Monday, August 4, 2008

Two Paths for Housing Prices

Here are two studies that come to vastly different conclusions on future declines in home prices. First up is the study by Charles W. Calomiris, Stanley D. Longhofer and William Miles. Titled "Housing Turmoil", this study looks at the relationship between foreclosures and home prices. These authors find that,
[e]ven under an extreme worst-case scenario for foreclosures,... U.S. house prices just aren't going to fall by very much in the next two years. In our worst-case scenario, the average cumulative decline is about 5 percent, and only 12 states experience declines greater than 6 percent by the end of 2009.
They conclude that "declines in house prices are highly likely to remain small.... [A]s foreclosures continue to climb in many states, house prices will remain flat or decline in those states -- but will not collapse."

Next up is Vladimir Klyuev in his study "What Goes Up Must Come? House Price Dynamics in the United States." He finds the following:
In the last few years, home prices had risen to unsustainable levels and then started to decline. In this paper we use a variety of techniques to assess the current extent of overvaluation. We put the most stock in the estimate based on a cointegrating relationship between the price-rent ratio and the real interest rate, which is quite robust to the choice of the sample period. According to these estimates, home prices were undervalued in the 1990s, but overshot equilibrium in 2000 and remain overvalued despite recent declines. In our best judgment, single-family home prices as measured by the OFHEO purchase-only index were around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent.
In other words, home prices may still have some ways to go. So which study is right? I find the latter study more reasonable, but I may be--and hope I am--wrong. Today's NY Times story on bigger waves of upcoming mortgage defaults from Alt-A and Prime mortgage (i.e. the good and supposedly safer mortgages) only seems to confirm
Klyuev's finding. Thankfully, Arnold Kling , helps puts this housing debacle into a long-run perspective that is not so dour.


  1. David, may I highly recommend to
    you Nassem Taleb's "Black Swan"?
    After reading this book, we get some much needed perspective on economist tea-leaf readings about house prices, oil prices et cetera. As Yogi Berra is reputed to have said, "Never make forecasts, especially about the future."

  2. Cassandra,

    I have been meaning to read that book. I will make an effort to get to it before the end of summer.

  3. My call is that we've got at least another 10% downward to go. Twenty percent is possible. Plan accordingly.

    There was a writeup on Taleb last weekend.

  4. My guess is that rather than real home prices going down, rents (and many other things) will go up!!

    The runup in home prices put alot of downward pressure on rents in the early 2000s.

    The only thing capable of really messing up home prices is the [absence] of jobs