Home prices in most of California won’t return to the peak levels seen in 2006 until 2025 or later, according to a study by Fiserv. The data reflects an unprecedented real estate market cycle period of over 15 years.
Fiserv made more specific predictions for certain major cities. They posit the return of peak prices won’t occur until:
- 2022 in Santa Ana;
- 2024 in Oakland;
- 2024 in San Diego;
- 2026 in Los Angeles;
- 2028 in Fresno;
- 2032 in Riverside; and
- 2039 or later in Sacramento.
Predictions were calculated using the Case-Shiller Home Price Index (owned by Fiserv), which collects data on single family homes with at least two arms-length sales. Sales pairs for each home are compared, and any price change contributes to establish an equilibrium price trend.
In order to accurately measure changes in the value of a residential real estate market rather than changes in the value of an individual home, each sales pair is assigned a weight based on the price change and the home’s location.
Other factors considered in the data analysis include price anomalies, turnover frequency, time interval between sales and initial home value. Price peak recovery predictions were created using historical trend data and supplemented with data from the Federal Housing Finance Agency (FHFA).
Editor’s note — All of these predictions were compiled in March 2010 before the new homebuyer tax credits temporarily boosted home sales by pre-selling homes to otherwise future buyers.
first tuesday take: Fiserv’s prediction that prices will return to the peak prices around 2025 is on par with first tuesday’s forecast. However, our separate processes of arriving at this projection were not nearly the same. [For more information regarding peak price predictions, see the September 2010 first tuesday article, Home sales volume and price peaks.]
The Case-Shiller Home Price Index sets the base years for collecting sales pairs at 1990 and 2000. Because 1990 was a peak price year, logically they should have chosen another peak price year for the 2nd base period. Using 2001 instead of 2000 to calculate price changes would have yielded a somewhat more accurate basis for their projections.
The report does not identify the cut-off date for data collection. Fiserv’s prediction may be evolving as more data is collected for 2010, so we will be keeping a close eye on any new forecasts they may release in the coming months.
In these projections, Fiserv has mastered the “art of the chartist” by basing future price movement on price trends of decades past, commencing in 1990 and 2000 (their base years), to then projecting the trajectory, set by the sale and resale of properties, into the future to predict when year-price increases will return to the peaks from early 2006. However, the purpose of looking back to history is to understand what drove past events, and then use that insight to make better-informed decisions to develop a forecast as an opinion about future prices — not to predict them by a mere projection.
History has shown us that home prices during the next couple of decades will rise close to the rate of consumer inflation (2% to 3%). We can safely infer that prices will continue to follow this inflationary pattern based on the decades following our Great Depression and its concurrent financial crisis of the 1930s, as well as the bond market’s analysis of inflation and dollar performance expectation in 30-year bonds.
Home pricing in the coming years will also be influenced by the retiring of the Baby Boomer generation (peaking in 2025) and the entry of the “Y” Generation into homeownership as first time buyers (peaking in 2018). These future events are used to support our forecast that California home prices will stabilize around 2014, with a “Y” Generation buying bump in prices around 2018, but won’t reach their 2006 peak again until around 2025. [For more information regarding demographics and California real estate trends, see the upcoming first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities — Part I.]