, but then again the nicest homes of the richest people from the 19th century are often the cheapest homes available in an urban landscape. What we have come to expect as housing consumers, separate bedrooms often w/ individual baths, LR and DR that are practically never in use, # of Sq ft/ occupant, land size put most homes built today in the luxury category of a previous generation. The reasonings of lower interest rates creating the demand sounds like the established modus operandi.

    Really though, it looks like the banks, the Federal Reserve, or the Federal Government, are all squarely in business to exploit and profit from the production of the working class. The increase in home ownership, force fed by the government, was an attempt to stuff the greed coiffures of the establishment. There is more than enough economic data to suggest that owning a home is not a good investment. The idea that we need to spend more money for ever bigger homes that consume ever more of our family budgets is not in the best interest of the American People, but then again that is not the business of Modern American Government. Instead our wonderful system sucks the “0″ growth wages of our children’s mothers/caregivers into the corruption of the apparatchik.

    The only group to have made the most money on the entire 1970 through 2000 real estate market has were the banks, and the government. I was convinced that the financial firms of Wall Street had captured our Legislature over the past decade and were now making laws to propagate itself. The reality is it probably started longer ago. Perhaps when Ike through in the towel. By the late 60′s it was apparent and the Baby Boom generation stood ready to take back America. Well, we now know their metal, they blinked, they opted for security and the status quo. No tough choices for them, they were happy to be plucked, stuffed, and sold.

  5. Lugnut says:

    “Previous pricing ratios are the likely mean reversion”

    So you feel there is no real threat of deflation below normalized pricing levels? I’m not quite as optimistic. I don’t have the stats to back it up, I just think there is going to be a continued erosion in the employment sector which will bleed through into a further consistent stream of foreclosures over time, with continued price erosion on those areas hardest hit. The knife is still falling, I think.

  6. nathant says:

    You write that rising interest rates will be a head wind to home prices, however average mortgage rates went from 7.38% in 1972 up to 16.08% in 1982 (from the FED)

    According to the census data nominal median home prices in America almost tripled during that time period.

    During that same period the stock market was essentially flat.

    In certain areas of the country housing looks very attractive and may prove a good time to invest instead of riding the market sideways for the next decade.

  7. call me ahab says:

    we could simply go sideways for a decade (or longer) and allow inflationto work off the excess.


    you sure have a lot of faith in the Fed. Classic liquidity trap- the Fed can at this point only supply a bumper crop of dollars w/ no takers

  8. Rescission says:

    Your analysis is spot on.

    Here are a few other interested “ground level” observations to support it.

    1. In our affluent southeastern city, the largest regional home builder (who was also named the best home builder in the U.S. a few years back, just announced they are going out of business and closing their doors at year end.
    2. Another high end builder was building and selling 75 homes per year, and this year they will build 4 homes.
    3. Houses just aren’t moving, especially anything over $500k. People are still “holding on” but the areas are littered with for sale signs. Eventually the prices will have to come down as supply and demand work their magic.

    More to fall. For sure.

  9. ashpelham2 says:

    It’s a pretty tight predicament that policy makers find themselves in, these days. Without the ability to raise rates, and really no need to, the federal reserve seems essentially useless. They can’t lower rates any further, meaningfully. This economy is still trapped in a vicious cycle of lower demand and oversuppy, and I always make the argument that we’ve been there since before 2000. There was an acceleration of spending up to the millienium change, then a recession that could have gotten rid of some of that excess, but a massive effort in 2001, before and justifiably (to some) after 9/11, was conducted to avoid that recession of all recessions. It should have been allowed to carry on. Instead, we went to war, and goosed the economy, and it last until end of 06, into 07.

    This will take years to correct. Fortunately, we took some big hits in 2008, and got rid of a lot of the excess. Now there is this slow healing process to get rid of the rest and put things back in order. A lot less fun than what got us here. I can see some sense of normalcy returning to people’s mindsets, but there has to be a feeling that government is working with us, and not ready to jump us and take our wealth. We could go either way right now: Revolution and civil war, or rejuvination and restoration.

