Just who is crazy (or the pessimist)?

Three years ago, during the peak of the housing bubble, I went out on a limb and offered up my forecast on where New Jersey home prices would go. That number was down 30%, and it caused quite a stir. The analysis was simple one, based on historical home prices, incomes, and rents. Home prices had risen dramatically when compared to household income. This left us with three possible outcomes, incomes would rise to bring the ratio back near historic levels, home prices would fall to restore those levels, or we had undergone a paradigm shift and the old ratio was no longer valid. When I looked at historic price to rent ratios, the pattern was the same, homes were commanding prices far and beyond what their rent rolls would infer. The same three outcomes existed here as well, rents would increase to make up the gap, home prices could fall, or else “it really was different this time.”

There was no magic, no crystal ball, no black box, and no esoteric finance. The concept was simple, how could home prices rise faster than the incomes needed to support those prices? Surely we’d hit a point where no one would afford to buy a home. The same applies to rental prices, at what point would it no longer make financial sense to hold on to an investment property? Or the opposite, rents so low that no one would consider investing in real estate. Landlords were subsidizing renters and were not being compensated for their risk.

I digress, neither the forecast nor the analysis was the point of this, it was the reaction. Hell hath no fury like a homeowner scorned. I was called crazy for even suggesting the possibility that home prices might fall 30%, it simply wasn’t possible, it couldn’t be possible. I was a bitter renter, or worse, a housing terrorist for suggesting such things. What did I know? I was just some idiot bubble blogger trying to crash the market.

My my, how times have changed.

From the WSJ:

Yale’s Shiller: U.S. Housing Slump May Exceed Great Depression

Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will fall further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said.

“I think there is a scenario that they could be down substantially more,” Mr. Shiller said during a speech at the New Haven Lawn Club.

Mr. Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct. Home prices rose about 85% from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Mr. Shiller said. “Basically we’re in uncharted territory,” he said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.” Many people became convinced that housing prices would increase 10% annually, a notion Mr. Shiller called crazy.

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55 Responses to Just who is crazy (or the pessimist)?

  1. gary says:

    Where’s all the realtors who visit this site on a daily basis? How come you’re not countering this onslaught with….(ahem)…. data? C’mon, show us the steady rise in sales and prices? After all, you’re the professionals, we’re simply jealous trouble-makers, right? Right?

  2. bairen says:

    Grim the optimist?

  3. pretorius says:

    So far, New Jersey home prices are down 1% from the peak, according to the data that exists on the topic. Prices are down 0.7% according to OFHEO and down 1.2% according to NAR. If anybody has better statewide data, please let me know about it.

    Don’t forget an important point about Shiller’s calculations – he is deliberately excluding the healthiest housing markets in the country from his database.

    Major metro areas like Houston and San Jose – where local economies are growing and housing markets remain solid – are ignored by Shiller while smaller markets like Las Vegas inexplicable meet his criteria for inclusion.

    Shiller also ignores the agricultural heartland, where home prices are rising faster than anywhere else in the country.

    So when Shiller says that home prices have dropped 15% from the peak, remember that his calculation doesn’t include the parts of the country where home prices are going up.

  4. Happy Camper says:

    Haiti’s poor resort to eating mud as food prices rise.


    What’s going on in the world?


  5. grim says:

    If anybody has better statewide data, please let me know about it.


    First American LoanPerformance says NJ home prices are down 5-10%



    Although they don’t provide the data to back the state graph.

    On a core based level, they provide two datapoints that cover portions of NJ:

    Edison, NJ
    12-Month -4.67%

    New York-White Plains-Wayne, NY-NJ
    12-Month -3.34%

  6. Pat says:

    I always did think Shiller was a wimp. 30%.

    Robert? Are you out there? Are you ready to get under my 99 umbrella?

    It’s getting crowded under here, but I can squeeze you in cause you’re skinny.

    And you’re kind of cute.

  7. gary says:


    When you see the words, “according to the NAR”, start laughing hysterically.

  8. grim says:

    If anybody has better statewide data, please let me know about it.

