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Michael White is the CEO of The New Mortgage Company. He has seventeen years in real estate as lender, owner, and mortgage originator. He has purchased and sold more than 275 properties for his own account, made hundreds of real estate loans for his portfolio, and originated hundreds of mortgages as a broker.

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Case-Shiller Still Predicts Massive 45% Fall From Today’s Values

price case shiller 1987 200909 by NewObservations.net

The 10 major cities in the Standard & Poor’s/Case-Shiller home price index have risen 5% from their April low, but the index is still predicting a massive 45% fall from today’s values.

The index is still showing a current loss of 30% from the high in June 2006. Based upon a trend generated from the actual prices of 1987 to 1997, and generated forward in a linear projection, the index will fall a total of 62% before it reaches the trend norm.

A more comprehensive analysis of the 10-city index based upon a full 120 years of data shows current values off 36% and a comparatively modest 20% fall ahead.

Review four charts and key data based upon major real estate price indexes at “Property Price Index”.

There Are 52 Responses So Far. »

  1. […] Full Article Here […]

  2. I disagee, they are basing this on a 10 yr trendline from ’87-’97.
    To be more realistic the trendline should be based on ’87-’09 or ’97-’09. I would be much more interested in seeing trend and projections based on current numbers instead of data that is 12 to 22 years old. Look at stock market graphs, nobody looks at a trend line from 12-20 years ago to predict current or future trends. If one used the last 10 yr trend line, the market has already made it’s correcttion.

  3. When you say nobody looks at 20 year old data you are wrong. Bob Prector looks at the last 300 years of stock market data when making projections. The last 10 years was of real estate data contains an unprecidented mania that will not happen again in our life times. You have to discount this data to get some idea of what is normal. Just as NASDAC 1995-2000 was not normal.

  4. Under normal circumstances I would agree with Tim P but that normalcy was lost with the beginning of the problem in 97 which is clearly delineated in the “Y” index line above. I believe the reason you would not using 97 to 09 is because of the deterioration of credit standards that I began to notice in 95 to 97, along with the down hill ride until the crash in 07. A common misconception since 07 has been that loose credit was only an issue for a 3 year time frame (05 to 07). I say No, that’s when it was simply the worst and the most noticeable. 87 to 97 would be the most recent 10 year time frame when the basic economic factors for real estate where in balance and the ago-old tried and true lending practices where in place. Why would you want to skew the data for the sake of a rosier outcome rather then finding the most sensible comparison?

  5. To TimP: The point of looking at 1987 to 1997 is based on the assumption that bubble values began after that time. I’m not sure why your comparison to stock analysis is wrong, but I do think it is right to look at historical values in judging real estate. Thanks for the note.

    To Michael W: I too believe that the point of the chart is to exclude “bubble” data. Thanks for the note.

    To Scott T: There is a timeline worth checking at the link below of 120 years of property data. It’s convincing about the presence of a bubble. Thanks for the note.


  6. The predictions pointed out in the article can be confirm by an analysis of the change from lax credit underwriting for home buyers starting in late 90’s, which created an undue stimulus on the demand for real estate, back to the traditional credit underwriting standards for home buyers.

    Incomes have not risen for years. The amount of the mortgage a home purchaser is qualifies for is determined by their “documented” income. Home prices will have to decline to a level to match the buyers purchasing ability.

    The more curious fact is the continued government intervention in the market for the benefit of the FED, FNMA, FHLMC, Wall Street firms and banks.

    The use of below market interest rates, tax credits, grants to “non-profit” organizations for down payment assistance and in Arizona silent seconds (no interest, no payment, debt forgiven after 15 years) for 22% of the purchase price, have the effect for new home buyers of their overpaying for their homes and artificially increasing the value of real estate.

    When the government’s money (our money, our children’s and grandchildren’s money) runs out, the undue stimulus and creative financing will finally be eliminated from the market leading to a sustainable lower value of real estate.

  7. To John L: I guess a big question is if market forces will ever again rule in real estate? Will it remains a permanent ward of the state, thereby contributing to the ruin of our national finances? thanks for the note. mdw

  8. […] Case-Shiller Still Predicts Massive 45% Fall From Today’s Values […]

  9. My hometown paper in Medford, Oregon had 53 Notices of Default or Sale this past Wednesday. Jackson County (about 180,000 population) has unemployment of 13% and more probably closer to 20%. The mortgage market peaked in July 2006 and I suspect the fall in values (caused by the rise in unemployment and fall in home values) will last through 2011. Mr. Shiller sagely predicted the stock market decline earlier and it would be wise to listen to him now regarding the home mortgage market. What disturbs me is the concentration of mortgage lending in so few hands. It’s a market killer. Congress has done a fine job of killing the golden goose.

