What will our $600k house be worth in the not-so-distant future? $326,968

In the previous post we looked at the current value of a hypothetical home valued at $600,000 at the peak of the housing market. Using the Case-Shiller data released today, we saw that the home had dropped over $200,000.

But what will the value of this home do in the future? Answer: keep dropping. At least that is the answer if you listen to the people who are putting their money on the line.

The Chicago Mercantile Exchange trades futures contracts on the Case-Shiller real estate indexes. The price of these future contracts gives a value of what traders expect the index to do in the future.

After today's release of the October figures, there was significant volume in the Feb-09 and May-09 contracts for the San Francisco index. It must have been worse than expected because both fell (Feb-09 from 133 to 127 and May-09 from 124 to 119 - see screenshot below).

Plugging these figures into our previous graph with the $600,000 home, we see that our hypothetical home will be worth $34,181 less in February, and $56,162 less in May... dropping all the way to $326,968.

Are the futures numbers always correct? Of course not. But they are as good of an approximation as you are going to get. Any real estate agent who disagrees with the projections is free to put their money where their mouth is and could make a fortune on a real estate recovery.

It is also worth noting that to date the futures markets have consistently been overly optimistic on housing, not pessimistic.



Update: Case-Shiller futures data should be lagged 2 months (i.e. August 2009 should be June 2009).

What's a $600k House Worth Today? $383,130

Today, Standard & Poors released the October 2008 numbers for their Case-Shiller housing index. The data showed housing prices continue to decline, dropping 18% in the last year.

If we look at the San Francisco index, we see a peak of 218.37 was reached in May, 2006. Today, the index stands at 139.44. While this definitely shows a significant drop, the numbers are a bit hard to conceptualize.

As such, I decided to take the data and transform it into numbers more easily understandable. Specifically, if you're house in the Bay Area was worth $600,000 at the peak of the real estate market, what is it worth today?

Here is a graph of the results:



As you can see the answer is $383,130. I highlighted another few points on the chart just to show how dramitic the increase in real estate prices have been.

Also, housing declines are not that uncommon. A house worth $200,000 at the beginning of 1990 was only worth $189,000 when the real estate bubble began in 1997.

Additionally, this same house has lost $216,870 in value from the peak! Amazingly, more than the entire house was worth in 1997.

A Look Back at 2008

From the Press Democrat:

The problems began with housing's deepening decline. Foreclosures spiraled to record heights with banks taking back nearly 60 homes a week -- four times the number a year ago.

Most vulnerable are those who bought around the peak of the housing boom three years ago with risky loans featuring low initial payments that explode when higher interest rates kick in. If they now owe more than the home is worth on the market, there isn't equity needed to refinance. Selling is the only alternative to foreclosure, yet it's a struggle in a market flooded by bank-owned homes.

Sales finally started to pick up this fall as prices hit seven year lows in Sonoma County, plunging to $325,000 after reaching $619,000 in 2005. But sellers still outnumber buyers and economists have said prices likely won't hit bottom until the second half of next year.

Tighter mortgage lending has hampered sales, particularly for the market's upper half, reflecting lender caution in the wake of rising foreclosures.

More Housing Declines to Come

60 Minutes had an excellent report on the next wave of real estate defaults that is on the horizon. My one quible is that plenty of people saw this coming. Major publications like BusinessWeek covered the Option ARM story (here - 2006 and here - 2005). Commentators on the web have reported on these problems going back even further.



Still, it is great to see this story getting coverage. Watch the video:

About the Website

This website was started in December 2008, over two years after the peak in real estate prices in California. Despite the nationally publicized fall in home values, many Sonoma County residents remain uninformed about the true state of the current market. I attribute this to several factors:

First, the people most knowledgeable about a local real estate market are normally real estate agents. Agents don't have an incentive to tell you home prices will continue to decline in the future because then they wouldn't make any sales. Hence, they will generally put things in the best light (i.e. “Now's a great time to buy!”) even when things look to be getting worse.

Second, another source of real estate news is local papers like the Press Democrat, Healdsburg Tribune, etc. However, newspapers derive a significant amount of their revenue from advertising, and their biggest advertisers are real estate agents listing their properties. So once again you create perverse incentives. While papers like the Press Democrat will occasionally run an excellent piece on the troubles in the housing market, if the front-page of the paper described how the $2 million listing on the back-page will soon be worth $750,000, the agent listing the property would quickly stop advertising with the paper.

I don't believe that real estate agents are intentionally trying to mislead people. It is just a fact of life that people tend to view the world through their own prisms. Real estate agents will tend to think it’s a great time to buy and home owners will tend to think that their property has appreciated. It's similar to the way that most parents tend to think that their child is the smartest, best looking, most talented kid on the block... not to mention that they should also be getting more playing time from the coach that keeps benching him or her. We're all inherently biased and our position in life affects how we view the world.

Finally, much like religion and politics, declining home prices can be a tough subject to discuss. You're not going to make many friends telling people their homes could decline in value. It's understandable given you are discussing someone’s personal net worth.

For all these reasons, I don't believe first time buyers in particular have many people looking out for them. Currently, we're going through what I believe is a once in a lifetime event where housing prices will decline for years and stay there for up to a decade. Buying a home too early could wipe out your life savings that you've worked so hard to accumulate. For this reason it's important to get as much information as possible on the benefits and risks of home ownership before taking the plunge.

This site will strive to provide insight into the current housing slump in Northern California from someone who thinks a home is a place to live in, not something to make you rich. If you have any questions, comments, or articles you would like to pass on please send them to healdsburgbubble@gmail.com.

I look forward to hearing from you and enjoy the site.

Disclaimer

Healdsburg Housing Bubble weblog (located at URL http://healdsburgbubble.blogspot.com/ and henceforth referred to as “HHB” or “this site”) is to present and discuss information relating to real estate, the real estate industry, and financial markets in general. All data and information provided on this site is for informational purposes only. HHB makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis. HHB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by HHB administrators. You should consult a finance professional before making any decisions based on information found on this site.