    The New Jersey Association of Realtors Q4 statistical release has the following to say. I like this table because it minimizes the problems associated with MIX when using median. Although you still have geographic mix issues here. I’m not sure using statewide median and average is at all helpful.


    Median sale price by number of bedrooms

    2 Bedrooms or Less
    Q4 06 – $232,000
    Q4 07 – $217,300
    Down 6.3%

    3 Bedrooms
    Q4 06 – $319,900
    Q4 07 – $292,800
    Down 8.5%

    4 Bedrooms or More
    Q4 06 – $494,700
    Q4 07 – $463,200
    Down 6.4%

  9. bairen says:

    What were capes going for in Chatham/Madison in 2000? I thought 275 to 300k, but I’m not sure.

  10. pretorius says:


    I laugh hysterically at some of the realtors.

    But what can you point to in their data that makes you question its accuracy?

    The NAR data shows double digit year-over-year declines in the markets you’d expect – Detroit, Las Vegas, Sacramento, Tampa.

    The claim that some people are tempted to make is that NAR people are covering up major price declines. This claim doesn’t stand up to scrutiny, however.

  11. grim says:

    We can look at table 7 to try to minimize the geographic mix issues, but we reintroduce the housing stock mix issues.

    Although this is very interesting, because it shows the impact of geography on house price appreciation.

    Median home price by region

    North Jersey
    Q4 06 – $443,400
    Q4 07 – $418,500
    Down 5.6%

    Central Jersey
    Q4 06 – $346,000
    Q4 07 – $356,800
    Up 3.1%

    South Jersey
    Q4 06 – $233,400
    Q4 07 – $237,000
    Up 1.5%

    New Jersey
    Q4 06 – $360,000
    Q4 07 – $355,600
    Down 1.2%

  12. pretorius says:


    The mix shift point is an important one. Fortunately, the OFHEO data uses a repeat sales methodology, so we have a good benchmark that isn’t influenced by mix shift.

    And the OFHEO data for New Jersey matches what the NAR data tells us – the decline from the peak has been about 1%.

  13. pretorius says:

    Grim 13, thanks, great post. I like to see you getting into the data again.

  14. TJ says:


    Remember the house that guy was chirping about in New Providence. The one he previously owned and sold in ’05. I can’t remember the context of the conversation, but it was something along the line of…towns like New Providence won’t see depreciation. He made a point how it was on the market for only 23 days and assumed it sold for asking after it went UC.

    MLS: 2489140

    It has finally closed.

    Sold 10/05 – $489,000
    Sold 04/08 – $485,000

  15. grim says:

    Didn’t the owner update the bathrooms as well?

  16. gary says:


    You’re claiming that prices are down 1.2% according to NAR, grim is showing data that says something totally different, I’ve got 9 out of 10 realtors still feeding me a line of sh*t, the lead talking head of the NAR, Lawrence Yun, has claimed bottom 27 times and then you’re asking me why I would question their data.

  17. grim says:

    From HousingWire (hat tip CR):

    Stick a Fork in It: Moody’s Downgrades 1,923 Subprime RMBS Classes — In Just Two Days

    Cue more write-downs, as if there weren’t enough to begin with.

    Moody’s Investors Service has decided that it’s finally time to downgrade investment grade subprime RMBS — you know, the Aaa-rated stuff? Between Monday and Tuesday, calculations by Housing Wire show that the rating agency has slashed ratings on 1,923 tranches from 232 separate subprime RMBS deals from 2005-2007 vintages.

    That total includes hundreds of formerly Aaa-rated securities, as Moody’s embarked on its largest round of downgrades to investment grade subprime MBS since the credit crisis began.

  18. bairen says:

    #19 Moody’s is a few years late to the party.

    Wonder how badly they’ll be sued.

  19. grim says:

    Wonder how badly they’ll be sued.

    Or worse, face a regulatory backlash that castrates their business model.

  20. PeaceNow says:

    Way, way back in ’05, when I was posting under my initials, I predicted the economy would be the big issue in this presidential campaign. I now predict that housing will hit bottom sometime during the summer/fall of ’09…which was about when I was planning to buy another place. (Sold in NYC in ’05, and hoping to go back.)

  21. Jonnyboy says:

    Nice read about the role Moody’s played in turbo charging this mess.

