A friend, Chuck, emailed this graph to me yesterday showing the historical ratio of the U.S. median home price (from Case Shiller) to median family income. Historically, house prices have been about 2.7 times income, but during the run up, peaked at over 5 times income. This graph shows the ratio at 3.62 as of Oct. '08, and has likely dropped somewhat since then. (I can't find a more current version.) With the drops of the past few months, maybe it's 3.2 right now. To get back to that 2.7 price to income ratio would take about another 15% drop in prices (assuming income holds.)
When you Google "Case Shiller home prices" and "median income", you'll find various versions of this calculation with adjustments based on different adjustments. And of course, there are regional differences, with the largest price drops likely found in the overbuilt, high foreclosure Sunbelt markets. And of course, as the recession deepens, the ratio could overshoot that 2.7 level to the downside as it did in the early 90's.
If one accepts the premise that there is some magical "P/E ratio" for residential real estate, and historically we'll correct to that level, then it appears we are well into the correction, not just at the beginning. And that may be good news.
I expect this post will generate a LOT of comments.
The following are a few more recent Case-Shiller charts courtesy of Seeking Alpha, Case Shiller and Standard and Poors.
The current median sold price in Sullivan (12/1/2008 through 2/28/2009) is more like $130,000 to $135,000.
Dave's posted figures for the three month (11/1/2008 through 1/31/2008) is currently at $148,500 -which is way off the current data and doesn't take into consideration the month of February which was way down in terms of volume and closing numbers. Tune in this Friday - the median will be more in the low 130 range in that time period.
Assuming from Dave's charts that the peak of the median sold price was close to $200,000 in June of 2007, we are currently down about 32% - 200k to 135k.
I believe the median will settle at $120,000 by the 2Q or 3Q - and stay there for some time - two or three quarters - which would represent a drop of about 40% + / - from peak to trough in Sullivan County.
Furthermore, this area will be the last (as it always is) to rebound due to it being a discretionary income purchase and buyers now have other options. This fact has been born out in other boom bust periods such as the early 1990's.
Realtors up here better hope that 120k is the floor.
Yours in Sullivan County,
Uncle B.
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http://seekingalpha.com/article/122499-december-case-shiller-report-delivers-more-bad-housing-news
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_022445.pdf
http://www.bearmarketinvestments.com/house-prices-real-prices-price-to-rent-and-price-to-income
Posted by: Uncle B. | February 25, 2009 at 08:33 AM
I question the applicability of this metric to second-home prices. Given the discretionary nature of a luxury item like a second home, I would expect a higher ratio of income to second home price than income to primary home price. What I'm getting at is the idea that assuming primary housing prices need to come down to level X in relation to income to spur greater sales, the price of a second home needs to come down by a greater percentage in relation to the same income to fuel greater demand for the second home. And I would expect that to be especially true in times of economic trouble, when the potential for loss of income is greater than in better times. Again, given the discretionary nature of a second home, I wonder how people would just lump both primary and second-home prices into one "housing cost" , compare that that number to their income, and go second-home shopping if the single resulting ratio were low enough. Obviously there will be exceptions in individual cases based on intangible values and "go for it because I may get hit by a bus tomorrow" equations. I have no data on this, just a hunch.
Posted by: ar | February 25, 2009 at 08:39 AM
I want to reiterate again that one has to be very careful with the inference that B. is making, that "prices" have fallen (or will soon fall) 40%. I talk with buyers all the time, and that kind of statistic comes around full circle --- that buyers expect that any particular house is now worth only 60% of what it was worth in 2007. So a $500,000 lakefront house then should now sell for $300,000. The overall market basket number needs to be tempered with an understanding that what is selling has shifted. The second home market, at least for the time being, is very soft, and that comprised a significant portion of the market when the median was $200,000. If, in fact, we start to come out of this recession in 2010, discretionary purchasing may pick up again, and second home will likely begin comprising a larger part of the market basket. I"m not saying we won't see prices fall by that amount — I don't have a crystal ball. But I don't think it's as simple a relationship as some would want to believe, because the market in Sullivan is made up of various sub-markets that behave somewhat differently from each other.
