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levels, home prices would fall to restore those levels, or we had undergone a paradigm shift and the old ratio was no longer valid.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 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.