    Triple-A Failure

  22. BC Bob says:

    “There was no magic, no crystal ball, no black box, and no esoteric finance.”

    Yet there was a blackbox. However, they all failed to implement one simple scenario. What occurs if prices decline? OOPS.

  23. Pat says:


    I been had.

  24. Pat says:

    I should have spotted that bare.

    O.K., who’s taking liberties with pret and spells worse than I do?

  25. BC Bob says:

    “I have been drinking and taking some drugs lately as my home is on the market for 8 months. Please bare with me if I make stupid statements on this forum.”


    Drinking and drugs can’t possibly inflict this much damage. Anybody that would recommend housing futures as a hedge for the physical must be under the influence of something much more powerful.

  26. rhymingrealtor says:

    Gary # 1

    I am one of the Daily Realtor visitors. I rarely dispute facts, only opinions.


  27. chicagofinance says:

    “BC Bob Says:
    April 22nd, 2008 at 9:55 pm
    Anybody that would recommend housing futures as a hedge for the physical must be under the influence of something much more powerful.”

    Why not?

  28. chicagofinance says:

    Anybody slse notice that Goldman’s real estate analysts have SLG as their conviction buy idea in the real estate space?

    Betting on SLG is betting on the New York job market, so Goldman is in effect telling its clients to go long New York jobs

    Are we missing something here?

  29. rhymingrealtor says:


    I thought I was the only one upset/dissapointed that this election has become about the economy. Where’s the talk about this mess of a war, nothing on the news anymore. I guess our boys dying is’nt as important as it was when everything else was peachy cream. I heard a new expression for voting women yesterday ” Pocketbook Moms” they took the place I assume of
    “Soccer Moms” I am neither, I am one of the frightened “Mother of sons Moms”


  30. chicagofinance says:

    slse should be else

  31. Pat says:

    KL, isn’t it a given that either C or O is going to win and end the war?

    Why should that be an issue if it’s a given?

    It’s already priced in and everybody is on to the economics issue. Pocketbook.

  32. chicagofinance says:

    OT: so my source was correct about Delgado, yes?

  33. bi says:

    Is Obama electable? with 35K people rally and 3:1 outspending, he lost by 10 pts tonight.

  34. RentinginNJ says:

    If anybody has better statewide data, please let me know about it.

    Fed Beige says NY metro area suburban prices down 15% from the peak


    Most of the data points in the OFHEO data set are refi’s and not actual sales. It’s much easier to “hit your number” on a refi compared with getting an actual buyer to pay your number. Also, only conforming loans are included in the data set. Many NNJ homes are therefore excluded.

    You just need to look around to see that a 1% decline doesn’t make sense. The increasing number of foreclosures, short sales & “comp killers” should clearly indicate that prices are down by much more than 1%.

  35. Al says:

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    I’ve information vegetable, animal, and mineral,
    I know the kings of England, and I quote the fights historical
    From Marathon to Waterloo, in order categorical;
    I’m very well acquainted, too, with matters mathematical,
    I understand equations, both the simple and quadratical,
    About binomial theorem I’m teeming with a lot o’ news,
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  36. Rich In NNJ says:

    I keed, I keed

  37. Hobokenite says:


    Most of the data points in the OFHEO data set are refi’s and not actual sales. It’s much easier to “hit your number” on a refi compared with getting an actual buyer to pay your number. Also, only conforming loans are included in the data set. Many NNJ homes are therefore excluded.

    Exactly! Excluding non GSE loans (i.e. Jumbos) in NNJ is retarded if you want to use it to measure prices.

    Of course CS excludes condos (and presumably co-ops as well), so it’s kind of useless for NYC and some other areas.

  38. TRx says:

    Speaking recently to a ‘cyclical’ realtor (ie, 30 yrs exper..and not a ‘fair weather’ one). He expects a 20% drop next year. He says prices aren’t “dropping” because people can’t buy. The finance side is a mess with paper and money requirements. However, he’s seeing a number of short sales with significant discounts. He said he prefers the precipitous drop of the early eighties. Kinda like pulling a tooth. One yank…painful but quick. This now is like a slow death. Again…just what I heard.

