Case-Shiller from 3 months into the future

Friday, August 22, 2008


This is an attempt to predict the dynamics of the real estate market in San Diego over the next 3-4 years.

"Fundamentals" curve assumes more or less unchanged interest rates and steady wage inflation that averages 3%/year going forward. For the top tier I use a soft-landing scenario (exponential decay to fundamentals). To extrapolate two other tiers, I use quadratic approximations of season-adjusted HPI points from the last 9 months.

Summary of predictions:

* Aggregate Case-Shiller bottom in February '09 in 150-155 range (late '02 pricing)
* Top tier: 5% decline followed by many years of scraping along the bottom
* Middle tier: 6-8% decline followed by a mild bounce-back


* Bottom tier may get some support from FHA short-refinancing program, in which case the decline will not be so severe.
* I'm assuming that GSE conforming-jumbo loans and higher FHA loan limits stay with us until the return of a healthy jumbo market. Technically, they are supposed to be discontinued on Dec 31, 2008, but it's likely that loan limits will be extended.
* Interest rates may not stay the same. Here are two alternative scenarios, with rates heading to 5.5% and 7.5% long term, respectively:

I'm not a prophet and I may be seriously off, only time will tell.

UPDATE: recalculated the "fundamentals" curve using actual CPI and mortgage rate data.


lukman said...

How are the tiers split?

SD Scientist said...

Geographically. See here

Eric_in_SD said...

Fascinating work, of course.

Are the price series CPI-adjusted?

Would it be possible to go back further in time, to see what happened in the mid-90's? How rapidly did the various tiers converge to the fundamentals then?

I assume when you show 3% wage inflation, that is on top of CPI adjustment; I wonder what is the macro explanation for such inflation. Are jobs in San Diego steadily shifting toward higher salaries?

Again, wonderful work. Keep it up!

SD Scientist said...

All series are in nominal dollars. I don't use 3% wage inflation on top of CPI. To chart fundamentals, I use CPI for the past and fixed 3%/year inflation for the future.

Unfortunately, my resale history database does not allow me to go further back than 1999 with enough accuracy.