I also don't think that for second home buyers making the decision to buy a second home is simply looking at their current housing expense and seeing what's left over to buy a second home. There's a "recreational expense" component that most second home buyers factor in. Some folks spend their discretionary recreational dollars on the opera and theater, others on vacations, and some golf or boats or any of the other myriad lifestyle bauble choices. Some folks make the decision to spend their recreational dollars on a vacation home. As part of that equation, they may decide to forfeit a larger or more expensive primary home. For example, my primary residence is in Sullivan County, and I would love to live on a lake. While I can afford it, I prefer having my current non-lakefront house and a place in the city. That's the lifestyle choice I've made. There are other tradeoffs to having an apartment in NYC, like not going on elaborate vacations or buying a new vehicle every 3 years.
Posted by: David Knudsen | February 25, 2009 at 09:09 AM
Knudsen:
"I talk with buyers all the time, and that kind of statistic comes around full circle --- that buyers expect that any particular house is now worth only 60% of what it was worth in 2007. So a $500,000 lakefront house then should now sell for $300,000."
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Dave,
And your buyers might be right.
Let's be clear.
From September of 2008 through the end of February 2009 - five months - there have been exactly seven waterfront sales in all of Sullivan County.
Bottom price: $139,000
Top price: $396,000*
* Does not account for the 1.7MM sale at Chapin.
Bid to ask differential about 15%.
In fact, you can toss out a couple of those since they are on ponds - not deep swimmable lakes.
There have been no sales whatsoever on what - if I may say - you would consider in your clients price points of 250k to 500k from reading your blog - i.e.; Black, White, Tennanah, Huntington, Shandelee, DeVegnoe, Highland, etc. Lakes.
Almost a half year.
That, in itself, will make any comps going further a crapshoot.
Uncle B.
Posted by: Uncle B. | February 25, 2009 at 10:20 AM
Interesting post as always. But I think one thing that's often overlooked in the CSI numbers is how striking the regional variations are.
Here's a full report: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_022445.pdf
Check the spread on the third page, regional breakout. The one year decline ranges from Denver with a 4% to Phoenix with a 34% decline. That's one hell of a standard deviation. Then add the difficulty of using an income/price metric for a county like Sullivan. Obviously if you measured prices in Sullivan to incomes in Sullivan the data would look very odd, as a large percentage of buyers/owners don't live in the county and wouldn't show up in that data. And as a popular retirement destination that would skew results as well, since incomes could be extremely low for retirees, even though they have ample assets. What's the right sample, the entire NYC area?
This is a tough one... as a macro trend though it's certainly interesting.
Posted by: Nick | February 25, 2009 at 11:59 AM
Been posting for a while on the divergence of "affordability" metrics from historical norms since 2000. This divergence appears to have been facilitated by cheap and easy credit. Now gone.
You see a similar movement from historical norms as you look at the rent-vs-buy calculations by msa. To bring in the quantity of buyers needed to soak up the inventory in many MSAs, you need to bring buyers out of the rental pool. This process accelerates as the cost to buy gets closer to the cost to rent. A combination of factors affects the cost to buy. These factors include lower home prices, lower interest rates (assuming credit availability) and higher income (which we should get with time, even given the recession). Partially offsetting this increase, you are seeing decreases in rental costs in many areas.
Posted by: henry | February 25, 2009 at 01:21 PM
I posted this on another thread but it is relevant here:
Barron's cover (2/23/09): "Manhattan on Sale"
http://online.barrons.com/article/SB123517384563737163.html?page=sp
One quote....
"When we look at New York City, we look at a price-income ratio that historically has been four times income, versus three times nationwide," says Zelman, who now runs her own firm. At 7.7 today, that ratio is "significantly higher than normal" because prices have only started falling. "If you want simply to get back to the median, it would be a 46% correction," says Zelman.
She adds: "If I had to pick one market in the country with the most challenge and the most substantive rate of decline [ahead], it's New York City. It has the greatest number of job losses among the higher earners."
Posted by: henry | February 25, 2009 at 01:43 PM
I noticed a comment in the other thread that I thought was really interesting. Not to be rose-colored or anything, but there's a counter-argument to be made as to what the effect of dropping incomes and uncertainty will do to the Sullivan market. Someone mentioned the Berkshires, etc..
On one hand the answer seems obvious, more people are feeling poorer, second home purchases are discretionary, lower demand.
But of course not all markets work that way, nothing takes place in a vacuum. Check out these two links in a row:
http://www.forbes.com/feeds/afx/2008/11/14/afx5694601.html
http://www.thestreet.com/markets/marketfeatures/10124875.html
Interesting right. In the midst of a total collapse for retailers as the crisis really took hold, the market (retail) fell sharply. But Wal-Mart posted a much stronger than expected gain.
