by Calculated Risk on 8/30/2007 05:30:00 PM

UPDATE: Changed 2nd graph to make the price change clearer (hopefully). Original 2nd graph is at the bottom. Nominal prices in San Diego fell a cumulative 18% in terms in the early '90s.

In an earlier post, I presented some graphs based on the new Goldman Sachs housing forecast. One of the graphs, reproduced below, showed a possible bottom for residential investment (RI) in Q4 2008.

Click on graph for larger image.

To this graph, I added a caveat:

NOTE: Please don't confuse a bottom in RI, with a bottom in housing prices. During previous housing busts, existing home prices continued to fall long after residential investment bottomed.

To clarify this statement, here is a graph showing prices vs. residential investment for the early '90s housing bust. The prices are based on the S&P/Case-Shiller price indices for the U.S. and San Diego. These are nominal prices; for real prices the time lag between the bottom for RI and existing prices would be even longer.

In the '90s housing bust, residential investment (as a percent of GDP) bottomed in Q1 1991.

The bottom for nominal U.S. house prices was in February 1994, about 3 years after the bottom for RI. In real terms (not shown) the bottom was in 1996.

The bottom for nominal San Diego prices was in March 1996, five years after the bottom in RI.

Note: Original graph.

This is the typical pattern for housing busts, and it is because prices tend to be sticky and don't adjust immediately to the market clearing price. It's important to remember that a bottom in RI will probably precede a bottom in existing home prices by a few years.