The Boston Globe interviews Warren Group CEO Timothy Warren whose firm tracks housing in Massachusetts. He suggests that it could take about 10 years before housing prices return to where they were at the peak in 2005.
Warren is a breath of fresh air when it comes to analyzing the housing market. Unlike industry-sponsored studies -- such as this bubbly comment from the National Association of Realtors -- Warren carefully tracks and analyzes data and his observations are not filtered by the need to use public pronouncements to spur real estate transactions.
But Warren's loyalty appears to lie with objective data gathering and analysis, rather than having an ulterior motive. He thinks that the declining number of home sales is worse than the previous housing slump of the early 1990s. He notes that "In the 1990s, we had just two years when the number of sales declined. We are in the fourth year of declining sales in the current slump."
He points out that the decline in Massachusetts' median price doesn't look as bad as it did in the '90s, but he thinks that the downturn could last longer. As Warren said, "if 2008 is another year of declining price, this would be the third year." He noted that in the 1990s slump there was a very slow -- six year -- recovery. After prices stopped falling in 1993, it took six years for the Massachusetts median price to exceed its level before the slump started.
Using this logic, Massachusetts is likely going to hit bottom in 2009 and then take another five years to see real estate prices return to where they were in 2005 when the prices started falling. People ask Warren when the recovery will start and he says, maybe in 2009. However, "after the recovery starts it might take five years." That would mean Massachusetts housing prices would recover to their 2005 levels in 2014.
Warren's five year recovery estimate seems optimistic to me -- I'd give it a year more than the 1990s recovery period -- or seven years. If my more conservative assumptions prove correct, then housing prices will bottom out next year won't return to where they were in 2005 until 2016.
Warren fingers easy money for blowing up the housing bubble. And since we're in the middle of figuring out how much damage the economic backlash from that easy money will cause -- in terms of foreclosures, excess housing supply, and far tighter credit -- it is somewhat encouraging that Warren thinks housing will ever rise again.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
3-30-2008 @ 11:07AM
taina2 said...
It is going to get worse, but building costs are skyrocketing and few new units will be built. This should end glut sooner.
3-30-2008 @ 2:04PM
MyKisa said...
It would be silly to think it will go back to where it was, that was a big spurt, but with 5 million becoming eligible for retirement each year, and with wide open borders (all candidates approve), there will be growth.
3-30-2008 @ 4:38PM
william lindblad said...
There is a great deal of focus on housing as it is the present economic culprit, however in general decision making the whole should be considered. if the present conditions continue we will see more job lose, inflation, market deterioration, bank failures and many as yet unknowns, in addition to problems mentioned in article. On the plus side we have government intervention. The position of the Fed, while not desirable by most, was the only recourse to avoid a possible panic. Fannie and Freddie have had their leash removed - this move may be good or bad and only time will tell. I don't know how to fix this mess either and I will point out that I have using the word "mess" since Sept. 2007, back than it received much critical comment. Time does have a way of changing minds. The one thing that I am sure of - the price of a home has to get back in line with the ability of the majority to pay for it - with a 30 year fixed. If we get into 40+ and the Japan lifetime loans we are simply asking for another round of price escalation.
3-30-2008 @ 8:23PM
DaveF said...
Housing, growth of government and health care were the only components of the economy that are growing. Administration policies instigated, promoted and ignored the credit crisis to demonstrate some level of competance at governing and improve poll numbers.
The issue will also be whether or not we can borrow ourselves out of spreading bad paper internationally. Bush has eroded the good faith and credibility of the US and there is no good will left. My prediction is that we will be lucky if the housing crisis is only ten years. Like Japan the crisis was instigated by fraud and corruption on a massive scale