Wal-Mart of course is the low cost option. People were still buying stuff. People are always buying things, the market rarely stops utterly and completely. But people do shift to the lower cost option in a downturn. By this logic -- and this logic requires a leap of faith -- what's probably the lowest cost close-in second home market in the NYC area might well benefit. People still want vacation homes, though not as many and not with as much cash to spend. But people feeling pinched might consider a lower cost option. Instead of the Hudson Valley or Western Mass. they might go for Sullivan. I don't see the Hamptons as a direct substitute (my own story notwithstanding) as a huge percentage of people there have some interest in the social element. But for those that ARE in the market for a second home, the low cost option may well be more appealing, not less.
I realize this is pushing it a bit into cheerleading territory. But it's an interesting alternate way to look at things... I wonder if there are any corollaries. Like I wonder if there are other second home areas that have expanded (or fallen less) in downturns.
Posted by: Nick | February 25, 2009 at 05:12 PM
Nick,
You're comparing Wal-Mart (a low cost retailer) to Sullivan County (a low cost second home region)?
C'mon.
Wal-Mart and Costco - along with Family Dollar, Dollar General - have held their own because they're budget stores.
However - a caveat - people have to feed themselves and their families thus they buy dry goods and groceris in bulk at a discount at a Wal-Mart
Your anology is a bit of a stretch 'cause people don't need a second home - as opposed to bread (the yeasty kind).
And, if they really want a second home, they now have more regions to choose from whereas five years ago, they were priced out other counties close to NYC.
Comparing Sullivan County to Wal-Mart - well, that's certainly..."Beyond the Hamptons".
The visitors association will love that one.
Uncle B.
Posted by: Uncle B. | February 25, 2009 at 06:34 PM
Nick,
The tradedown thesis is valid in many markets. It seems to me that the problem in this case is that the magnitude of drops in other locales (substitutes) will erode SC's low cost position... unless SC drops in step (plus or minus). Walmart, on the other hand, has structural (scale and operational) advantages that give it a cost advantage that is hard to compete against.
My understanding from talking to some very experienced real estate professionals is that second homes have been hit harder in downturns given their discretionary nature. Please note that I have no hard data on this thesis, and would welcome more information on the topic.
Posted by: henry | February 25, 2009 at 09:35 PM
Dave -- I'm not sure I understand your quibble wit B's inference that prices have dropped 40-ish% based on the data he presents. If I read your comment correctly, you are saying that B's data may be misleading because it is skewed toward primary homes rather than second homes. This, you say, is because second home sales have dropped off so dramatically as a portion of overall sales. Here's where I get lost: maybe your observation simply helps prove B's inference. In other words, yes, second home sales have dropped off sharply, and so they do represent only a small portion of the overall sales from which B's data is drawn. But the REASON they've dropped off so much is precisely because B is correct -- their value has dropped 40-ish%. The problem is that sellers are just not accepting that by lowering their prices. It's the buyers who are recognizing it, by not purchasing grossly overpriced second homes, thereby accounting for the drop off in second home sales. Why isn't that explanation consistent with B's inference?
Posted by: ar | February 25, 2009 at 10:20 PM
Hey, I said it was a leap of faith. Just food for thought. Not sure I place much value on the hypothesis either.
Posted by: Nick | February 25, 2009 at 10:34 PM
The other thing to keep in mind here is that this stable midpoint of 2.7 times earnings only seems to be valid post-1975. Useful in a normal economy, but all signs point to this recession being worse than anything we have seen since 1975, so I wouldn't wager money that 2.7 will be the stability point in '09 or '10.
