When Will Housing Recover?

An interesting perspective on recent trends in the U.S. housing market is gained by noting how housing prices correspond to per capita income, a traditional measure of affordability. The ratio of housing prices to per capita income is high but close to historical norms in many regional markets. However, notable exceptions do exist. In California, housing prices recently reached levels relative to per capita income far above historical norms. A significant pricing correction has begun in that market. Similarly, housing prices are correcting sharply in Arizona, Florida, and Nevada. Investors need to be mindful of the potential for housing market–related losses and the potential for contagion among asset classes.See comments and response on this article.Falling real prices for housing are unusual in the United States; falling nominal housing prices are unprecedented, at least since the Great Depression of the 1930s. Yet, although complete figures for 2008 are not yet available, we can see that the nation is undergoing an extraordinary decline in both real and nominal housing prices. On a national basis, nominal prices for housing declined by an unprecedented –8.0 percent between Q2:2006 and Q2:2008 (the latest available data). Over this period, regional housing markets were especially weak in California (–27.3 percent), Nevada (–28.6 percent), Arizona (–24.8 percent), Florida (–27.0 percent), and Virginia (–19.4 percent). Concern with problems in the California housing market is at the epicenter of the current crisis because California is the largest regional housing market, is presently experiencing a fast rate of price depreciation, and was a pivotal state in the tightly contested 2008 presidential election.We show that the sample of 10 metropolitan statistical areas used in 1987 to constitute the original S&P/Case–Shiller Composite 10 Index—the most widely followed housing price index—is dominated by what turned out to be seven red-hot and then stone-cold regional housing markets, including California, Florida, Nevada, New York, and the District of Columbia. In these markets, prices soared up to a market peak in Q4:2006 and then began a collapse that continues through Q2:2008. At the same time, housing markets remain stable throughout much of the United States. Moreover, despite the severe correction in a handful of high-profile markets, housing prices have continued to rise in 23 states. In another 11 states, the recent decline in housing prices is a modest 0–5 percent. The current and unprecedented nationwide decline in housing prices has had little to no effect on homeowners in 34 of 50 states—that is, in roughly two-thirds of the states.For the United States as a whole, housing prices will conform to long-term norms if, in an environment of flat housing prices and continued low interest rates, typical per capita income growth ensues for only 1.20 years. In this case, the nationwide housing “crisis” will be on the road to recovery by the first quarter of 2010.