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June 30th, 2009

## An 18.1 pc decline in home prices is an improvement?

A recent Forbes article screams: “..closely watched housing market measure showed hints of improvement. Home prices fell 18.1% in April, from the year-earlier period..”

The reason it says this is an improvement is because the home prices fell 18.7% in March! So, this fall is 0.6% lesser than the fall in March. Assuming constant acceleration, the home prices could stop falling in 30 months. That would be October 2011. Also, by that time the home prices would be 37% lower than the prices in March 2008 (that is, a home valued at 500,000\$ in March 2008 would be valued at approximately \$320,000 in October 2011) and about 15-16% lower than the prices in March 2009.

Now of course, the preceding simplistic analysis is just a bunch of BS coming from a computer scientist with no economic experience and you are free to discard it with a whiff of dismissal. And if you know any better, you really should. But in case you don’t, let us analyze it a bit further.

Prospective home buyers continue to hesitate to buy in a market with falling home prices. The reason is obviously that they don’t want to lose value. However, as the home prices continue to fall further and further, at some point of time, they simply go below the cost to live in the house (aka rent). A certain percent of home buyers at that time buy the property even if they think the property prices are falling, as they can simply compare the hard cost of rent with the hard cost of owning. In most circumstances this “certain percent” is enough to ensure that the cost of owning a home does not go below the cost of renting. There is no indication yet that today’s circumstances are any different.

So, where does that leave us? If we can check the prices of the home against the cost of renting, then we can cross check our rough calculation above.

In the DC metro area, the price of renting a 2 bedroom apartment runs between \$1000 and \$1600. The cost of owning a 3 bedroom townhouse has fallen from between \$200,000 to \$400,000 to between \$ 140,000 to \$280,000 depending upon the location etc. The monthly cost for the loan would be between \$1100 and \$2200. Assuming a further 15% loss in value from our previous calculations compared to March 2009, the projected cost of owning would run between \$119,000 to \$238,000 and the monthly cost to be between \$935 and \$1870, which seems to be nicely centered around the rent. Crosscheck seems to succeed, and also it appears that bottoming out could really happen well before October 2011, but does not seem to be before October 2010.

Since I like speculating better than equivocating, I will draw a stake in the ground and say that home prices should bottom around October 2010. There, you have it, my expert opinion after about 40 minutes of Excel line charts and blogger scribbling.

There is an insane number of assumptions in the calculations above, so don’t even bother to tell me about all of them. But overall, I have tried to do some concrete analysis, rather than leaving you with a very dry “it depends” answer.

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October 23rd, 2008

## Newsflash! Greenspan made a mistake – No way!

The star boy of 2000s has finally admitted that there may be a flaw in his market ideology! That’s OK Alan, we have known it for a while.

In early 2000s, when markets were crashing, Alan came up with a novel idea – well, the economy is shrinking, but if we can keep the housing market booming, perhaps the net will be 0 or slightly positive. He enabled exactly that, by setting the interest rates to historic lows. People were offered ridiculous lending terms, bigger houses and dubious futures, and all working Joes were sucked into Alan’s ideology. Remarkable short sightedness from a guy who led the Federal reserve for 19 years!

Now, however, the US faces a different challenge. The economy is tanking (in much worse ways than in 2001), and the govt has no card to play – the interest rates are already low, the jobs are shrinking AND the housing market has crashed. I like to call the current meltdown the “Greenspun” meltdown.

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