  10. yuan says:

    “If over the next few years, we continue to see a sub-par recovery, with job creation lagging, and real incomes falling”


    IMO, this stalled recovery is just a minor sovereign debt crisis away from synchronized global deflationary recession. I see lots downside risk being masked by a haze of “muddle through” hopium.

  11. Luxury or staple? Houses and cars have very similar attributes in that regard, much as clothes once did before people started wearing sheet metal to impress. They are a bit of each. Staples in the sense that everyone needs them. Luxuries in the sense that distinctions among them provide status (or lack thereof).

    Imagine you were an interplanetary scientist studying life on earth. You had studied and catalogued every creature save humans, and had reasonably concluded that all were slaves to efficiency, doing whatever achieved the greatest benefit at the least cost in their quest to survive. Then you looked at humans, and found, in some cultures, distinctions that didn’t make sense. For some reason, in a few places, humans were willing to pay double or even triple for a thing that accomplished the same purpose as something much cheaper, but only had a different name (e.g., a Lexus instead of a Camry). Without understanding the nuances of human behavior; without seeing things as humans see them, how could you possibly understand why humans would behave in such apparently irrational and inefficient ways? Luxury goods defy classical economics. They have upward-sloping demand curves, being more desirable because they cost more. Having accumulated vast riches over the course of the last century, for much of the Western world and Japan, practically everything has a component of luxury good to it. Unless you could somehow grasp the existential lifestyle statements the purchase of luxury goods conveys, you’d probably just conclude that when humans get too rich they start to act stupid. And you’d be right.

  12. DeDude says:

    I agree with the 5-15% fall in prices. However, I would be careful with basing any predictions on median income to median price metrics. The issue of whether your home is considered a necessity or a luxury will have a huge effect in either direction. If large number of people decides that it is just extremely cool to own a huge luxury mansion then any money earned in excess of basic survival gets showed into housing. If the huge wasteful mansions become more yesterday and un-cool than a Hummer, then the above median priced houses could take a substantial hit on top of what they already have suffered.

  13. Wuwei says:

    I live in a town that has tons of old Victorian mansions that were once the equivalent of today’s McMansions. Back in the 60s and 70s these mansions were all turned into apartment buildings or rooming houses, and then in the 80s and 90s they were all restored and brought up to current luxury standards as single-family homes again. I expect we will soon see the return to apartments and rooms for rent, but with an oversupply of huge homes, way beyond what anyone needs in terms of space, what will happen to all these new places built during the boom? I would expect we will see some spectacular fires.

  14. @ahab,

    Yeah, that inflation blurb stood out to me too. So why are we in mortal fear of that demon deflation?

    That aside, most people I talk to almost always see a house as an investment that they can build wealth in. These would be the people eager to move from the rental market to home ownership. When they are looking at it from that perspective then it is easy to see why a premium is assigned to it

  15. S Brennan says:

    The one note monkey notes that Barry rings the bell:

    “Last, and perhaps most important, people pay for Homes with income from jobs.

    STOP trying to prop up housing through gimmicks that work the wrong end of the the telescope. Stop listening to “respected” economists. I might be a one note monkey, but those guys are little better than a schooled mackerel in a corporate gill net.

    Build jobs. How? You build industries through government/private partnerships that profit national interests, long term investors, employees and suppliers. You then defend those industries from predatory practices your COMPETITOR nations develop. Don’t blame other countries for stealing your jobs, that’s the what COMPETITOR government should be doing. It’s the also the job of US leaders, it’s just that they’re to busy being feted and bribed by those COMPETITOR governments and those who make money on the deal. See Prescott’s/Bush’s, trading with the enemy WWI & WWII for example of traitorous behavior by the HiFi crowd.

  16. vine2wine says:

    These arguments arent very clear to me if : ” When we discuss housing, we must remember that it is not only local, but very specific to each unique property.”

