Will house prices track stock prices (in NE USA)

March 3, 2009 5:39 AM

The stock market is at 1997 levels. Are house prices (specifically in the NE US) likely to follow? If not, why not? If yes, why and when? All arguments welcome.

(Yes, I know, overly simplistic, "it depends, all markets are local, NYCity real estate actually went up last year" (or so the real estate shills claim and I would be curious to know how those stats were calculated)- bearing all that in mind, what factors might I be missing?)

posted by IndigoJones to work & money (17 comments total)

You'll have to look this up, but there's a theory that the "right" price for housing is some multiple of income. Something like 2.5x. So if the median income is $40,000, the median house price should be $120,000.

If house prices go above that, its a sign that prices are artificially high and will correct at some point.

(The price of NYC real estate went up, but that's probably because volume was down.)
posted by gjc at 5:55 AM on March 3

Oh, and the Dow Jones number is next to meaningless as compared to the actual economy. Ignore it. It's just a composite (made-up) number reflecting 30 different stocks. One of the was AIG, so there's a huge drop right there. Other companies in the DJIA- Bank of America, Boeing, Caterpillar, Citigroup, GM, HP. All companies that are in various levels of trouble not entirely related to "the economy". Some, like me, might say that their poor business models caused the economy to go down through FUD.

Anyway, the stock market isn't the economy. It's just the reflection of what people are willing to buy and sell bits of paper for.
posted by gjc at 6:09 AM on March 3

IndigoJones posted "Are house prices (specifically in the NE US) likely to follow?"

Adjusted for inflation house prices in most markets are likely to fall to and below 1997 levels. Right around 1997 is where the housing bubble started (IE: house prices started to exceed what they could be rented for) and historically house prices noticeably over correct when returning from a speculative market.

What happens in in non adjusted dollars is, IMO, impossible to predict. Wild inflation, deflation, or stagflation is possible, even likely, in the next few years and the US in particular may inflate their way out of the housing fiasco.
posted by Mitheral at 6:31 AM on March 3

During the Great Depression, the Dow Jones Industrial Average dropped nearly 90%, but housing prices dropped only 30%.

From January 1973 to September 1974 the S&P 500 dropped nearly 50%, but median housing prices continued, in general, to rise during that time.
posted by DevilsAdvocate at 6:32 AM on March 3 [1 favorite]

Seconding what DevilsAdvocate said.
posted by jerseygirl at 6:48 AM on March 3

But note that during the Great Depression, it wasn't a housing bubble that caused the crash, but rather a stock bubble. In our case, we have THREE bubbles; the stock market which popped in 2000, but which the Fed desperately attempted to reflate. Their huge interventions then caused two subsequent bubbles, those of debt and real estate. Now all three are popping at once.

You will probably see housing return to relative price levels from around 1995ish. But with the desperate bailout attempts from the government, it's possible that they may not lose that much more face value, while inflation eats us alive from underneath. If the price of houses isn't allowed to drop, then the price of everything ELSE will rise to compensate.

In general, bubble prices return to the level at the start of the bubble, overshoot even further, and then slowly return to something approaching normal. But there's never been such interventionist monetary and fiscal policies before, so we can't take lessons from history in the same way.

It's my personal belief that we're going to find out that the Great Depression was the good outcome from a bubble; continuing the fiscal and monetary insanity, as we're doing, trying to get the economy back into bubble status, can only worsen the total damage. We have a debt problem, and you can't borrow your way out of a debt problem.
posted by Malor at 7:48 AM on March 3 [1 favorite]

Ack, my first paragraph there is nearly illiterate. I'm sorry. Please forgive the misplaced commas and fragmentary sentences; I hit Post too soon.
posted by Malor at 7:49 AM on March 3

Your specific location will affect it to a major extent. Cities with massive restrictions on building new housing units will be less affected than places with more relaxed laws. Think San Fansisco vs south Florida or Detroit. SF's restrictions on building permits led to a massive shortage in housing which led to higher prices. Even if prices drop, SF isn't overbuilt so the shortage (though it's less of a shortage than before) will prop up prices. In south Florida there are now more houses than people want/can afford so prices will drop on some of them until they are practically at zero. Detroit is an even more graphic example where prices have been falling since long before this crash started.
posted by thekiltedwonder at 7:51 AM on March 3

