housing bust?

[Jim Devine <jdevine03@xxxxxxxxx>]

The New York Times

June 17, 2007
Economic View
When Does a Housing Slump Become a Bust?
By ANNA BERNASEK

MANY Americans fear the consequences of a housing bust, but few know
what one would really look like.

Think about it for a moment. How far do housing prices have to fall
before a slump becomes a bust? In the stock market, we have a pretty
good idea what a crash is. Among stock market experts, there is a
consensus that a 10 percent decline in a major index is a correction
while a 20 percent decline is more significant: a crash or a bear
market, depending on the time involved. For the macro economy, there
is also agreed-upon terminology. For example, a recession means two
consecutive quarters of declining gross domestic product.

But when it comes to declines in housing prices, there is no such
framework. As experts debate whether we're headed for a housing bust,
you'd think that we should at least be able to define it.

The problem is that economists haven't agreed on a definition. In
part, that's because severe declines in housing prices tend to be rare
events, not a common subject for discussion. The last really big
decline in national housing prices occurred more than 70 years ago,
during the Great Depression. Another reason is that the data measuring
the housing market is far more opaque than that for the stock market.

But let's work with the data we have. Start with the worst housing
market on record. During the 1930s, housing prices fell sharply across
the nation. According to the S.& P./Case-Shiller home price index, a
measure of national housing prices, the average price of a home fell
24 percent from 1929 to 1933.

More recently, there have been severe price declines in regional
markets. The most severe was in the so-called oil patch during the
1980s. In the late 1970s, as global oil prices soared, oil-producing
areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming and Alaska
experienced an economic boom. As oil prices collapsed in the early
1980s, those economies crashed, and housing along with them.

In the worst cases, nominal home prices fell 40 percent in Lafayette,
La., and 33 percent in Casper, Wyo., from 1983 to 1988, according to
the Office of Federal Housing Enterprise Oversight. In Houston, prices
fell 22 percent.

Then there were the sharp price declines in housing on both coasts
during the early 1990s. At that time, a series of events including the
recession of 1990-91, the military downsizing after the cold war and a
commercial real estate collapse led to a housing downturn.

For instance, in Los Angeles, Long Beach and Santa Ana areas of
California, the average price of a home tumbled 19 percent from 1993
to 1998, while on the other side of the country, in the Hartford area,
the average home price dropped 17 percent over the same period,
according to the Office of Federal Housing Enterprise Oversight.

Two economists with the Federal Deposit Insurance Corporation, Cynthia
Angell and Norman Williams, have studied housing cycles since 1978 and
have come up with a definition of a housing bust. In a paper published
in February 2005, they called it a decline of at least 15 percent in
nominal prices, meaning not adjusted for inflation. While economists
tend to focus on real prices over time, the authors argue that in
housing, nominal prices are a better measure of distress because
homeowners, rarely think in inflation-adjusted terms in assessing
market conditions.

Other economists, however, argue that 15 percent may be too
restrictive a definition. Mark Zandi, chief economist of Moody's
Economy.com, says a better one would be a decline of 10 percent or
more from peak to trough. "When you see a decline in home prices of 10
percent, you get significant credit problems and it's enough to wipe
out equity in most cases," he said.

Mr. Zandi also said that once prices have dropped 10 percent, there
tends to be a self-reinforcing downward cycle. If borrowers can't
afford their mortgages and banks foreclose, their homes are generally
sold at significant discounts to the market. That creates an added
drag on overall prices, resulting in greater numbers of foreclosures,
followed by even greater price slides.

Another reason Mr. Zandi argues for 10 percent is the tendency of
housing-price measurements to underestimate declines. Sellers often
provide discounts that may not show up in the measured price, but are
still significant. Today, some homebuilders are discounting the sales
price of new homes by an average of 5 percent, Mr. Zandi said.

So how far have prices actually fallen? The median price of an
existing home has declined 4 percent, on average, since the peak in
October 2005, according to the National Association of Realtors. Yet
in some areas, by Mr. Zandi's definition, at least, the market is
already experiencing a bust.

In the 12 months that ended in March, for example, the median price of
an existing single-family home in the Sarasota-Bradenton- Venice area
of Florida fell by 12.4 percent, according to the National Association
of Realtors. In Louisiana, in the area of New Orleans, Metairie and
Kenner, the average price fell by 11 percent. And in the Reno-Sparks
area of Nevada, the average decline was 8.8 percent, not far from Mr.
Zandi's threshold.

Over all, Mr. Zandi points out that 40 percent of metropolitan areas
around the country are now experiencing declines in housing prices.

WHAT would a definition of a housing bust tell us? First, it would
help explain why, despite all the focus on the possibility of a bust,
many people may feel that the housing market really isn't all that bad
right now. On average, and based on national surveys, price declines
haven't been that severe.

But if the pessimists are right that there's more to come, look out. A
10 percent decline in prices is likely to feel pretty awful. And then
everyone might agree on what a housing bust is.
--
Jim Devine /  "if there's an original thought out there, I could use
it right now." -- Bob Dylan & Sam Shepherd.