Are We There Yet?

Are We There Yet?

Any parent or adult driving with a child on board has heard this question sometimes to a maddening degree before, but the long drive, the twisting journey, that is prompting this question today most often is not about a trip to grandma’s house but the trip that grandma’s house is on: the trip of a generation down a slippery road of declining value, and the question about our destination, “Are We There Yet,” is a query about reaching the proverbial bottom. Keeping in mind the adage purloined from the stock market that one can go broke trying to pick a bottom, this analysis will try to determine not “the” answer but “an” answer by looking at past housing prices.

Before delving into any numbers a word of two needs to be said about the activities that led us to this point, a point where terror-stricken adults are asking that timeless, child-like question used to open this paper: Are We There Yet?

This will serve as a general overlay of and a prism through which to gaze upon the recent past. Leaving to others to determine the questions of “Who knew what and when?” or “Who should have known and didn’t?” or “Who was incapable of ever knowing?” or “Who, among the professionals, acted less than professional?” or “Who was legally required to act and failed to do so?” I will, to sum things up, relate a saying I heard early in my career as a Commercial Loan Workout Officer in the early 1990’s relayed to me by an old timer who said of the lending side of the bank “they always manage to screw it up!” “They never can resist participating in Pulse Lending” by which he meant lending to anyone with a pulse.

What drove a man who had 25 years of lending and workout experience to such a conclusion was, more than anything else, his belief that those in charge of money, usually highly credentialed and titled themselves, always fail to remember that money draws fraudsters like honey draws bears or, more apropos, like a corpse draws vultures, vultures who often have credentials and titles similar to theirs but are professional incompetents or lean toward larceny by genetic make-up. In short, of all the ways that can be used to describe the recent past in the housing market a not inaccurate one is it was a period fraught with frauds of every kind. Some were the old fashion, readily identifiable kind and others were less readily identifiable because they hid behind the academic or titled veneer of their creators.

There are a number of sets of statistics dealing with price valuation but nowhere near as many as such an important part of our economy would suggest there be. There are the Case-Schiller numbers which have paired sales on individual properties but focus primarily on the metropolitan areas. There are the National Association of Realtors (NAR) numbers on existing home sales, but some critics are leery of them because they are produced by a group with a vested interest in rising home prices since its members make their living on taking a percentage of each home sale. There is even inconsistency about what is meant by “home” or “housing” from one set of statistics to another. Is it vacant or owner occupied? Does it have a business attached? Is it a condo or a co-op?

I have decided to use The Historical Census of Housing Tables found at (www.census.gov/hhes/www/housing/census/historic/values.html) simply because they are the longest running and, too, the least likely to be effected by a vested interest in the producer of the numbers. Government numbers certainly have their critics but it is difficult to determine which way the government would want to bend these numbers. It is a measurement of the median value of “owner-occupied single-family housing units on less than 10 acres without a business or medical office on the property.” They start in 1940 and end with the last census in 2000. They are not without problems. The main one of which I will refer to later.

What can we glean from this table and does it offer insights that can help answer the question of a possible bottom in housing prices some time soon? Can past be prolog when it comes to divining the future of home prices?

First, there are two sets of numbers: one adjusting the past numbers for inflation to the year 2000 and one unadjusted, giving the nominal values for each decade end. Looking at the unadjusted numbers it is heartening to note that the nation as a whole has never suffered a decade to decade decline in median home values as measured by the Census Bureau, and with only two exceptions, Connecticut and Rhode Island, no state has ever suffered a decade to decade decline: Connecticut and Rhode Island both declined in the 1990 to 2000 decade, 6.13% and .37%, respectively.

However, when looking at the inflation adjusted numbers, the ones I’ll use from here on, a different picture emerges. Though the nation as a whole still has not suffered a decade to decade decline, a rolling decline has rolled from one group of states to another starting with the 1980 to 1990 decade. In that decade, of the 50 states and the District of Columbia 27 had declines, led by Wyoming which was down 33.53%. While this analysis is not about the reasons for the declines it is notable that no coastal states declined. It is also notable that when you google “farm belt states” Answer.com gives you the following: “The states of the Midwest that are noted particularly for their agricultural production: Iowa, Kansas, Minnesota, Nebraska, North Dakota, and South Dakota.” All of which declined during the 1980 to 1990 decade. It would also be instructive to point out that Bob Dylan, Tom Petty, Billy Joel, Bon Jovi, Van Halen and Foreigner, among others, performed at the first Farm Aid concert in Champaign, Illinois, on September 22, 1985. Such had become the plight of farmers that an aid concert had to be thrown for them. Iowa was down 27.11%, Kansas down 10.83%, Minnesota down 10.09%, Nebraska down 14.63%, North Dakota down 25.23%, and South Dakota down 20.30%.

Some of other states on the list of 1980 to 1990 decliners have links to oil (Texas down 1.65%), coal (West Virginia down 19.69%), mining (Utah down 22.4%, Colorado down 16.71% and Nevada down 10.07%) and other commodities like tobacco (Kentucky down 12.22%). Most of the 27 decliners have economies with strong links to commodities like corn, wheat, soy, oil, coal, metals, minerals, and tobacco.

When you move to the next decade, the 1990 to 2000 decade, none of the previous decliners makes it to the list. They all rose and most rose more than they fell in the previous decade: Iowa was up 40.78%, Kansas up 25.19%, Minnesota up 29.52%, Nebraska up 36.65%, North Dakota, failing to beat it previous decline, up 14.64%, and South Dakota up 37.95%. The total number of states that had declines dropped from 27 to 12.

