When will housing finally hit bottom? Pick a year, and you can find an analyst's opinion to support your guess. One respected housing expert sees a bottom in six months, while other equally experienced observers see a bottom in 2013, followed by a decade of slow improvement.

Though there is no reliable guide to the future, data from the past at least offers a range of possibilities. As imperfect as the past may be as predictor of the future -- history tends to echo, rather than repeat -- it does alert us to cycles and patterns that may play out going forward.

Why is this so? For two reasons: Human psychology reliably swings between euphoria and caution in the marketplace, and the business cycle of rising debt and overexpansion followed by contraction of credit and retrenching is a regular feature of free markets.

Income Leads the Way

One standard way of assessing the underlying valuation of housing is to compare it with income. When homes are soaring in value, they rise above the historical average of four times median household income. When houses fall in value, they dip to 3.5 times median household income.

Ned Davis Research and CNBC recently published a chart of this ratio, housing prices to median household income, which I have annotated.



The ratio accurately reflects peaks and valleys in residential real estate: Housing prices rose to a peak in the late 1970s and then fell sharply in the deep 1981-83 recession. The resurgent economy boosted prices for seven years, leading to another peak in valuations in 1990.

For various macroeconomic reasons, housing then stagnated for about a decade, drifting below the historic mean of four times income. These factors included the relative balance of supply and demand between home buyers and sellers, and the greater attractiveness of stocks and bonds to investors in the 1990s.

We all know the story of the Great Housing Bubble -- low interest rates, disavowal of risk management, subprime loans to unqualified buyers and investor wariness after the dot-com stock market crash all led to a massive sustained surge in home buying.

In the early 1990s, home sales averaged about 4 million a year. By the mid-2000s, that number had nearly doubled to 7 million sales a year.

This imbalance between supply (limited) and demand (rising due to the influx of marginally qualified buyers and investors) led to seven years of skyrocketing valuations. But nothing goes up forever, and the global financial crisis ended the housing bubble's seemingly unstoppable ascent.

The Fed Takes Over

Once the Federal Reserve and federal government finally acknowledged that housing prices were in a recessionary free-fall, the Fed stepped in to maintain superlow mortgage rates by purchasing $1 trillion in mortgages, and government agencies offered a slew of programs aimed at stabilizing the housing market and home prices.

As the chart reveals, these unprecedented efforts have provided a modest stabilization in valuations. But the limits of government intervention are painfully clear: According to the Treasury Department, about half of the borrowers who had mortgage modifications done in 2009 were behind in payments by the first quarter of 2010.


The fundamental headwinds to any sustained rise in home values are substantial. Foreclosures have risen for the ninth month in a row, even as housing inventory continues to rise. (I first reported on the bulging foreclosure pipeline back in August of 2009. More recently, I reported on the worrying numbers behind underwater homeowners.)

Other commentators have also noted the fundamental drag presented by the excess supply of existing housing units and the huge number of homeowners with negative equity (i.e., the mortgage exceeds the market value of the house).

Indeed, some analysts see a second leg down in housing prices as inevitable. There's nothing fancy or complicated about the reason: When supply exceeds demand, prices fall until a new equilibrium is reached

So When's the Bottom?

At this point, the guessing game moves from "when will housing bottom?" to "how much further will housing decline?" Some analysts are staking out future drops in the neighborhood of 5% to 8%.

Two interesting features in the chart above suggest targets for both the housing bottom and the eventual low point in valuations. Bubbles tend to rise and fall in symmetry, meaning that a bubble that took seven years to reach its apex typically takes about the same period to time to retrace to its starting point.

By that reckoning, the housing bubble, which took off in 2001 and ended in 2007, will need about seven years to complete the retracement to historical valuations. That would put the bottom in the 2013-14 time frame.

As for valuations, market-watchers have long noted that "it's different this time" is a remarkably inaccurate basis for valuing anything. Thus, we can look to the last deep recession in 1981-83 for some clues about where housing valuations may be heading -- to about 3.5 times median household income.

This ratio of income to home prices is useful because it follows regional variations: Higher-income areas will have higher home prices, but the ratio will likely be about the same across the nation.

"It's different this time" has a close and equally inaccurate cousin: "it can't happen here." But of course it can.Those counting on a timely resurgence in home valuations ignore the fundamentals of supply and demand at their own peril.

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cabo79

The economy will pick back up when home prices are back to 1999 levels and banks start loaning money to small companies again. Right now the banks are just sitting on the situation and hoping that prices stabilize. This strategy will keep the resession going for at LEAST another 10 years.

