Price (green line)
The median home price surprised me again with a significant decline, $6,600 from January to February, to $213,400.
I was thinking a few months ago that prices would fall to a point where they would level off for a few years while inflation would take care of the last bit of the correction. Now, it’s looking like the median home price may make the entire correction by the end of 2008.
Sales (blue line)
We saw a decent bounce in the number of homes sold from January to February but nothing special.
March home sales will be key. March will give us an idea of how the rest of the year will play out.
Listings (red line)
It looks like the decline in the median home price is finally starting to discourage home sellers.
The inventory of homes for sale increased less than 1% from mid-February to mid-March. Last year it increased over 4% the same month.
Conclusion
Last month I wrote, “Certainly given the intense downward momentum entering 2008, it’s possible we could see price declines this year similar to or larger than those in 2007.” Ditto.
“MLS Listings” are measured at one point in time, usually the 15th day of the current month. “Median Price” of homes sold and the total number of home “MLS Sales” are for the entire preceding month.
10 responses so far ↓
1 Cbass // Mar 18, 2008 at 3:27 pm
All I can say to that graph is wow John! That is about a 20% drop thus far, just eyeballin it from like 265k down to about 215k. Good thing I did not buy in middle 06 I would probably want to hurt myself right about now.
2 Peter Fork // Mar 18, 2008 at 6:48 pm
Kudos to you John! This graph is my favorite, it gives you a good hint of where things are going.
3 John Wake - Real Estate // Mar 18, 2008 at 9:33 pm
Cbass, it went down to $213,400. I just added the number to the post.
4 Aaron // Mar 19, 2008 at 12:03 pm
Median Home Prices should be 3 times yearly income. The median income is $45,000 a year-Times 3= $135,000. That might be low…but I wouldn’t be surprised to see prices at $160,000-$180,000.
5 YoungSnowbird // Mar 19, 2008 at 1:18 pm
Aaron, the median income was $54318 in 2006, so that makes an estimate of about 163k$. I would say this is a lower limit of where prices can go.
6 John Wake - Real Estate // Mar 19, 2008 at 1:48 pm
The median has already fallen about $50,000 from the peak. We’re only about $30,000 from $180,000.
I can’t see going below $180,000 but you never know.
7 Brian McMorris // Mar 22, 2008 at 7:47 am
John, as you know, I have been putting the $160K target on your blog for over a year now. That is the number you get when you normalize the appreciation through 2008-09 from the trend it was on before 2003. I think it is interesting that others are coming up with the same number using different techniques (BTW… the multiple to average earnings has been as low as 2.5 in past recessions).
I am standing by that number, $160K. Your chart sure makes a good case for it to happen. The rate of decline in home prices will not reverse on a dime. So, just the momentum already established should get it there. It will be hard for it to stop at $180K as fast as it is dropping right now. Anyone who bought mid 06 will be hurtin’ for certain, as CBass suggests.
8 John Wake - Real Estate // Mar 22, 2008 at 8:10 am
Well, I did not see prices going up they way they did in the first six months of 2005 and I didn’t see prices increasing for 12 months after the sales top in July 2005.
Inertia is the most powerful force in nature. Prices could be below their “market” value but that is more difficult than going above their market value.
I see a lot of pent up demand for homes. Once the conventional wisdom is the prices have bottomed out, sales will improve significantly. Many buyer don’t have to see good prospects for appreciation. They just need to see no prospects for depreciation.
However, as fast as prices are falling now, inertia could overshoot the market (you say $160K is the market but I think that is much too low. $180 is too low in my ballpark estimate). In the case of an overshoot, there would likely be appreciation again quickly, within a year or two.
9 Brian McMorris // Mar 22, 2008 at 11:23 am
John, I agree with your basic ideas about inertia. But your conclusion that $180K is an overshoot is flawed by most rational metrics.
I think Dr. Robert Shiller has shown conclusively (rationally) in studies of real estate values over 200 years of data, that real estate appreciates from 0 to 1% annually “REAL” return (that is, after inflation is netted out). This is logical. I don’t think real estate can appreciate faster than an economy in the longest run (that is productivity growth plus inflation).
If inflation is averaging around 4% the past five years and going forward a couple more years, then the appreciation rate should be around 5% from a normalized level (4+1). I think we can argue that January 2003 was a somewhat “normal” market for real estate nationally, as well as AZ.
If we look at your graph, the average home was at around $140K on Jan 1, 2003. If we compound that value at 5% over six years, we come up with a “normal” value of $187K on Jan 1, 2009. But, like you, I think inertia is powerful and trends tend to overshoot the normal. This is why I think $160K is a reasonable bottom valuation. Time will tell.
10 Brian McMorris // Mar 22, 2008 at 11:41 am
One more thought: there are some fundamental factors that can change these purely technical trends, in which case, inertia / slope of the trend could change almost instantly:
1. The Congress legislates some action to put a “floor” in on home values. This is possible in this crazy election year. There is some talk about a big tax credit (like 10% of price towards down payment) for home buyers. That would probably do it.
2. The global Central Banks and other big institutional money sources (Saudis?) drive mortgage rates down to 4% for fixed 30 year to rescue the housing market.
3. The Fed government buys up foreclosed houses and auctions them off to the lowest bidders or back to the original owners (kind of a dream scenario for the Socialists among us who want government to take care of us)
4. The last possibility is the dooms-day scenario where the Feds can’t save the big banks from failing, all mortgage lending stops, and home prices fall through to the basement becaue there are no buyers. This is the 30s Great Depression scenario, but I think the Feds and Congress have the ability to stop this from happening (at least I hope!)
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