  10. To danshanteal: I hope things turn around soon up there. Thanks for the note. mdw

  11. real estate has still way to go downward, but the conclusion this article is drawing is stupid

  12. If the conclusion is stupid, you should at least offer some reason why. Or you look stupid. Thanks for the note. mdw

  13. The problem with the data is that 2009 houses are not 1997 houses. We have clearly changed what we consider proper digs and want more room and amenities. If home prices drop another 45%, they will be a great value, costing far less than the raw materials. The bubble inflated not only prices, but the size of homes.

    I’ve retired and down sized to a 2250 sq foot townhouse with a two car garage. My parents raised me and 2 siblings in a 864 sq foot and no garage.

  14. The size has changed, but you have to work with hard facts. These are the best facts on pricing. Thanks for the note. mdw

  15. @Jeff

    “The problem with the data is that 2009 houses are not 1997 houses. ”

    Actually, Case-Shiller looks at sales pair of the SAME HOME, so for the purposes of this index, 2009 houses *are* 1997 houses.

  16. People would learn much more if they concentrated on understanding the implications of the numbers; as opposed to challenging their validity. Thanks for the note. mdw

  17. That trend line does look awfully flat. Just eyeballing that it looks like it goes from 74 in 1987 to 85. That’s a 0.63% rise per year. That doesn’t even keep up with inflation, much less any real wage increases. Your really want your readers to swallow that one?

    I give this post an “F”.

  18. The trend from ten years of data is not very different from the trend for 120 years of data. I use a shorter time-period for this trend report because it is the data the provider makes available to the public for the monthly releases. Thanks for the note. mdw

  19. @Mark

    I think your math is off. 74 to 85 over ten years is an annual rate of just 1.4% here is the math (74 * 1.014^10 = 85). You may not have been compounding the return.

  20. It’s a straight linear trend line generated by Excel. On less extreme market data the linear trend works well. Thanks for the note. mdw

  21. @Mark

    One more thing, before you “give this post an F” you should check your numbers.

  22. The post may be an “F”, but the grader get an “F” for lack of support of his grade. Thanks for the note. mdw

  23. I doubt it will correct because of the sunken costs. The debts wil instead be monetized, allowing the banks to keep the overhang on their books until unemployment drops and boom times return. Everything that the Fed, the Treasury, Congress, and the FHA is doing indicates that reflation and monetization is the path that they have clearly chosen. They even went so far as to banish m2m accounting. The overhang will stay on the books for a few years and there will be no 45% further correction.

  24. Even if the reflation strategy works, the “real” price of real estate may still follow the trend in the chart. Thanks for the note. mdw

  25. […] Case-Shiller Still Predicts Massive 45% Fall From Today’s Values : The Implode-o-Meter Blog. […]

  26. Case-Shiller index above is not inflation adjusted. Tried to find an inflation adjusted graph but couldn’t. Know I came across it once.

  27. Send word of what you find. Thanks for the note. mdw

  28. Can someone cite the practical value of the C-S Index? I can’t see that it is relevant to prospective home buyers and sellers since home price trends vary considerably over specific zip codes, some current trends being up and others being down. More relevant to those people would be to watch the trends by zip provided by trulia.com and zillow.com.

  29. Local data is more important than national trends, but the national trend should not be ignored. Thanks for the note. mdw

  30. If a historical graph was useful in predicting the future, all the richest people will be historians. It is impossible to predict the future of prices over the long-run. Some will be able to over the short-run, just as people can profit playing roulette in the short-run. The law of averages eventually kicks in.

  31. Nobody can predict the future, but you can make intelligent guesses. This data will make your intelligent guess much smarter. Thanks for the note. mdw

  32. Regardless of many are saying in these posts, I believe it’s possible fall of 40% Because the homes had been inflated at least Between 200/400 thousands higher during 2005/06.

    And even for those in denial, the facts are there.

  33. If you bubble up, you can easily imagine the crash down. Thanks for the note. mdw

  34. The reset is needed since the whole bubble was contrived and artificial. Current values are absurd and the banks are just holding on to properties waiting for the govt bailout and running of the printing presses for cash. Whatever you do, don’t buy anything yet, the worst is yet to come. The “buyers market” spin is nonsense.

  35. It is a terrible time for ordinary investors to buy. Far too much systemic risk. Thanks for the note. mdw

  36. Housing a living expense and not an investment. Pull you heads out people. The only people that disagree are talking their position. I own real estate and it will decline a minimum of 40% from its current position with no increase in value in my generations life time and we will live a long time.

