Real Estate

Yesterday we learned that home prices in the first quarter of 2009 were about 19% lower than they were in the first quarter of 2008. This shouldn't have come to a surprise to anyone considering the fact that while real estate prices were still collapsing throughout 2008.

To define a housing bottom the more important number will be the month to month data. The data for March showed prices nationally were down about 2% from February. It is not good news, however looking at March, we know that the stock market was in a bit of a free fall between January and March, credit markets were in turmoil and there was very little upbeat economic news.

We know that much of that changed in April so the March-April sales prices may be key to see if we have reached a housing bottom or if prices will continue to fall. There were only a very few metropolitan areas in March that had stable or increasing prices.

There are other factors that have been commented on extensively. One is that while there is evidence of increased sales activity, it is distressed sales. Not sure why that is a problem, those houses are effectively being offered at clearance prices and people are smart enough to buy the lower priced house. We do have to work through the inventory of these distressed properties before we are going to see price increases. Also, some analysts pointed out that people who might want to sell were holding on to properties waiting for prices to stabilize or improve.

It sometimes seems that some of these analysts expect prices to return to levels that existed at the high of the housing bubble. I can't imagine that happening, since the very essence of a bubble is that it creates artificially high prices. I think the best we can hope for is a return to where housing prices should have been had we not had a bubble.

Looking at data showing how prices had behave since 1975 the current level of prices is very close to where they would have been and the trend from 1975 to 2000 continued. You can very clearly see the start of the real estate bubble in 2001. This provides a reasonable basis to say we are in the range where prices may start to stabilize. Of course in the years between 1975 and 2000, housing had it ups and downs. By my calculations we are already lower than what would have been the upper limit of variation but not at the bottom limit. It is entirely possible that the declines will continue to that level (about another 5%).

Finally, one mantra in real estate over the years has been location, location, location. There are some areas that have been much harder hit than others. In many cases the areas of the greatest speculation, California, Florida, Arizona, Nevada have a great oversupply of housing and may take quite a while to reach stability. Other areas are suffering more than the rest of the nation from industrial restructuring and job loss and may have depressed pricing for a long period. However, in most other areas, and I believe I see some signs of this already, housing is at or near the bottom right now. I don't think prices are going to escalate dramatically in the immediate future, but once the market sees that prices are stable, housing is extremely affordable and buying will pick up.