Rosenberg: Home prices may drop as much as 20%

David Rosenberg, Chief Economist at Gluskin Sheff, has recently given a couple of different views about the near term future for housing prices. These views are different only in degree: both are negative.

Home Prices May Drop 20% Further

First, he has suggested that prices may have 20% to fall, on average to reach a bottom, as seen in the following graphic:


I would add some caveats.

  1. Interest rates were higher on the mid-1990s. If you adjust home affordability to the lower interest rates of today, there is no reason to argue for as big a drop as 20% from here based on a historical cyclic comparison.
  2. If interest rates rise rapidly, the historical comparison would be biased to the down side and, at first blush, one is tempted to say that housing prices could drop more than 20% from here if interest rates rise above those of the mid-90s. One offsetting pressure could come from increased demand arising from buyer fear of higher future interest rates. This fear could push demand forward and support prices.
  3. Higher interest rates could well be accompanied by greater economic activity and increased employment. This would provide home price support due to increased demand. The downside of higher interest rates, particularly if they reach above the levels of the 1990s, would be suppression of economic activity and employment. Thus higher interest rates accompanying economic expansion could weaken the expansion.

Housing Prices May Drop 10% Further

In another graph, Rosenberg provides data that could be used to argue that home prices could have another 10% to drop:


A caveat here would include:

The 10% drop to the two historical bottoms shown requires that all other assets remain at current valuations. If we use the stock market as a proxy for all other household assets*, then a drop of 10% in the market would push the ratio to 29%. A further rise of 15% in stocks pushes the ratio down to 24% and no further drop in home prices is needed to reach the bottom ratio values of the 1960s and the 1990s.

*Note: Using the stock market as the proxy for all other household assets is a very gross assumption and could lead to misleading conclusions. Significant other possible assets include cash and equivalents, commodity investments, bonds and small business interests, which may, in total, be larger than investment in stocks.

Median Price Lows of 2009 Will be Taken Out

Six months ago I projected that the median price lows of 2009 would be taken out to the downside in 2010. See here and here. The following table shows the status of median home prices as of January, 2010:


The two big uncertainties in the housing market are the future course of the economy and the number of foreclosed properties that will come to market over the next 2-3 years. These two factors are related. The rate of growth of mortgage delinquencies is related to the unemployment rate, discussed here. The number of foreclosures coming to market in 2010 has been estimated to be greater than in 2009, with numbers remaining high in 2011 and possibly 2012.

It’s the Economy, Stupid

If the economy continues a modest recovery in 2010, with a GDP grow the entire year near 2 – 2.5% (my best guess), housing prices could go through a long bottoming process in 2010, possibly extending into 2011. The bottom in prices in this scenario would probably be within 5% to 10% below current levels.

If the economy is weaker than I project (let’s be honest again – it’s a best guess – then the lows in prices could well exceed 10% from here. With a double dip recession, Rosenberg’s most pessimistic projection is well within reach and could in fact be exceeded

If we have a strong recovery, especially if GDP growth for 2010 gets near or exceeds 5% for the entire year, then whatever the lows are in the first quarter will be the bottom in prices. The low should be close to current prices, within a couple of percent.

Anyone calling the timing and price for the housing market bottom is really making a prediction on the overall course of the economy for the next 12-24 months. Since Rosenberg has had a relatively negative outlook on prospects for the economy, his projections for housing are among the lower outlooks.

John Lounsbury provides comprehensive financial planning and investment advisory services to a small number of families on a fee only basis. He has a background which includes 34 years with a major international corporation, 25 years in R&D management and corporate staff positions. Since 2002 he has operated his own sole proprietorship business. John is also one of the top ten authors at Seeking Alpha and a featured commentator at Real Money.

  1. Attitude_Check says

    Well your analysis tells me that home prices will drop AT LEAST 25%, since higher interest rates are almost completely “baked-in”. Of course the Fed could turn-on the money machine again, but there are very good reasons they are not continuing QE.

    What do you think will happen to mortgage rates in April after the Fed stops buying RMBS securities?

    1. John Lounsbury says

      I am expecting mortgage rates to rise, but probably less than some think. I expect 25 bp by June and 50 bp by end of the year. The reason there will not be more? Weak demand. Home purchase demand will remain subdued for 2010 and in the most distressed markets there will continue to be investor purchases with cash.

      I am not so sure about higher interest rates in general. The consensus is so firm on increasing interest rates in 2010. The consensus is more often wrong than right. If my hunches are correct, GDP will stagger back toward zero as the year progesses and we will fall short of the 2% GDP gain over the entire year that I have been hoping for.

      Yes, eventually there will be higher interest rates but we may not see them in 2010.

      I have to keep reminding myself that the last time we had a credit induced recession (1930s – actually two recessions), there was great fear of imminent inflation all the way through the decade. It never came. Things are not the same now as in the 1930s, but the fear of recession during the deleveraging process is the same.

  2. Kirk Kinder says


    Nice article. I think you are right that the direction of the economy is key. However, we have more homes in foreclosure or 90 days past due than we had even in 2008. Depending on how long the extend and pretend can continue, we will see a large surplus in housing, which will have a dramatic impact on prices. This coupled with less stimulus (Fed or tax credit) will have a negative impact.

    The other alarming point is there has never been a bubble that hasn’t returned to pre-bubble prices. This includes tulips, South Sea, railroads (1860s), and tech bubble. So housing could see the year 2000 pricing if history holds.

  3. demandside says

    The house price-to-rent ratio data recently posted at Calculated Risk ( also suggests 25% drop to the historical norm.

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