https://calculatedrisk.substack.com/p/what-will-happen-with-house-prices
It is clear that over the next year house price growth will slow from the torrid 20% year-over-year (YoY) pace in February (and likely also in the March report that will be released later this month). I think there are three likely scenarios going forward for house prices that I’ll call “slow”, “stall” and “bust”.
First, last year I asked What could cause inventories to increase? and I noted Richard Feynman’s comment about science (1 Minute video here):
First, we guess … Then we compute the consequences of the guess … to see what it would imply and then we compare the computation results to nature or we say compare to experiment or experience, compare it directly with observations to see if it works.
If it disagrees with experiment, it’s wrong. In that simple statement is the key to science. It doesn’t make any difference how beautiful your guess is, it doesn’t matter how smart you are who made the guess, or what his name is … If it disagrees with experiment, it’s wrong. That’s all there is to it.
I take the same approach to making housing predictions. First, I make some guesses as to what will happen (I tell myself some stories), and then I see if it fits the data. If the data doesn’t fit the story, the guess is wrong.
So, these are just guesses - and the data will tell us which (if any) are correct.
My definition of “slow” house price growth will be annualized growth in the mid-single digits. For the “stall” scenario, this will be close to no change (seasonally adjusted, annualized) in house prices. And for the “bust” scenario, this would be house prices declining over the next few years.
The “bust” scenario would be nothing like the decline in house prices following the housing bubble. Following the bust, house prices declined about 26% nationally from the peak (according to Case-Shiller), and significantly more in some cities. For example, prices decline 60% in Las Vegas, and over 50% in Phoenix and Miami following the bubble. In the housing bust, prices fell for several years due to the large number of distressed sales (foreclosures and short sales). We will not see cascading price declines this time since lending standards have been solid.
The following graph shows the year-over-year change in the Case-Shiller National Index (Seasonally Adjusted) since 1976. We can see the recent sharp increase in prices.
Also note that house prices stalled in 1982 and in 1991. In 1982, prices declined about 1% from the peak, and in 1991, prices declined about 3% from the peak. I’d consider both of those periods to fit the stall scenario.
Now let's look at the year-over-year change for the same period in real terms (inflation adjusted using CPI-less shelter).
Note that in real terms, house prices declined during the stall periods in 1982 and 1991. In the early ‘80s, real prices declined 11% from the peak, even though nominal prices only declined slightly. Homeowners are only concerned with nominal prices, so they didn’t notice the real price decline.
In the early ‘90s, real prices decline almost 14% even though nominal prices declined 3%. Note that real prices were flat for several years in the mid-‘90s.
During the housing bust, real prices declined 35% compared to a 26% decline in nominal prices (this was a low inflation period).
House prices tend to be sticky downwards in nominal terms. Homeowners resist selling for less than the recent sale prices of similar homes in their neighborhood. However, there are always the homeowners that need to sell (death, divorce, moving for employment, etc.), and sometimes these homes will sell for less than previous sales. Note that house prices were not sticky downwards during the housing bust due to the all the forced sales.
However, even in normal times, house prices are not sticky downwards in real terms as the second graph above shows.