by Bill McBride on 9/26/2008 10:44:00 AM
Friday, September 26, 2008
First, here is the investor presentation material from the JPMorgan conference call last night.
Click on chart for larger image in new window.
Here are the House Price Appreciation (HPA) numbers JPM is working with.
JPMorgan presented three scenarios: a base case (with national prices falling 25% peak to trough), a deeper recession (28% decline), and a severe recession (37% decline).
Currently the Case-Shiller futures are predicting a 33% decline peak-to-trough, Goldman is forecasting 27%, and Lehman was forecasting 32%.
Also note the unemployment numbers for each scenario (7%, 7.5%, and 8% for a severe recession), and price forecasts for California and Florida.
Earlier this month, I presented three ways to look at prices: real prices, price-to-rent, and price-to-income. I've taken the JPMorgan national prices forecasts and added them to the price-to-household income chart.
This graph shows the price-to-household income ratio and is based off the Case-Shiller index, and the Census Bureau's median income Historical Income Tables - Households.
Using national median incomes and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area).
For this graph, I assumed that prices would fall over four more quarters for JPMorgan's base house price projection, over five more quarters for the "Deeper recession" projections, and over eight more quarters for the "Severe recession" projections.
Also, after reaching the price trough, I held house prices steady while incomes continue to rise mostly with inflation.
I'd expect this ratio to decline below 1.0 (like in the mid-90s), so I think the JPMorgan base case is too optimistic. My guess is that national house prices will decline somewhere between JPMorgan's "deeper recession" (28% peak to trough) and their "severe recession" (37% peak to trough) projections.