Analyzing trend data from First American CoreLogic and the Federal Housing Finance Administration, PMI Mortgage Insurance reports in its latest Housing Market Mortgage Review “that the bulk of the home price declines are behind us.” It continues:
“. . . Both also suggest that house prices have still not reached their long-term trend levels.”
As with other goods and services, house prices depend on demand and supply. Over a long period of time, however, the growth rate in home prices should conform to income growth – otherwise houses would become either increasingly unaffordable or more affordable, PMI observes, adding that over long periods, home price growth and income growth tend to be similar.
The data are shown in the charts below. The first one shows CoreLogic’s Home Price Index (HPI), while the second graphs actual levels of the HPI through July 2009, as well as the long-term trend based on the 1983-2001 house price data. And the third charts the same relationships for the FHFA purchase-only HPI.
This stuff ain’t easily digestible, but it’s good for you. Like carrots and leafy vegetables. The explanation that follows the charts is worth reading and can well make clear what you’re seeing.
“If we assume that the growth rate of home prices over the 1983-2001 period for the LP HPI (and 1991-2001 for the FHFA HPI) was reasonable given the growth rate of income, then we can use that trend rate to determine what house prices would have been, on average, beyond 2001 in the absence of their actual sharp run-up.
“Figure 2 shows the actual levels of the LP HPI through July 2009, as well as the long-term trend based on the 1983-2001 house price data. The impact of the housing bubble is clearly evident in this chart, with the LP HPI about 35 percent above the long-term trend at its peak. At their recent bottom earlier this year, the LP HPI was only about 10 percent above its long-term trend, a significant – but not complete – closing of the gap.
“Figure 3 shows the same relationships for the FHFA purchase-only HPI. At the height of the housing bubble, the FHFA HPI was about 24 percent above its long-term trend, while earlier this year it was only 8.5 percent above.
“While the trend data from both the LP HPI and the FHFA HPI suggest that the bulk of the home price declines are behind us, both also suggest that house prices have still not reached their long-term trend levels. How they get from today’s levels to their trend levels is important. If, for example, the owners and/or servicers of the large number of vacant and foreclosed homes not yet for sale decide to dump their properties onto the market, then we could see home prices reach their long-term trend levels quickly.
“More likely, however, is that these owners/servicers will continue to put these properties on the market at a more measured pace in order to avoid additional sharp drops in home prices. In this case, home prices would be relatively flat for the next several years, as the trend level caught up with the actual level of prices. In an environment of rising home sales and falling unsold inventories, as we have today, this is a more likely scenario than one in which home prices fall significantly further from here.”
To be honest, I need to spend more time with the data. But I think it’s important for anyone interested in the direction of the housing market – and who isn’t? – to pay attention to thoughtful analysis such as this.
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Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022