Posted by: Reg | February 25, 2009 at 11:20 PM
Below is a link to an interview with Robert Schiller, the Yale professor who has been so prescient about the stock market crash earlier this decade and in predicting the current housing meltdown. The most pertinent point he makes is that we have seen a 25% fall in house prices yet we are only halfway to the bottom. Due to psychological factors(fear) he expects the fall to shoot well below fair value and indicates we have another 50% to fall!
http://www.businessinsider.com/shiller-house-prices-still-way-too-high-2009-2
Posted by: cfranch | February 26, 2009 at 12:06 AM
ar, my point is that the market basket of houses over the past few months is different than it was say, a year, ago. Over the past few months, a lot of the houses selling have been lower end, bargain priced foreclosures and fixers. I don't think that the reason "second homes" haven't been selling is primarily because they're priced too high (although that certainly is a factor), but rather that second home buyers, over the past few months, just really haven't been buying. Consider cars. Maybe there's a statistic that shows that during the 4th quarter of 2007, the average sales price for a new car was $24,000, but during the 4th quarter of 2008, the average sales price was $18,000. Does that mean the price of every car dropped by 25%? Probably not. The drop could be do to downshifting by buyers to lower priced types of cars --- more Honda Fits, fewer Mercedes' E-Class sedans. That isn't to say that $60,000 Mercedes E-Class Sedans aren't cheaper today than a year ago, but they probably haven't dropped 25%, to $45,000.
That's why I've said, in previous posts, I don't know whether a lakefront house, for example, has dropped 15%, 35% or 45%, because we don't have much recent sales information for the various submarkets here. I think we're going to wait while buyers and sellers duke it out to get a better sense of where prices may level out.
Posted by: David Knudsen | February 26, 2009 at 05:43 PM
if a seller is serious about selling, shouldn't they reduce the price regularly until buyers start showing up? once buyers are looking at the property, the seller would have an indication that the asking price is getting real. (if buyers aren't looking at a property, wouldn't common sense indicate its priced too high?) every property must have a price it would sell at even in this market. in other words, falling house prices might be the solution and not the problem.
Posted by: larry | February 26, 2009 at 08:22 PM
Dave Knudsen writes:
"I don't think that the reason "second homes" haven't been selling is primarily because they're priced too high..."
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Au contriare David.
The majority of the offering prices are way too high for the 1Q 2009 - especially the ones in your specialty niche.
Until the seller drop their prices - we have a stalemate:
No volume
Lower prices.
Looking forward to reading your February 2009 data.
Uncle B.
Posted by: Uncle B. | February 26, 2009 at 08:57 PM
larry, i think we're in a bit of a bizarre aberrational vacuum at the moment.(Wow, kinda liked that phrase 'bizarre aberrational vacuum' --- sort of sounds like something those neverending panels of pundits would say on Anderson Cooper 360.) A lot of buyers right now are in hold mode, and I don't know if price, alone, will entice them out of it. Rather than a drop in real estate prices, per se, there needs to be a general improvement in consumer confidence. For example, I like really nice sheets. The kind you put on the bed. Sumptous, luscious, 600+ thread count luxury sheets. But I don't really need any more sheets. The other day I stopped at Woodbury Commons, and somehow I ended up walking by the Frette outlet, and of course, had to stop in. Now, they had a great sale --- there were some really nice sheets for about a hundred bucks a piece. (I'm talking individual sheets, not sheet sets. This is Frette, after all.) I was tempted, really tempted. But I turned around and walked out. Because no matter how good a deal the Frette sheets were, I didn't really need them and decided not to spend the money on them. In six months, when the economic environment may feel a little less like quicksand under my feet, I may have made a different decision. But of course, those sheets might not be on sale for a hundred bucks. The same is true right now of real estate. I've written that I don't think that price, per se, right now will stimulate demand. Although, I do think that buyers in the current market can selectively strike some very good deals. In six months, I may look back and regret not picking up some of those sheets for a hundred bucks.
Posted by: David Knudsen | February 26, 2009 at 09:02 PM
>>Uncle B:
Furthermore, this area will be the last (as it always is) to rebound due to it being a discretionary income purchase and buyers now have other options. This fact has been born out in other boom bust periods such as the early 1990's.
Realtors up here better hope that 120k is the floor.
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How true.
Take a look at some of the active listings over in Columbia County, New York (mid-Hudson / near MetroNorth) *under* $200,000!
http://www.beachandbartolo.com/homes1.htm
~~endive
Posted by: endive | February 26, 2009 at 09:23 PM
Or, on the other hand, in six months, you may be able to get a wide selection of high quality sheets at 80 cents... or lower.
Another problem with your sheet analysis is that Frette in SC is still advertising prices from last year while Frette outlets a short drive away have dropped their price by 25%. It is not surprising why the Frette outlet in Sullivan County has not made a sale since last summer.
Posted by: henry | February 26, 2009 at 09:46 PM
Does Frette makes any towels?
