Calculated Risk Blog

Reader Krazy Kat sometimes sends me links to articles on this blog,, and they’re always interesting. Here’s one explaining why there are two bottoms in housing declines: housing starts and new homes and then later, sometimes a couple of years later, existing housing prices. Obviously, homeowners will be more affected by the latter. Is the author right? Heck if I know but he or she seems to know a lot more than I do, so why not? I’m just guessing anyway. Scroll up (or down – it’s a great blog)  for more good stuff on the real estate market, mortgages, etc. Here’s what the author has to say about two bottoms:

In my previous post I discussed the question: Housing Starts: Is this the bottom?

We don’t know the answer yet.

But some readers are confusing a bottom in housing starts with a bottom in pricing.It doesn’t work that way!

There will be two distinct bottoms for housing:

1) First single-family housing starts and new home sales will bottom.

and then followed some time later …

2) Prices for existing homes will bottom.

Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom. 

Sorry for repeating myself.

Also, it is theoretically possible that single-family housing starts (off 80% from peak) and new home sales (off 78% from peak) could go to zero – but unlikely. Sometime this year housing starts and new home sales will probably bottom, but that doesn’t indicate a bottom for house prices.


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3 responses to “Calculated Risk Blog

  1. Stanwich

    So I was bored and did a little comparison of this housing downturn with the last major one in the late 1980’s/90’s. According to Case Shiller, in the New York metro area, the market peaked in September 1988 and declined for about 2.5 years when it hit bottom in April 1991 after a total 15% decline. The market didn’t surpass the previous peak of 1988 until May 1998, about 10 years later. The market then went on a tear for the next 8 years increasing by more than 250% to peak in June 2006. Since the peak in June 2006 to December 2008 we have declined almost 15%. So we are basically on track in term of percentage decline and timeframe as the last cycle…….but that was as of December 2008. You don’t need to be an economist to figure out that things have not gotten better since four months ago.

    The differences in the two cycles have more to do with the intensity and timing of the stock market corrections and financial crises. While the S&L crisis was big, it pales in comparison to the massive over-leveraging in our current cycle. In addition, the S&L crisis had a very efficient RTC to deal with distressed assets. Our current crisis is being exacerbated by a myriad of programs beginning with the letter “T” that throw hundreds of billions of dollars at something, but we aren’t quite sure what we are achieving. And probably the biggest difference is the enormous shift in the taxing regime that is implicit with such spending. Markets don’t like the unknown and they have signaled their displeasure. Sure, we have gained some ground in the past week or so but a bear market rally does not make a bull. To sum it up, we are trying to achieve a soft landing in this cycle with trillions of dollars of spending but we would have been much better served by disgorging bad assets to an RTC-like agency, providing liquidity to the banking system and reducing corporate taxes. While unpopular, these measures would quickly put us on a path to recovery. Our current path is akin to the one Japan chose in the 1990’s, have we learned nothing from their example?

  2. Flyover Girl

    I can’t imagine housing starts would ever go to zero in Greenwich, but I know of several other places where it has. Most notably, the city of Detroit, Michigan – where absolutely NO new residential building permits were issued from 1975-1995.

    That’s *twenty years* of no new residential construction. It wasn’t a matter of public policy; it was just the marketplace.

  3. anonymous

    Politics and populism will only delay and complicate any recovery w/false starts and threat of hyperinflation, etc

    Would track Manhattan per sf trades in 740 Park and 15 CPW….and Belle Haven waterfront land sale prices to understand high-end pricing dynamics of NYC region, as opposed to Case-Shiller which is perhaps a more useful guide for mundane housing prices

    IIRC, 740 Park was trading for ~$2K/sf in ’99 or so; 15 CPW peaked in ?’08 at ~$9K/sf…..I tend to think Manhattan (and Belle Haven) prices will revert to early ’90s levels by time we bottom

    Much possible deflation exists in prices of discretionary shelter…..weren’t 740 Park-like apts white elephants back in ’70s?