    Residential real estate cannot deviate from wage increases as it is a cost of living expense intrinsically linked to wages. Not only will we fall to the mean but we will blast below it…that is the only way to maintain a mean. The government is propping up home prices with Fannie, Freddie, Ginnie, FHA, and tax credits. Once this dries up it will be a fast a furious fall to the bottom.

    Good luck to you the optimists…your house is worthless.


  37. Realism is refreshing. thank you for your note. mdw

  38. @Joe W

    It’s not 10 years. Look again. The trend line covers 22 years. From 1987 to 2009 (I think…. not clear from graph)

    74 * (1.00632 ^ 22) = 85.

    0.623% rise as a long term trend for urban housing prices is nonsense. Even if you just grab the CPI-U index on inflation (111 in jan 87, 211 in jan 09) That line should have risen from 74 to 140. 140!! Not 85!!

    Or if you instead use 1995 as your base value, then project out using CPI, the index “should” be at 105. (starting at CSI 75, CPI-U was 150 in jan 95, and 211 in jan 09, for 40% increase)

    I’d guess the “real” trend line would bring C-S index up somewhere between those two.

  39. I have a problem with the trendline being based on data before the 1997 real estate tax act. This act essentially opened the door for tax free income from flipping/speculating in real estate. How many opportunities are there for earning tax free income? Of course, to benefit, the trend has to go up not down, but since this law is still on the books, I think things should be evaluated with this law in mind. It is a game changer and as long as the potential for tax free income exists, there will be a higher demand for real estate than otherwise. Obviously, it can’t make something unsustainable sustainable, but perhaps it can reset the price level higher than prices before it was enacted. Just like the mortgage interest rate deduction results in higher prices, so might the 1997 tax act.

    In addition, I am confused by this post. Is the 45% predicted drop from Case-Shiller? Or is it from Mr. White? The title says it’s a prediction of Case-Shiller, but since it’s derived from the trendline in the graph, which appears to have been created by Mr. White (?), how is this connected with what Case-Shiller might predict?

  40. to JoeW: you can see 120 years of trend here:
    the trend based on 10 years is similar. the actual data of the 120-year trend is referenced at the bottom of this story.

    to outlier: i used Case Shiller to create the trend line. it is my trend line based on their data.

    thanks gentelmen for the notes. mdw

  41. Trendlines have another nasty little feature when returning to the norm that I did not see discussed. For home prices to truly return to norm, they must not only go down to Case-Schiller’s red trendline, they must go well below it and remain there until the average value is re-established.

    Those of you arguing various reasons against the return to trend are really just re-stating the “it’s different this time” argument. That has never quite panned out in previous manias/panics and won’t this time either. Remember Dow to 35,000? Was it different?

    Also, you can plot a similar 100-year trendline for the S&P stock average. It is just as scary and will undoubtedly be just as true. To see the inflation adjusted version just go to http://www.iTulip.com. The market has already returned to the trendline on that one. But it still needs to drop below trend and remain there for some time to re-establish the average. That should begin to happen within a few weeks, if not days.

  42. In 1960, out of a total non-farm work force of 54,274,000, there were 15,687,000 manufacturing workers in America, representing 29% of the total. By 2009, out of a total estimated labor force of 134,333,000 non-farm workers, there were only 12,640,000 manufacturing workers, representing just 9% of the total. In the 1980s, there were about 7,000 machine tooling companies in the U.S. and it was ranked #1 in the world, with about $25 billion in annual revenue. Today, the U.S. is ranked 7th in the world, and output has dropped to a disturbing $3.8 billion.

    Approximately 80,000,000 baby boomers about to begin collecting social security benefits, likely regardless of retiring, which at poverty level payments of $1,000 a month, would amount to almost $1 trillion annually. Which is about 37% of the entire tax revenues collected currently. Where will that money come from? Well, let’s explore that as well, since you see the government has been putting IOU’s into the social security fund almost from its inception, spending the money on everything else. The Social Security Administration estimates the trust fund will run dry around 2037, before many of us retire. But that’s if the IOUs are all paid back, which is all but impossible to achieve since the currently projected unfunded liability is about $13.6 trillion. So, forget getting a social security check. You think it will come from medicare funding? Then consider this…medicare parts A and B have combined unfunded liabilities of $68 trillion. And since passing the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, medicare part D has racked up unfunded liabilities of $17.2 trillion. David Walker, the former comptroller general of the United States, called medicare part D “probably the most fiscally irresponsible piece of legislation since the 1960s.) Where will that come from I wonder. And Obama requested $634 billion to be put into a “universal health-care reserve fund”, never bothered to mention the money isn’t available and the program could never be funded.