Good morning. It's Friday and the following are the following are the three month totals.
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CLOSED SALES - SULLIVAN COUNTY, NY - 11/27/2008 through 2/27/2009
=================================================================
Total Homes Sold: 88
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CURRENT MEDIAN PRICE: (includes Chapin Sale) $133,500
CURRENT AVERAGE PRICE: $166,000
CURRENT AVERAGE PRICE* (without the 1 Chapin Sale): $147,750
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Compared to Dave's prior three month data of 11/1/2008 through 1/31/2009:
Current Vol. - Down 17%
Current Median Price - Down 10%
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Posted by: Uncle B. | February 27, 2009 at 08:36 AM
They do!
But at $80 to $120 a pop for a bath towel - I think I'll pass for the time being.
http://www.frette.com/en/shoponline/category.aspx?folderid=28a108d0-df17-4c67-97d8-cf9516c16c63
Posted by: Mr. Frette | February 27, 2009 at 08:53 AM
wow Columbia prices have dropped indeed!
http://www.beachandbartolo.com/homes1.htm
Where in Sullivan can you find those gorgeous Columbia homes for under 200k???
Looks like Sullivan has some ketch-up to do
Posted by: Julio | February 27, 2009 at 12:11 PM
This chart, along with data from some markets that the historical relationship between the cost of owning versus renting is coming back into line, suggests that we could be nearing the end of the correction. But even if prices find a floor, that doesn't mean prices will rise any day do. In fact, they could move sideways for an extended period of time. That happened in New York City in the late 80's/early 90's. After bottoming out around 1991, prices stayed flat until 1994 or so. (And flat real estate prices are actually declines, of course, when you factor in inflation.)
Posted by: Jeff | February 27, 2009 at 03:58 PM
"if a seller is serious about selling, shouldn't they reduce the price regularly until buyers start showing up?"
Not necessarily, and dropping the price may not work. I just noticed that a house I was looking at in May, then asking $200K, now has an asking price of a little over 150K. Nice grounds but awful house; evidence of mold even I could pick. Marginal houses like that aren't going to sell at any price in this market.
Posted by: Bix | February 27, 2009 at 09:01 PM
I don't think B.'s median reportage really means a whole lot. Even during the boom when you couldn't touch anything under $300k, the median was only in the upper $100's.
It would be nice to see how many houses sell over $200k, though.
Posted by: Rod | February 28, 2009 at 12:14 PM
Obama plan... Reduction in mortgage interest deduction for those making over 208K. Reducing incentive (admittedly at margin) to buy upper end houses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.
http://online.wsj.com/article/SB123559630127675581.html?mod=article-outset-box
Posted by: henry | February 28, 2009 at 01:19 PM
Ignorance is bliss Rod.
Ask Dave how many houses sold over $200,000 in the last three months and compare that to the same period in 2008, 2007, 2006 and 2005.
Nimrod
Posted by: Nimrod | February 28, 2009 at 10:26 PM
Nimrod, that's interesting to look at. Probably more instructive to consider the percentage of houses that sold above $200K, as well as the actual numbers, because the total number of houses has been falling. (All single family sales as reported in the Sullivan MLS).
12/1/08 through 2/28/09 --- 82 total SF sales, 20 above $200,000. 24.4%
12/1/07 through 2/29/08 --- 109 total SF sales, 33 above $200,000. 30.3%
12/1/06 through 2/28/07 --- 119 total SF sales, 49 above $200,000. 41.2%
Posted by: David Knudsen | March 01, 2009 at 09:36 AM
Thanks David - and even those stats are less than revealing since comparing anything to those credit-bubble years is misleading. As we now, it was a ponzi scheme and unsustainable.
But back in 2003/2004/2005, these would be telling sales figures for $200k+ since I feel those years were vibrant but not artifically so, prices were rising, but not off-the-grid skyrocketing.
When this all shakes out, it will be interesting to see where we reset to - 2003? 1998? I'm sure we will overshoot at first, but I bet, with all the advances in infrastructure and all the money invested in this area over the past 8 years, 2003/2004 will be a fair guess at what Sullivan County will look like, price and inventory-wise.
As I am sure many of listing-watchers on this site have seen, the quality and diversity of the listings now available is tenfold greater than just 12 months ago. A real selection for buyers, and some at real compelling prices.
Posted by: Rod | March 01, 2009 at 02:14 PM