Dan Alpert's Two Cents

Reconstructing American Home Values

On a National Level, We are About 75% of the Way to Price Stability for American Homes, While Some Markets Have Overshot to the Downside


One year ago, we projected that the U.S. housing market would decline from peak bubble-era levels by 28.2%. Although many observers thought we were overly pessimistic, it turns out we weren’t pessimistic enough. Now, with the benefit of hindsight and more robust data points drawn from the last 12 months of market activity, we believe that housing will stabilize nationally, when expressed in terms of the Case-Shiller 20-City Index, at a decline of 43% from peak levels, or an index reading of approximately 117.

To firmly return to the upper limits of historically justifiable levels of stabile prices relative to rents in particular, we believe the Case-Shiller 20 markets must decline, on average (with considerable differences among markets), by an additional +/-16.9% from May 2009 levels.

In the final years of this decade’s housing mania, home buyers not only assumed the value of the home they acquired would rise to the moon; they were often paying more than 50% of purchase price toward what was effectively a wildly overpriced option on that presumed growth, relative to the portion that could be reasonably attributed to the shelter cost.

In addition to being massively overpriced relative to the value of the embedded option on future growth, U.S. homes completely disconnected from every other indicia of the potential value of owning a home—rents, incomes, construction materials costs and labor costs.

The bubble actually dates back to 1997, when housing diverged from a historical range of average price/rent ratios (which we have calculated as 11.4–13.8 times prevailing rents, dating back to 1953). The balloon in home prices accelerated to 15.2 times by the end of the tech bubble in March 2000. After a slight downward adjustment, and with the Fed’s reaction to the events of Sept. 11, 2001, the price to rent multiple of U.S. homes commenced its relentless and unprecedented climb to its peak: 25.6 times at the end of 2005.

To regain long-term stability and work off the current housing glut, prices will need to fall (net of extraordinary tax credits for the purpose of spurring short-term housing demand), such that the price to rent multiple re-enters its historical range of values. This has already occurred in several markets, as set forth in the appendix to this report, with the others expected to catch up over time. On a national basis, such an adjustment would still result in nominal (before subtracting inflation) growth of 48.5% in housing prices since 1997, as would be expected—but still a long way from the 163.8% rise to the bubble’s peak.


One year ago, in our report Putting a Floor Under American Homes,[1] we wrote that the U.S. housing market—as measured by the Case-Shiller 20-City Composite Index (SPCS20R)—would decline by 28.2% from peak to trough as a result of the housing bubble’s collapse. We endured many quizzical stares at the time, and some government and private-sector leaders thought our projection wasn’t much more than an overstated curiosity.

We honestly wish our August 2008 prediction had come to pass, as awful as it seemed at the time. Now, with the benefits of hindsight and more robust data points, we believe that housing, nationally, will stabilize, when expressed in terms of the Case-Shiller 20-City Index, at a decline of 43% from peak levels, or an index reading of approximately 117.

The graph below (explained in detail later in this report) sets forth, on a logarithmic scale, the Case-Shiller 20-City Index, and contrasts it to where we believe prices should have remained (from an inflection point in 1997 to present day), based upon observed price/rent ratios from 1953 to 1997, the point at which the market initially diverged before going completely off the rails after 2001. The dashed red line illustrates the remaining price decline (nationally) that we believe necessary to return to sustainable levels.

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Daniel Alpert is a Managing Director and Founding Partner of the New York investment bank Westwood Capital, LLC, and its affiliates. He is a frequent commentator on the housing and credit crises on the CNBC, FoxBusiness and Bloomberg networks, as well as in leading newspapers, periodicals, and websites.

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