    The world’s largest money management firm, PIMCO, explains the rule this way: “The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support.”

    The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

    So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world’s largest holder). That’s 16,267,000 pounds. At current dollar values, it’s worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that’s roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that’s around $500 billion of reserves. Our short-term foreign debts are far bigger.

    According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we’ve been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

    Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

    Some other highlights:

    Inflation rate under past presidents (CPI) – source – Bureau of Labor Statistics:

    Richard Nixon 1971 – 40.5
    Ronald Reagan 1980 – 82.4
    Ronald Reagan 1988 – 118.3
    George HW Bush 1992 – 140.3
    William Clinton 1996 – 156.9
    George Bush Jr. 2000 – 172.2
    George Bush Jr 2008 – 215.3
    Barrack Obama Oct. ’09 – 216.2

    Now, some employment data to keep things in perspective U6 Jobless rate, source bureau of Labor Statistics (and a few other GOVT sites):

    Bill Clinton – unemployment in 1994 – 13.97 million
    Bill Clinton – unemployment in 1996 – 13.1 million
    Bill Clinton – unemployment in 2000 – 9.9 million
    George Bush – unemployment in 2001 – 14.94 million
    George Bush – unemployment in 2004 – 14.83 million
    George Bush – unemployment in 2007 – 13.39 million
    George Bush – unemployment in 2008 – 20.85 million
    Barrack Obama – unemployment in Jan 2009 – 23.67 million
    Barrack Obama – unemployment in Oct. 2009 – 25.08 million

    Anybody see any recovery? All I see is Americans losing their jobs, freedoms, and money. Working harder, paying more, getting paid less.

    “It is no measure of health to be well adjusted to a profoundly sick society”

  43. […] http://www.latimes.com/business/la-fi-cover-rentals29-2009nov29,0,350802.story http://blog.ml-implode.com/2009/11/case-shiller-still-predicts-massive-45-fall-from-todays-values […]

  44. Wow. I agree that this post deserves an F.

    So many problems, where to start?

    1. Flat line trend on a non-logarithmic y-axis. Ever heard of exponential growth? Yes, they have that in financial markets, too, not just biology!

    2. The trend is based on a flat part of the cycle. If I connect the dots from 1990-1994, am I going to get a negatively sloped line? The C-S should bottom at 40! The point is that you need to consider the time period over which the trend is drawn. The 1987-1997 period does not include a full cycle. It’s better to connect peak to peak or trough to trough.

    3. Inflation has been greater than this trend line. Don’t you think home prices will go up at least that much for a long-term trend?

    Please do not listen to this advice. Sheesh.

  45. to: Anonymous

    1. flat line: I keep track of both the 120-year trend and the 10-year-prior-to-the-bubble trend. Both trends are close enough to each other to make it likely the short-trend line is useful.
    2. peak-to-peak: This method of devising a trend might make sense outside of a bubble, but the data was chosen to keep bubble values out. if that isn’t reasonable, then i don’t understand reason.
    3. i am double checking on whether or not these are real figures adjusted for inflation.

    thanks for the note mdw

  46. Assuming that house prices keep trend with inflation, then an exponential trend is expected, unless the data is inflation adjusted. This trendline is linear and relatively flat, thus I assume it is inflation adjusted. The question is, is the Case-Shiller data also inflation adjusted?

    The main point is, both data sets have to be either inflation adjusted or not.

    It would be great if someone could find that out…

  47. to P: I am working on this. thanks for the note. mdw

  48. The Case-Schiller line has a positive slope because of inflation, so it is not inflation-adjusted. Since the curve compares the price of the same house over a long period of time, an inflation adjusted version would be flat until it reaches the current bubble. There is no reason for the same 1200 sq. ft. house to increase in value over time except from inflation. The bubble price increase is temporary and the long-term trend will re-establish itself once the bubble dies. So far the bubble looks sick but not dead…yet.

  49. smvcpa09’s comments are spot-on perfect. It is rare to see such insight on the web or anywhere for that matter. Thanks for the great post…

  50. So many of you are still in denial! You just cant handle the fact that you paid to much for your homes and values are and will continue to drop ! It’s time to take off them rose tinted glasses !It’s far from over and prices could easily fall another 45% despite inflation ! Grow up and stop complaining and never accept the advice of CNBC or JIM CRAMER !

  51. Hilarious. Not only will the bubble return, it will do so alot sooner than anyone thinks. Whether a house is worth the price you pay or not is irrevelant. It only matters if you can afford it.

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