Report suggests bottom is far off

A new Credit Suisse research report titled “House Prices: A Lot Done, More to Go,” suggests that nationwide housing prices are likely to continue to decline until late in 2009 or early 2010.

The report, using two separate methods of predicting home price trends, says both methods “point to home prices moving back in line with past historical ‘equilibrium’ levels in 12 to 18 months.”

The report notes that housing prices could “overshoot” their equilibrium levels and fall for even longer than 12 to 18 months, in which case, “ ‘cheap’ housing is still about two years away.”

Credit Suisse charted two “valuation metrics,” one of which is tracking the ratio of median single-family-home prices to median family income. That ratio held in a narrow range from 1981 through 2000 but then “exploded upward” and kept rising for five years, peaking in October 2005. (That, folks, is a housing price bubble.) Credit Suisse projections indicate that metric will return to the upper end of its previous range in September 2009 and the lower end of that range, if the decline continues, in April 2010.

The other “valuation metric” applies a price-to-earnings ratio for America’s residential housing stock, with “price” being the total value of residential real estate and “earnings” being the sum total of rents and imputed rents paid by homeowners. That metric also held fairly constant from 1981 to 2000 and then shot higher, also peaking in the third quarter of 2005.

Credit Suisse’s analysis shows it returning to the upper end of its previous range in the third quarter of 2009 and the lower end of that range, if the decline continues, in the first quarter of 2011.

Relatedly: As reported in Tom Petruno’s Money & Co. blog, the chief executive of Home Depot on Wednesday offered a more optimistic forecast, saying, “We’re getting awfully close to the bottom.”

-- Peter Viles