  39. Rich In NNJ says:

    SL (58),

    Still shows as under contract.
    I’m guessing the the wetlands portion or approval from the town is what is holding up the purchase. I think the buyer wants to be sure they can build.

    I have an idea of who is purchasing the property through word of mouth. A lawyer who’s daughter was a finalist on Food Network’s “Next Food Network Star”. Not a well liked person, but how many lawyers are?

  40. me@work says:

    Great….that’s encouraging [sarcasm off]

    We really would have liked the place — and would have left it intact to make a small farmette.

    I hope it falls through. (yeah, yeah I know…I’m just a sore loser….)

    Thanks for the info.


  41. Pat says:


    Japan Official Urges U.S. Subprime Bailout
    Likens Credit Crisis To A Broken Bathtub, Says U.S. Should Use Public Funds To Fix

  42. grim says:

    Just how much devalued subprime debt is Japan sitting on?

  43. HEHEHE says:

    US taxpayer to Japan – F-Off!

  44. Hobokenite says:

    Do the Japanese always use public funds to fix broken bathtubs?

  45. 3b says:

    #3 pret:So when Shiller says that home prices have dropped 15% from the peak, remember that his calculation doesn’t include the parts of the country where home prices are going up.

    True. However, many of those areas where prices are going up, were never part of the bubble areas to begin with.

  46. Leo says:

    My ex and I purchased a house in Parlin (Middlesex County) in 1978. Our total income was $27,000 and the house cost $49,000. Try finding that ratio today.

  47. Christina says:

    We moved from CA to NJ at the end of 2005. My husband argued with me for two months about selling our house in CA (Irvine, California which by the way is the epicenter for the mortgage meltdown) I insisted – Let’s get out while we can. He thought I was crazy. I finally won the debate after he consulted with a friend of ours who had been in the business for 30 + years who advised “run while you can and don’t look back”. You can imagine how hard it is not to sing “I told you so…” every morning at the breakfast table. I think you are a genius for writing this blog. It’s common sense. Yes, it is amazing how the tide shifts, isn’t it. The next stroke of luck was waiting to buy a house here (and still waiting…) Then again what do I know. I’m just armed with simple math skills.

  48. Laurie says:

    RE:#50…so you were able to unloaad the CA house???

  49. reinvestor101 says:

    I wonder what would have happened had there not been a bunch of negative talk through blogs and the media? Would housing be down at all?

    Really, what has changed from 2-3 years ago? The only thing that has changed is perceptions and expectations. Negative talk changed perceptions and expectations.

  50. Imus says:

    #50: Your husband is clearly a lucky man.

  51. jcer says:

    Reinvestor a market in the short term is almost always heavily influenced by perceptions. The perception 3-5 years ago was buy a home it is a good investment prices only go up etc. The real issue is 7 years ago there was a disconnect beginning where the intrinsic value for a property became disconnected with it’s market value due to a distorted marketplace fueled by cheap and easy credit. As a real estate investor you should understand that something was up, if you did not you should rethink investing in real estate. For example rent vs. buy if I cannot get at least 9-10 cap gross on the apartment or over 6 cap net why would I ever buy, with buying I am taking enormous risk and if I try to derive cash flow from my investment it becomes a hassle. What about appreciation of the property well anymore than 5% per year is unsustainable because in a non bubble market or market where property is undervalued appreciation should not move much beyond inflation or wage increases baring external influencing factors i.e. neighborhood demographic change. So to answer your question this was destined to happen just as the subprime collapse before it, the junk bond crash of the 80’s, the S&L crisis, and NY metro housing collapse of the 80’s. Most people who didn’t see this were blinded by greed.

  52. Anon E. Moose says:

    @reinvestor 101 (52):

    I think the internet et al. has made this a spectator sport for the voyeurs among us, but I really don’t think it much changed the outcome. The bubble was inflated by cheap and easy credit, and its absence is the catalyst for the bust. The boom years’ ‘demand’ for housing is more accurately described as hyper-supply of money to loan. The option-ARM game came to a halt because of inevitably poor loan performance, not anything you or I or Grim have written (sorry).


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