How Low Will Housing Prices Go?
by Charles Hugh Smith, contributing editor
Monday, December 12, 2011
Executive Summary
- The three macroeconomic factors that will suppress employment — and in turn, housing prices — for years to come
- Expect an overshoot as housing prices revert to their historic mean
- Why those who are buying now are likely “catching a falling knife”
- Relative valuations for determining when the housing market will have hit bottom
Part I: Headwinds for Housing
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II: How Low Will Housing Prices Go?
It’s a truism that “all real estate is local,” and to the degree that the ultimate price of a property is only truly “discovered” when a specific buyer purchases a specific property at a specific point in time, this is certainly true. It is also true that many key inputs to real estate valuation are locally derived, such as employment, wage levels, demand for rental housing, the attractiveness of neighborhoods, and so on.
But to say that interest rates managed by the Federal Reserve or subsidies provided by the Federal government have no influence on real estate valuation is clearly untrue. Valuation is directly influenced by global, national, and state economies, and by the policies of the central bank and government.
In attempting to answer the question When will housing hit bottom? we might start with the coarse-grained systemic inputs and then move to the more fine-grained local inputs.
Employment and Housing Demand
In Part I, we saw that employment is closely correlated with the price of housing. This correlation is even more pronounced if we look at employment and new single-family home sales, which is the sector of home sales that actually creates significant employment:
Thus a good place to start our inquiry is to consider the macro-economic factors that are likely to broadly impact employment.
by former_user