September 20 2010 at 10:37 AM Report abuse rate up rate down Reply
sgentilejr

All of YOU took part in the Destruction of the USA. YOU bought all of the Imported products off the store shelves and in doing so it was YOU who gave away the Wealth and Jobs of the USA. The Jobs and the Walth will never be back_____NEVER. Simply because YOU are buying more and more Imported products each year now as the number of made in the USA items falls each year. That is neither Bush's or Obama's fault___IT IS ENTIRELY YOUR FAULT, because you do your own shopping and YOU buy the imported junk and that is not going to change.

September 20 2010 at 3:30 AM Report abuse +1 rate up rate down Reply
1 reply to sgentilejr's comment
willmatrix

American products were overpriced and of inferior quality. Plus, there are so many things that aren't made in America. If American workers want to work, they need to be competitive instead of using unions to get inflated wages, benefits, and pensions while producing lower and lower quality products.

September 20 2010 at 10:22 AM Report abuse +1 rate up rate down Reply
wavesofgreen

The United States' middle class is falling. Wealth is being concentrated in fewer and fewer hands. Most manufaturing jobs have gone overseas and tradesmen who might have at least formerly made a good quality living are being squeezed by illegal aliens. This isnt a problem Democrats, Republicans or the Tea Party will solve. When you combine the impoverishing of America with the aging of the Baby Boom nad the termendous crash of the easy credit culture you have a perfect strom of downward pressure on real estate values.

September 19 2010 at 8:04 PM Report abuse +5 rate up rate down Reply
trdus

"c'mon folks !!!! I saw this coming when it started 25- 30 years ago! Two story sub divisions going up everywhere . Homes selling for hundreds of thousands of dollars ! Inground pools, two suv's in the driveway fence guy in the backyard, two dogs, two trips to Disney land a year ! Tell me, did any of you actually believe that any of it was sustainable ??? If you did, I'm really worried !! And, what everybody is forgetting right now is, (including the fella who wrote this article) "WHREE'S THE MONEY GOING TO COME FROM " !!!! Unless somebody quickly comes up with something like the invention of the Automobile, the Airplane, or the Computer . And manufactures it here in"AMERICA" I don't see what's going to be the next great thing to to bring us out of the nose dive we're in ! But keep this one little bit of information in mind America, reality was your Grandparents day, or perhaps your Great Grandparents not what you've been living !

September 19 2010 at 7:25 PM Report abuse +2 rate up rate down Reply
CHABSENTIA

Finally somebody that gives the facts. The major reason for the Housing bubble and the economy we see todaty was seven years of an imbalance of supply and demand because of marginally qualified buyers and investors. This is because on 1999 the Clinton administration made it possibel to purchase homes with no money down so that everybodt could have part of the American dream. If Mercedes, BMW, and Porsche announced incentivized irresponsible people by offering their vehicles with no money down then it would ruin them. Think about it.Anybody with a basic knowledge of economics knows that the one hundred percent increase in home values between 2000- 2007 was wrong and a danger signal. Actually the calculation is very simple . Take the national yearly average befre 1999 and multiply it three which is the number of years after 2007 to the present and subtract that along with the decrease in value that has already happened and subtract that number from one hundred percent and divide it by the national yearly average increase befre 1999 and you have the number of years. So if the average annual increase before 1999 was six percent then you have eighteen percent. The average annual decrease in values since 2007 has been forty percent for a total of fifty eight percent . This leaves forty five percent Forty two percent divided by six percent which was the average decrease before 1999. This result is equal to seven. Seven years from the peak of 2007 is 2014 which agrees with the author here. Doesnt make any difference that interest rates are low now. They aare artificially low because the Fed made it that way.When interest rates start to rise again and they will then they will compensate for how long they were kept artificially low.

September 19 2010 at 7:08 PM Report abuse rate up rate down Reply
1 reply to CHABSENTIA's comment
cabo79

I love the way you say "The Clinton administration" did this. This is the root of all the problems we are having in the real estate market. The system works like this: the real estate agent works on commission and wants to make a sale, the mortgage originator ( loan officer) is paid on commission and wants to make a sale, the appraiser works on a fixed price for the appraisal, but if he/she doesn't come in with the appraisal the mortgage originator wants, he/she will not get any work. The three conspire if you would to make the sale. The bank doesn't care, it packages the loans and sales them and makes a commission. Wall Street loves it, they sale the packaged loans to the stupid investor, making a big commision. Then bet against the packaged loans, because they know they will crash so they can make even bigger profits. Your politicians don't care, the financial sector pays them well (campaign contributions) to look the other way. The system could be made to work in an honest manner if the government cared to make it so. THROW THE BUMS OUT!

