Sunday, November 2, 2008

Building Equity?, don't count on it for a while

The Center for Economic and Policy Research has released its latest report. It's a good read and perfectly illustrates what I harp on about on this blog. It reaches the conclusion that prices still have a way to fall in the bubble markets because they are still out of line with traditional ratios of price to income and price to rent.

The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas

The Prospects for Accumulating Equity

Despite the collapsing housing bubble and consequent fall in house prices in bubble markets, the prospects for accumulating equity still look grim for homeowners as prices are still far from reaching their historical norm. The relative merits of owning and renting will be affected by the extent to which homeowners can accumulate equity. Even with the general increase in house prices at the same rate as the overall rate of inflation, homebuyers are at risk of facing plunging home values in bubble inflated markets.

Table 1 below shows that more than 60 metropolitan areas will accumulate less equity in 2012 for a recently purchased home than a home owned from six-months ago. Out of 100 metro areas, 33 are projected to accumulate negative equity in 2012, as opposed to 34 metro areas in our previous report. In fact, all 33 metro areas are in bubble markets as indicated by Table 1 below. They will generally accumulate slightly less negative equity in 2012 than our previous report predicted, due to the decline in house prices and the modest increases in rents assumed in this analysis which is returning the annual rent to price ratio to historical levels. Nevertheless, house prices across the bubble markets still have a long way to fall. In comparison, metro areas without housing bubbles will likely accumulate positive equity in a relatively short period of time.

(part of Table 1)
Major Metropolitan Areas Projected to have Negative Equity in 4 years (2012)

San Jose-Sunnyvale-Santa Clara, CA
San Francisco-Oakland-Fremont, CA
Los Angeles-Long Beach-Santa Ana, CA
Bridgeport-Stamford-Norwalk, CT
Oxnard-Thousand Oaks-Ventura, CA
Riverside-San Bernardino-Ontario, CA
Honolulu, HI
Sacramento-Arden-Arcade-Roseville, CA
Seattle-Tacoma-Bellevue, WA
San Diego-Carlsbad-San Marcos, CA
New York-Northern New Jersey-Long Island, NY-NJ-PA
Portland-Vancouver-Beaverton, OR-WA
Washington-Arlington-Alexandria, DC-VA-MD-WV
Salt Lake City, UT
Baltimore-Towson, MD
Fresno, CA
Stockton, CA
Bakersfield, CA
Boise City-Nampa, ID
Modesto, CA
Poughkeepsie-Newburgh-Middletown, NY
Boston-Cambridge-Quincy, MA-NH
Worcester, MA
Ogden-Clearfield, UT
Providence-New Bedford-Fall River, RI-MA
Denver-Aurora, CO
Minneapolis-St. Paul-Bloomington, MN-WI
Madison, WI
Chicago-Naperville-Joliet, IL-IN-WI
Colorado Springs, CO
Allentown-Bethlehem-Easton, PA-NJ
Phoenix-Mesa-Scottsdale, AZ
Miami-Fort Lauderdale-Pompano Beach, FL


Tyrone said...

In Table 1, did the authors consider things such as:
- Rising unemployment
- Rising foreclosures (alt-a, prime, neg-equity walk-aways)
- Rising inflation (likely)
- Declining dollar value (assuming it declines in the coming months)
- Inability to sell US Bonds (debt)
- Government debt default (worst-case, OMG we're toast)

What am I missing?

Anyway, best to keep your powder dry.

p.s. Can we create a new acronym? NEWA - Negative Equity Walk-Aways (or NEWs); since MEWs are gone, we need NEWs. :)

Oldtimer said...

These are the same forecasters that told us real estate prices would begin plummeting in 2006, right?

Maybe I missed it, but I think not.

Forecasting is the process of taking the recent past a projecting it forever into the future. As Warren Buffett observed, forecasts can tell you alot about a forecaster, but they tell you nothing about the future.

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