    Then all the comments about generalizing % drops across the country? WTF? This arguments seem so contradictory. Macro-Econ parameters for housing is a joke when used in this fashion.

  17. Brendan says:

    As others have already touched on, housing is subject to fad mentality and group-think as much as anything. If everyone is saying buy as much RE as you can pay for, then there are people out there who will do just that, and vice-versa. When the fad fades, people become weary of their old toys (big houses that have big energy bills and big maintenance and upkeep hassles) and over-respond in kind, get an apartment or buy a small house. In time, the pendulum will swing back. It’s going to be a while, though.

    I’m not a big fan of anecdotes, but I’ll add a few that might enlighten. Just sold my house last week for $204K, which I bought for $176K 7.5 years ago. Assuming 2% inflation, the price is pretty much exactly the same (but let’s not forget that wages have lagged inflation). The house is definitely in better condition and more up-to-date than when I bought it and has a few upgrades, maybe worth $10K resale. So all said and done, the house probably lost a little value since February 2003, when prices hadn’t really started picking up yet, but interest rates were close to bottoming out. Still interest rates are lower today (buyer is now paying 4.75% on an FHA loan according to the closing documents). Bottom line is, I don’t see prices going much lower in that sub-market (Phoenix proper). Houses on the outskirts are a different story. It’s all very local market specific at this point.

    This leads to my second anecdote, I have a friend who lives in those outskirts. He’s probably 30%-50% underwater, if he could ever find a buyer out there (the few buyers there are are primarily buying places like my old one, closer to town). But, he’s embraced having a home, got a few large dogs, and pretty much doesn’t have options. Even though it seems like defaulting makes sense, he’d have to rent a house because of the large dogs, so he’d end up making a rent payment that’s the same as his mortgage, which was refinanced and used as an ATM at a low rate. So why move? His choices are throw away money on an underwater mortgage or throw away money on rent. What difference does it make to him? Until he has a compelling reason to move, he’ll just keep making the payment. To him, it’s just rent. If it takes long enough, eventually he’ll pay the principal down enough to no longer be underwater, even if the house doesn’t appreciate. If not, no more skin off his back than defaulting today.

    And as a final anecdote, I have another friend who “owns” a condo just down the road from the house I just sold (so in a healthier – that’s a relative term – part of the market). He’s easily 100% if not a more underwater on that. He hasn’t made a payment since last summer. He’s not getting kicked out until just before Christmas, almost a year and a half after he made his last payment. He’ll soon be living in his parent’s guest house at age 30. There’s still a lot of this out there.

    What I’m driving at here is that there’s just no analyzing this market. Every situation is so unique right now that this will take a long time to sort out. I think BR is right, the market might drop a small amount more, but at this point it’s not going to be a 5-15% across the board, but more like 5% increase in value one place and a 20% or 30% drop in another. Blanket statements that worked two years ago no longer work today.

    Maybe the next fad will be to buy cheap second and third winter homes in depressed markets like Las Vegas, Phoenix and Miami. That would throw off the model pretty quickly (though I wouldn’t count on it). I do think that most signs point toward the suburbs not seeing much new growth for a long time, though. If there is any growth, I expect most will be urban or active adult. Prices will just remain too low for new homes to be competitive in the burbs, especially with new regulations such as sprinklers for residences (+$5-10K to construction costs) and expectations like granite everywhere. Without land values propping them up, I can’t see how builders will be able to build to compete with resales of 2000 and newer models.

  18. hammerandtong2001 says:

    Wee, I knew something was wrong in the housing market a few years ago.

    People were buying big houses with living rooms they didn’t intend on living in.

    And there it is.


  19. Expat says:

    I am not so sure 5-15% decline is what the ratios predict. Simple ones, like median price to median income suggest something different. The long-term median household income to median house price ratio is 2.7 (Goldman Sachs). The latest data I can find shows the median price to be around $180k. The latest median household income is about $51k. $51k x 2.7 = $137.7k which implies a 23% drop in prices.

