Planning to invest in Real Estate? Watch out the market hasn't bottomed out yet!

I came across this interesting graph on index of American home prices for the last 120 yrs that was originally produced by Professor Robert J Shiller and later updated by a reader and posted at www.ritholtz.com. Shiller had initially come up with this analysis as part of his book 'Irrational Exuberance'. The magnitude of the rise in housing values during this boom cycle was in excess of 100%, that too within a short span on 6-8yrs. In some of the hot markets like Florida, California, Nevada etc the price increase was much higher than the national average. No wonder the fall has been equally dramatic! Comparing this with the previous boom/bust cycles puts lot of things in context and brings out the magnitude of the bubble. As you can see from the chart, while the real estate prices has come down by a significant margin in the last couple of years, we are still at the mid-point and have a long way to go before the markets bottoms out.

Source: www.ritholtz.com

Note: The above chart is an adaptation of the classic Shiller housing price chart with updated data. The original graphic is via NY Times.

Here is another interesting graph from Reggie Middleton's boom bust blog. The below graph is an extrapolation of the Robert Shiller's analysis in comparison with interest rates, population growth, building costs etc and it highlights at what point the market is expected to bottom out. As you can see from the below graph, the interest rates and building costs came down during the 80's and 90's, setting the stage for this historic boom. Another interesting statistic to note is that, the last time the housing crash happened back around 1920 it took almost 25 yrs for the market to recover!

Source: www.boombustblog.com

One of the important parameters to consider for market recovery is the foreclosure rates. So far the housing bubble has led to foreclosure of around 2.3 million homes. In 2009, with all the economic issues and lay-off's that are happening, this trend is expected to accelerate further leading to foreclosure of around 2.4 million more homes. Looking at a longer term, around 8.1 million homeowners are expected to lose their homes by 2012. So we are in for a prolonged real estate downturn. If you are planning to invest on a home, wait and watch for another year or two before you take the plunge!

For those interested in reading more you could check out the below links:

United States Housing bubble
Causes of the United States Housing Bubble
No Ceiling yet on Home Losses: Report: Expect 8.1 Million Foreclosures by 2010