Saturday, May 29, 2010

IMF Economist: Real Estate Headed Much Lower

International Monetary Fund economist Prakash Loungani at a National Economists Club luncheon in Washington D.C. told the group that he expects much more downside in the real estate market according to WSJ.

Since the 1970's. on average,  previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%.

But the latest boom was so much stronger than the previous ones that it's logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms.

Also, price-to-rent and price-to-income ratios were well above historical values in all OECD countries, except Japan, Germany and Switzerland, according to Loungani's analysis.

Loungani said his analysis of prices and rents in U.S. metro areas suggests that many markets on the West coast and in parts of the Northeast could yet see prices plummet a further 30%-40%.

Loungani may have something here, but the market this time around is very distorted because of the aggressive government programs to prop up housing. By using the aggregate number he is using, he is taking into account market prices, but also prices of bank controlled properties, which are still obviously nowhere near market prices. I would like to see separation of this data to get a better perspective on the overall market.

Given that interest rates are as low as they are, I am a buyer of real estate that appears to be a "steal" and I would  lock in the current rates long term.


  1. This comment has been removed by the author.

  2. Wenzel,

    I agree with your comment on aggressive government response, which will only further exacerbate these problems. Along with the unprecdented boom comes unprecedented interventionist response-- another negative for real estate prices!

    The gamble, as you say, is-- will price decreases outpace potential increases in financing costs over the same period? Although, with a stock market downturn/double dip economic picture becoming more and more evident, we could, by the end of the year, find ourselves in something of a real estate pricing perfect storm-- even higher govt bond prices (and thus historically low mortgage prices) combined with further free-falling real estate prices!

    The buy of the century could be right around the corner. Long real estate, short government bonds! (Don't forget your oil and gold!)