My late stepfather once pointed out to me that New England got through the Great Depression easier than other parts of the country partly because the people here are still fairly fiscally conservative. I think, in general, that holds true for today's crisis as well.
Having said that, NE is pricy and RE may not fall to bargain levels. Will it drop more? My gut says 'yes', but I don't think you're going to get a huge deal on decent properties.
I think if you wait for the 'right time' to do something, you'll wait forever...
posted by pentagoet at 7:51 AM on March 3

there's a theory that the "right" price for housing is some multiple of income.

CF also the rent/own ratio, which is wildly out of whack in my suburb of NYCity, alas. But this is the kind of input sought- more always welcome.

(By NE, I mean North East more than New England. My bad.)
posted by IndigoJones at 8:09 AM on March 3

For a visual representation of Mithreal's point that "Right around 1997 is where the housing bubble started ", look here. The graph is based on Shiller's work.

Still, housing prices basically reflect the cost of credit, and the world (esp China and the oil states) is still flooding the US with credit to the tune of around 5% of GDP. That money has to go *somewhere*.
posted by bonecrusher at 8:16 AM on March 3 [1 favorite]

I don't know anything at all about economics or real estate, but as a New Yorker hoping to finally be able to buy an apt in the next few years, I found this apocalyptic commentary very interesting. For what it's worth.

Also the Atlantic has a fascinating loooong story about what the crash will do to reshape American cities.
posted by CunningLinguist at 8:21 AM on March 3 [2 favorites]

I had a post written up about Nebraska, before I did a second reading of the OP and other comments. :) (For the record, Nebraska doesn't seem to be in too bad of shape).
posted by thewalledcity at 8:32 AM on March 3

You'll have to look this up, but there's a theory that the "right" price for housing is some multiple of income

To follow up on this point, and bring it back to your specific question- the numbers you're more interested in tracking, IMO, are unemployment figures.
posted by mkultra at 9:38 AM on March 3

I wish I knew about these before the crash happened, and I'd love to know where to find regional numbers for current conditions, but the stock market probably isn't a good way to gauge the "right" price for a house.

The two numbers I've seen that seem reasonable are rent-to-price ratio, and income-to-price. The theory is that these things revert to some natural mean. I've heard 15x rent is a reasonable ratio, donno about income-to-price. If prices go up but rent doesn't, then it takes longer and longer to recoup the investment; it was a sign that investors weren't looking for rent, just a greater fool.

The stock market valuation generally reflects the future expected earnings of companies (and also their current holdings on book). Unless the companies make and sell houses, the only reason to expect them to affect the housing market is if reduced future earnings indirectly leads to fewer jobs or lower income.
posted by pwnguin at 3:15 PM on March 3

One element to consider is the multiple of housing costs to median income should really be housing costs to household income these days. In many households the higher income than, say, the 1970s, produced by a higher incidence of two income households has been directed largely to housing.
E.g. a 1950s nuclear family with one bread winner can afford, say 2.5 times the father's income. A 21st century family can afford the same proportion of the father's income, plus the bulk of any income brought in by the mother.
Obviously nuclear families make up a smaller number of households, but I think the broad point about two income households show that this 'traditional' value multiplier needs to be updated.
Note that this applies where demand exceeds supply. In places with a lot of vacant housing there is no reason to believe the same thing occurs, but I think the area you are looking at is probably priced this way.
posted by bystander at 5:25 PM on March 3

the world (esp China and the oil states) is still flooding the US with credit to the tune of around 5% of GDP. That money has to go *somewhere*.
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Interesting point- but it raises the question, how much percentagewise of GDP were they flooding us with, say, four years ago? I don't doubt the money has to go somewhere (gov't debt, it appears, possibly muni bonds), but is the investing world really ready to inflate another housing bubble? And if not houses, then where? Are we really doomed to a life of serial bubbles?

Thanks again all, most interesting, keep those cards and letters coming.
posted by IndigoJones at 9:51 AM on March 4