Wrinkly Dollar

Where Will Home Prices Go From Here?

In light of the current economic turmoil, home values have dropped along with the prices of many other assets. According to the Case-Shiller measure of home prices for 20 cities around the US, nationwide home prices have dropped 29% since their peak in the summer of 2006. With such a large drop behind us, is now a good time to buy a home? Can current homeowners be comfortable that the value of their homes will not fall by much more?

Of course, no one knows the answer to these questions. But there is one measure used by Wall Street traders that gives an indication of where professionals expect home prices to be in the future. They are futures on residential home prices – contracts between professional traders that are bets on where home prices will end up. Again, no one knows what home prices will do over the next year or two or five, but these contacts hammered out between traders have a whole host of informed opinions behind them – the expectations of economists, supply and demand considerations, etc. – so they are arguably one of the best indicators of future home prices around and certainly much better than an uninformed opinion.

So what does the market for housing futures currently say about future home prices?

The outlook is negative to be sure. Today’s market (as of April 7, 2009), which is based on the RPX index of home prices, predicts that home prices for 2009 will fall by almost 30%. (They have already fallen 10% since January.) The chart below shows this very well. Historical home prices are shown in white and the path predicted for the next five years by the RPX housing futures market in red. Note the drop for 2009 still to come.

Many people I’ve talked to still make the old argument in favor of purchasing a place to live: Why throw away my money on rent when I can be putting it toward the ownership of my own home? But given the free fall in home prices these days, that is outdated reasoning. With such a steep drop in prices being predicted by housing futures markets, it seems a much better idea to wait a year or two, when home prices are projected to level off. Why purchase a home today only to see another 20-25% of its value go up in smoke? Instead, save your money by renting during that time, and use it to purchase a home later at lower cost.

It’s true that there are many benefits to owning a home that I haven’t mentioned, like tax breaks and having a place of your own to raise a family, but there are also negative ones, like upkeep costs and property taxes. In the vast majority of cases, however, the economics of purchasing a home make no sense at all when staring at a potential drop in value of 20-25%.

I should also mention here that home prices can vary extremely from city to city, and that the nationwide averages shown above are likely not well-representative of any given location.

By the way, you can check these markets yourself here. You can also have a look at the history of home prices in your city since 2000.