In 2000 (a 20 year period), of the 27 decliners in the 1980 to 1990 decade all but four had median home values higher in 2000 than in 1980: Louisiana- 1980 median value $85,100, 2000 median value $85,000 (down .12%); North Dakota- 1980 value $86,900, 2000 value $74,000(down 14.84%); West Virginia- 1980 value $76,200, 2000 value $72,800 (down 4.46%); Wyoming- 1980 value $118,400, 2000 value

$96,600 (down 18.41%). All the rest were higher.

In the 1990 to 2000 decade an entirely different set of states had declines. Nearly all of the Northeastern states declined: Maine down 11.64%, New Hampshire down 19.36%, Vermont down 8.61%, Massachusetts down 10.72%, Connecticut down 26.54%, Rhode Island down 22.04% New York down 11.54%. Another notable state in the decliners of the 1990 to 2000 decade was California: down 15.33%. But this group of decliners is different than the previous group in that when you compare their 2000 median values to their 1980 median value (the same 20 year period) not a single one had median values less than its 1980 median value. This is because they each had value increases, on a percentage basis, in the 1980 to 1990 decade far in excess of their declines in the 1990 to 2000 decade.

What can we take away from these inflation-adjusted, median home value numbers? Among other things,

1) Something happened in 1980 that changed the median home value landscape.

2) Prior to 1980, median home value declines were rare: three states were down in the Sixties (Florida down .86%, New Mexico down 5.31% and Wyoming down 2.97%) and DC alone was down 13.55% in the Fifties.

3) After 1980, large groups of states suffered declines together: 27 in the Eighties and 12 in the Nineties.

4) No state has suffered back-to-back decades of declines and of the states that suffered declines in the 20 year period from 1980 to 2000 all but four have higher median home values in 2000. The lone holdouts are the previously mentioned states of Louisiana (down .12%); North Dakota (down 14.84%); West Virginia (down 4.46%); Wyoming (down 18.41%) which suffered declines in the Eighties and tended to be farm, agricultural, energy, or mining related states.

5) Even though the nation as a whole has never had a decade-to-decade decline, since 1980, the number of states with declines have been large enough, geographically diverse enough, or, in toto, to important to the overall economy of the nation to seriously call into question any system of real estate commoditization based on the belief that the nation has never had a decade-to-decade decline in median home prices.

But how do we use these numbers to tell us about the future? How do we use them to answer that tedious question of taxied tots: Are we there yet? Are we at or near a bottom?

Looking at the 60 year period from 1940 to 2000 for the nation as a whole, taking into account the high growth decades and the low growth decades, we can smooth the growth rate over that period by calculating a compound annual growth rate (CAGR) for median home values. The U.S. median home value adjusted for inflation in 1940 was $30,600. It was $119,600 in 2000. Using the CAGR formula of CAGR = (FV/PV)^1/n - 1 (where FV is the future value, PV is the present value, and n is the number of years) the CAGR for U.S. median home values over the 60 year period is 2.3%. If we just adjust the 2000 U.S. median home value for inflation through 2008 we get a median value of $147,538. Adjusting the year 2000 number of $119,000 for just the 2.3% CAGR without adjusting for inflation through 2008 the result is a lower figure of $143,462.

So, using the higer figure, the one adjusted for just inflation it would not be unreasonable for the U.S. median house value to be $147,538 at the end of 2008, but just keeping up with inflation is not the worst case scenario. Housing has had decades when its growth did not even keep up with inflation.

Now comes the problem alluded to earlier on. The numbers used in this analysis are census numbers and are only updated every 10 years. If they are updated more often I could not locate them on the Census web site, but the Census Bureau does release on a monthly basis numbers equally useful for this analysis. They are the U.S. median asking prices. Since it is rare to get above the asking price and in the current environment assuming that the selling price will be below the asking price we can assume that the bottom could lie somewhere in between the median asking price and either the inflation only adjusted figure of $147,538 or the CAGR only adjusted figure of $143,461.

According to the U.S. Census Bureau’s table of Median Rents and Asking Prices the median U.S. asking price was $171,800 at the end of the 3^rd quarter of 2008. Using the calculated figure of $143,462 for the U.S. median home value for the end of 2008 it could be argued that U.S. asking prices are still 16.49% higher than the U.S. median value, meaning we may have 16.49% more to go before a bottom is in on housing. If we use the inflation adjusted figure of $147,538 the gap is a slightly smaller 14.12%. Given that asking prices across the nation have most likely fallen since the end of October 2008 we may be closer to the bottom than that. Since this is a U.S. median figure the drop most likely would not be uniform across the country. Some states could drop more and some less.

In the future and this analysis was about the future, when talk begins about fixing the MBS system I would suggest that we need far better numbers that are adjusted monthly and are readily available to buyers and sellers alike. It would also help if those designing the system kept in mind that if real estate is a commodity it is like no other. It is a commodity that is “planted” only once and can not be packed up and shipped to areas where the economy is better like corn, wheat, soy, sugar, iron, copper, oil, coal… It is a relatively illiquid market where the “commodity” stays put, and it isn’t profitable to ship it to other areas to sell it when the local populace can’t afford it. It would also help if those designing such a system would keep in mind that money attracts thieves of every strip and strong safeguards should be kept in place at all times.