    Of course, if you believe this extremely long-term ratio is mean reverting, you must allow for a severe dip below to compensate for the extreme bubble conditions (upwards of 6 for the ratio). Toss in 17% real unemployment, certain to rise interest rates, and record inventories, it is easy to predict at sustained drop to a ratio of 2.5 or lower. Assuming incomes even manage to remain stable, this means $51k x 2.5 = $127.5k or another 30% drop.

  20. I am using Ned Davis data

    Its not that I don’t trust GSCO — well, maybe it is.

    I prefer pure data providers than potentially conflicted Street sources. And Goldman, post Commodity Re-weighting in 2004, has decidedly lost my trust …

  21. [...] Barry Ritholtz at The Big Picture: First, we must note that Housing can be a variety of things: Shelter, or an investment, a basic staple, or a luxury item. A $100k rural ranch has very different characteristics than a $750,000 suburban manse or a $2 million townhouse. When we discuss housing, we must remember that it is not only local, but very specific to each unique property. (This was part of the problem with the securitization of mortgages — it is very difficult to homogenize US housing, and the attempt failed in part for that reasons). The bottom line is we need to be cautious in generalizing housing — all houses are not all things to all people. [...]

  22. rfullem says:

    First, it is clear Mr. Leonhardt did not buy his first house between 2004-2007. He may a long-time renter and is thus oblivious to the debt cycle of homeowners. Or he may be part of the purposefully ignorant majority that bought a “home” years ago, silently enjoyed the heady millionaire-next-door days, voted to keep Fannie Mae churning out subsidies, and, through the magic of refis, sent the kids to college. Now he, using bifocals for hindsight, has, like many others, declared himself both brilliant and righteous for avoiding the pitfalls of the speculative fever that gripped everyone who bought a house (not a home) prior to 2008.

    Well, as an older, first-time housebuyer in March 2007, I can safely say that owning a house is both a a staple and a luxury. It is a luxury because you “want” your kids to enjoy their childhood in a place they will always call “home.” Like other luxuries, you tend to remember your first home. (If it were a staple, you would not remember it).

    When I bought, I was aware of the 30% rent/own pricing discrepancy, Mr. Shiller’s 2006 housing/CPI chart, and most of the developer conflicts of interest. For me, after looking at homes for 5 years and not knowing exactly when the bubble would turn, it was apparent that time was working against me. I agreed to pay the extra 30% in order for my kids to get the above mentioned “luxury” experience before they turned teenagers. I think economists and Presidents would all my decision “irrational” and “speculative” and thus I deserve the to lose all my money.

    The problem we face today is that homes were marketed as a staple, financed like a luxury, and had no regulators in between. Like many others (seemingly all outside the Fed), I knew about the crazy marketing and the “flippers.” However, when I bought, I had faith that what I learned in CFA class about lending, cash flow, and bank oversight (OCC, Fed, safety and soundness, CAMELS, etc.) still applied. I was/am still SHOCKED to hear about the ratings, 30%+ no money down/ARM financing, and the complete lack of responsiveness by regulators on this vital issue.

    To explain why this is a vital issue, according to Fed survey of Consumers, 85% of the consumer balance sheet is financed through a mortgagee/home equity. By contrast, a home makes up only 40% of one’s assets. How regulators could simply ignore house financing and underwriting methods – saying it was not their responsibility – is astounding, outrageous, and negligent. Saying that there was “plenty of blame to go around” or that house price fell “unexpectedly” is an excuse but not excusable.

    Now back to the luxury debate. For the 10mln+ of underwater first-time home buyers that bought between 2003-2007 and still make your their monthly payments (over 40% had fixed financing), you drove the Rolls Royce off the lot. Unfortunately, the dealer forgot to say it has a one gallon gas tank. Now you have to pay him dearly to fix it. Recourse? Are you kidding? you and your kids have none. Tough luck.