September 20 2010 at 10:49 AM Report abuse rate up rate down Reply
gmydogbud

Thank you, Barnie Frank, Chris Dodd, Nancy Polosi, Charlie Rangel. I did the right thing and because of you, me and people like me are being punished, not for what we did, but because of what you choose to do. Since you are all so educated, have spent so many years in the Congress, you must have done this by design!

September 19 2010 at 6:21 PM Report abuse +2 rate up rate down Reply
tom

Hmmm... housing prices take a dump right after Jimmy Carter and Obama take office.

September 19 2010 at 6:06 PM Report abuse +2 rate up rate down Reply
sarah56123

I don't care what my home is worth, I love it, I love the neighborhood and the town. To me, it's worth a mil. I would not step out of it for being underwater. You don't bail on your children; or do you? It just so happens I have as much equity as someone can in a more expensive home with a higher paying job. But I won't sell it...you don't mess with a good thing. To me, a home shouldn't be a lifelong sentence of financial slavery to prove a point to your huz and the world..that your stupid! Now the tables have turned, everyone realizes that the joke is so over! Men, if you can't support me, I have nothing to do with you. Making me wait will not lower my expectations to accomodate your expectations, it will raise them to abnormally high levels, like genious high levels in the academic world!

September 19 2010 at 5:53 PM Report abuse rate up rate down Reply
iamannatude

I seen this coming about 10-12 years ago. My husband and I had a roofing company back then so we were right in the thick of things with the housing boom. We had a 3 phase, multi-million dollar, 10 year project in the works. (Ah, the good ole days for dreamin) My husband fell thru a manhole and broke his back just days from final closing on the contract. Unfortunately/Fortunately. We both KNEW that while we were working hard chasing the housing "cash cow", that they were building too fast, prices going up(by the virtual minute) and selling/financing to anything with a pulse, that THE MISSION (this will probably END badly) WAS A GO! Just without us. Seen it as a real drag, lost everything. BUT! BECAUSE we were in dire straights, (homeless in 95 & 96) we were actually out of the line of fire. Sure, we probably could have bought a house, we had a pulse, but I seen it coming as a bad thing and was glad in the end that we weren't sucked into the "housing pit'. I,too, am a 'baby-boomer' but was smart enough to know that to sign a mortgage contract that we couldn't afford and be able/unable to carry it for 900 years, was insane. Mostly, people were buying homes they just flat-out couldn't afford. Period! You can blame the Government, the banks, the mortgage brokers, even your Great Aunt Lucy. HOWEVER! Bottom line is the signature on the contract. A piece of paper, a pencil and a touch of common sense. You can't spend $100 if all you have is $85. Simple. Credit cards NOT accepted,lol. We are buying a nice mobile home(don't laugh!) our mortgage is $170(not bad) the note is NOT bigger than the worth, and we pay 0% interest. If I get tired of my neighbors, I can pack up kit n kaboodle and move all my stuff together. Plan on moving it to it's own land, BUT not before we pay it off. WHY? Because baby steps are easier than jumping off a cliff. Even have a so-called 'back-up' plan. A 20' camper! lol.A little common sense(THANKS,MOM!) and restraint.

September 19 2010 at 5:50 PM Report abuse +3 rate up rate down Reply
1 reply to iamannatude's comment
cabo79

Most people are not that smart, from the people that bought these houses to the stupid investors that bought the Mortage Backed Securities. The smart ones were your elected politicians and the Wall Street firms that made billions first selling the MBS's and then shorting them.

September 20 2010 at 11:08 AM Report abuse rate up rate down Reply
ralanbrunette

This article fails to take one factor into consideration, which supports their argument-that America needs approximately 1 million new units a year to keep up with natural need through fire, tear-downs, floods, population shifts and growth, immigration, etc. When the recession started, we had approximately a 7-8 million unit overload. Do the math...the builders are currently building under 250 thousand units a year, and we are gaining on units sold from the backstock every year. I'd give this 2-3 years more, tops, before modest gains will be seen with existing units, and new units will start to be built again, but in modest numbers.

September 19 2010 at 5:45 PM Report abuse +3 rate up rate down Reply