The difference is prices were below value in 1997. A drop of 15% would drop them back to these depressed levels, but they would be below fair value. He is correct in that a 5% drop would lower them to fair value, but he shouldn't be surprised the market may overcorrect.

What does a further 15 - 20 % housing price drop mean for California ? We are already at over 11 % unemployment.

Lord, prices were not below value in 1997, the NY Times own Case Shiller chart shows that 1997 prices were roughly the baseline from 1946 until 1997

http://f.imagehost.org/0079/housingpricebubble.gif

Do you mean that the housing bubble already started in 98?

Dean- is the real price the most relevant value? I read in the Economist that house prices have fallen to where they are about equal to the price of renting. Is that the normal case? If so should we expect rents to fall as house prices decline further?

Yes, the housing bubble started in the mid-90s. I am not sure how the Economist did their own/rent calculation, but we are still about 10-15 percent above the historic sale prices to rent ratios.

There is a painfully stupid calculation that some folks do using ownership costs that are based on the current mortgage interest rate. The painful stupidity results from the fact that no one expects interest rates to stay at current levels.

Hence, if we do an own rent calculation based on a 4.7 percent mortgage, when the mortgage rate goes to 6.5 percent in 2-3 years, as everyone expects, the same calculation gives a sale price that is 15-20 percent less. How many people would pay $400k for a home that they expect to be worth $320k in 3 years?

Okay, I’m probably making a bad calculation here, but when I look at the Case-Shiller 10-City index data in real dollars it looks like housing prices would need to fall by about 33 percent from the current level (January 2009) to get back to the price levels of June 1997. Also, I agree with Steve that 1997 prices basically represent ‘trend,’ and not ‘depressed levels’ as indicated by Lord.

I would be wary of using rents without having a housing-rent ratio that shows a broad time-span. Rents are astronomical in some areas as well or at least much more expensive than they were before the bubble. Be careful of assuming that rents aren't inflated.

In 1994, a 1700 square foot apartment sold in Manhattan for $430K. Assuming Manhattan follows the rest of the country, the Case/Shiller chart referenced above implies that same apartment will sell for approximately $750K (inflation adjusted) in a few years. I find that hard to believe.

Unfortunately the Economist article merely stated this as a fact and did not give the methodology. Your guess seems plausible.

Crosby- there is no rule that different cities have to maintain the same levels relative to each other. If a city like New York becomes home to only super rich people, the housing prices could rise above trend.

Still, don't be surprised to see NYC prices return to normal levels.

Dean,

Your approach leans too much on sale price in 3 years. The rate could be higher then but price could be too.

Buying house is subjective, not objective.

Many renters have moved out and bought home at a fixed rate they could afford now. Don't think those fixed-rate borrowers fearing what their residence will be or drop in 3 years if there's a higher rate.

They think more from a current buyer's perspective--after-tax-cost between renting and buying for the next seven years. Looking at a buyer's view. Not an expert here.

NY prices - prices are higher but their multiples have come down from the past. Not so much about the price between 1994 and now but look at affordability.

One shouldn't confuse Schiller's national house survey with his 10-city survey. Nationally house prices barely keep up with inflation, but large metro urban areas keep up with incomes. The real 10-city value increases about 2% a year, but swings between boom and bust.

I think housing prices will end up falling significantly below trend levels because there is a historically unusual oversupply of housing relative to population due to the surge of new construction during the last few years of the housing bubble.

Dear Mr. Baker: Noam Chomsky referred me to your blog in regard to an op-ed I wrote for the 4/16 issue of Newsday. He thought my thinking is similar to yours and so I post a link here for your consideration and comment. Sincerely, Dave Kapell

http://www.newsday.com/news/opinion/ny-opkap1712659990apr17,0,7973490.story

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