Wednesday, February 25, 2009

Stress Test House Price Scenarios

by Bill McBride on 2/25/2009 03:59:00 PM

Here are a couple of graphs to illustrate the Capital Assistance Program house price scenarios. (see previous post) Note: the FDIC called it Capital Assessment Program (so the graph titles are incorrect!)

House Price Scenarios Click on graph for larger image in new window.

For whatever reason the Treasury is using the Case-Shiller Composite 10 index (I'd prefer the National Index). This graph shows nominal house prices under the two scenarios: baseline, and more severe.

Under the baseline scenario, nominal prices in the Composite 10 cities would return to mid-2002 prices. Under the more severe scenario, prices would return to early 2001 prices.

Scenarios Price-to-rent The second graph shows what this would mean for the price-to-rent ratio.

Note: this is price-to-rent for the Composite 10 index and Jan 2000 is set to 1.0.

This assumes rents stay flat for the next two years (recent reports suggest rents are falling - and that would mean prices would have to fall further).

This metric suggests that the severe price declines would bring the price-to-rent ratio below the normal range. Note: this requires the above assumption on rents.

NOTE: This is based on the Composite 10 index, and that index will most likely decline more than the national index. Even in these 10 cities, some areas will probably see larger price declines (as an example areas with significant Option ARM loans) and other areas less.

Repeating this table of the scenarios:

Distressing Gap

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