Yep, Paul Krugman thinks housing prices might end up dropping by 40% in the next two-three years due to the SubPrime Mortgage Meltdown, according to a post he put on his New York times Blog today titled - Housing: How far is down?
I'm not surprised Krugman cites a Times Article released today -New-Home Sales Fall; Biggest Drop Since 1995
"...Sales of new homes plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector.
The Commerce Department reported Friday that new-home sales tumbled 9 percent in November from October to a seasonally adjusted annual rate of 647,000. That was the worst showing since April 1995, when the pace of sales was 621,000.
The sales pace for November was much weaker than economists were expecting. They were predicting sales in the weakest sector of the economy to drop by around 1.8 percent, to a pace of 715,000."
But what caught my eye and what suggests a 40% drop in value by the time this is all done is the charts below:
"…Below are two pictures. The first is the CBO’s estimate of the housing-rent ratio — the ratio of home prices to an estimate of the rental rate on equivalent properties. It’s comparable to the PE ratio on stocks. What you see is that it fluctuated in a relatively narrow range until this decade, then took off for the wild blue yonder.
It would appear a drop of atleast, 40%, in the value of real estate, over all, would be needed - based on the chart above. And here's the other chart and explanation, from Krugman's blog:
"..The question you need to ask is, is there any fundamental reason why this ratio shouldn’t go back to historical norms?
Don’t tell me about how some areas with high prices are especially desirable — that was true in the 90s, too. What we need is some macro reason to believe that things have changed.
Well, one thing has changed: interest rates, including mortgage rates, are lower, in large part because of huge capital inflows from China and other countries. Here’s the chart:
INSERT CAPTION
But is this enough to justify prices anywhere near current levels? I don’t think so — for three reasons.
First, the math doesn’t work even if you look at the average: the overall cost of buying a home relative to renting has risen even taking interest rates into account (and yes, that’s true even if you use real rather than nominal rates.)
Second, the average is misleading. As I argued more than two years ago, America is really two countries when it comes to home prices: in “flatland”, where new housing can easily be built, real prices never rose much; the big rises have come in the “zoned zone,” where land and permits are constrained — and those rises have been much larger than the average, so much so that they make no sense even given a maximum allowance for interest rates.
Third, we won’t always get lots of free money from China."
Well, sounds like the Economy is going to be awfully rocky in the next year or two - but I'm not an Economist - so maybe someone can tell me why this stuff doesn't mean much .. except, it does!