  23. rfullem says:

    by the way , the answer is not about affordability. It is more than fine (hence the Ritholtz 5-15% thingy). The issue is about demographics and general prices. The population or payrolls growth will not support the prices no matter what the income level. On prices, I am hoping (with some realistic indicators – gold, food prices, energy, ) that the reflation cycle is now becoming entrenched and that RE will eventually be seen as a hedge again (1970s style).

    Just as an aside, in August 2006, the NAR affordability index dipped below 100 for the first time. In other words, anyone who bought a house that month could not afford it. Did not see any mention of it in the media or by Fed governors. Any idea why?

  24. dsawy says:

    The demographic factor isn’t being given enough attention in all this, IMO. There’s no amount of credit, incentives, etc that can get the housing market to recover to previous price levels with the Boomer demographic going into empty-nest mode, then retirement mode, and then finally just croaking.

  25. [...] is still about 5 to 10 percent overvalued, nationwide. Barry Ritholtz, at The Big Picture blog, says 5 to 15 percent. Other real-estate specialists — like Tom Lawler and Mark Zandi — think [...]

  26. sparrowsfall says:

    Another bullet: both the monetary and (especially) fiscal spigots have been wide open for thirty years (with a brief respite under Clinton). Not gonna get any wider open in the future — actually much less so.

  27. cognos says:

    Barry, your analysis is silly. Its non-specific enough to claim you’re “right” in the future on some vague basis. But to claim “housing has not bottomed” is like claiming “SPX has not bottomed”. Its both LT and ST wrong.

    Houses were being auctioned in S. Florida, Nevada and California for about HALF of what they auction for today. Simple facts.

    Generalized sales prices are also up… the Case-Schiller guys work hard and they have prices up 5-10% off bottoms and that index moves like a battleship.

    Finally, and most egregiously your argument ignores the GIANT economic truth — its simple a DEFLATION issue. With headline CPI off about 2% since Jul 08 (versus expected +2% annual inflation) this has been a 5-6% increase in the real costs of debt. This describes an enormous part of the housing crash. If policy makers could’ve simply kept the value of the USD steady… they wouldnt have f-ed debtors and caused this. Its not really a “housing to GDP” issue… right? How silly.

  28. cgb22 says:

    One of the most important reasons for the housing boom that really began in the 1970s was that the Baby Boom generation was getting into the market. It has taken them 40 years to start the end game, i.e., getting ready for the great beyond. So, it affected the starter market, then the move-up market. Now they’re talking about downsizing.

    The Boomers were a huge demand component just by their numbers: Lots of them, lots of divorces, lots of people simply cohabiting and thus affecting the household formation rates. Lots of people moving around the country. (A French businessman asked me once how many miles I’d moved as I changed jobs. At the time, it was probably around 8,000 miles.)

    It’s not clear to me that the aging of the baby boom means a huge falloff in demand by itself. But if you combine aging boomers and the rise of a virulent anti-immigration mindset, the demand picture could be altered in subtle, yet profound ways.

  29. Expat says:

    hi Barry, I cited GS because it was the first reference I found on Google and I wanted to appear erudite and serious by using a source (ok, a dubious choice…but better, at least, than citing the NAR). I have been ranting to anyone who will listen for the past five years about this real estate bubble and have always targetted a drop to close to 2.5 on the median price to income ratio. Most of the very long term charts I have seen run from 2.7 to 3, so I don’t see why 2.5 is unreasonable (mean reversion).

    The best we have been able to do by throwing several trillion dollars at the real estate market is to prop the ratio temporarily at about 3.5 which tells me a lot about how vulnerable it is to a large move down.
    Of course, I don’t deny that policy won’t work to keep prices stable through inflation, but then the ratio will still drop, n’est-ce pas?

  30. Expat says:

    By the way, I believe Ned Davis uses Median Disposible Household Income while my references are to Pre-tax Household Income. We are discussing two different ratios, I believe.

  31. [...] Housing market is facing a lot of headwinds: Weak household formation, soft job creation, Rates more likely to be higher than lower 5 years from now, etc. [...]