The real estate picture
January 27, 2010Jon Brooks Comments OffReading individual headlines on housing data this week only serves to confuse the picture:
- Home prices rise for 6th straight month (Washington Post)
- Home prices decline for first time in 7 months (CNNMoney)
- December home sales down nearly 17 percent (AP)
- Sales of new homes fall 7.6% to nine-month low (MarketWatch)
- Home prices suggest tenuous housing rebound (Reuters)
Can we make any more sense of it on Seeking Alpha, where market watchers, financial savants, and economic bloviators hold forth? The prevailing outlook — with some exceptions — seems to be negative. Some choice extracts, followed by longer excerpts.
“The last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.”
“…we are seeing the biggest drop in existing home sales in 40 years.”
“We can speak of year-on-year gains in house prices in some markets (Dallas, Denver, San Diego, San Francisco) but on the whole, things are going in reverse.”
“The housing price bubble popped, but it is no longer deflating. Prices have come back into line with incomes (actually, housing affordability is near an all-time recorded high, according to the National Association of Realtors) and interest rates have fallen to historically low levels.”
“(The) improvement is encouraging, (but) it will be a very long time before housing prices get back to their April 2006 peak levels.”
“The Fed program is to buy up to $1.25 trillion of residential mortgage backed paper, or about 25% of the outstanding issued by Fannie, Freddie and Ginnie, and is scheduled to be completed by the end of March…What happens to housing prices after the Fed stops buying and mortgage rates rise? What happens when the tax credit expires this spring?”
Reviewing the November 2009 S&P/Case-Shiller
Now that the strongest selling months have been reported, look for all remaining CSI releases until early spring to continue to indicate notable price weakness coming from typical seasonal declines as well as extra-seasonal declines as a result of reduced demand from activity that was “stimulated” forward into the summer and early fall by the tax sham.
Also, looking at the 1990s-era comparison charts its obvious that even after the main downward thrust has been reached, the housing markets have a long tough slog ahead with the ultimate bottom likely many years out… Or if we are currently experiencing the Japanese model… decades out.
Further, is important to remember that the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).
Today, we may not be so lucky…I aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns.
What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity. The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.
…(T)he last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.
Is It Just Me or Are Things Getting Worse Again?
Existing Home Sales Down 16.7%
Some of this is likely due to the buy-it-forward situation, i.e. buyers lured into buying a home by the first time home buyer’s credit. That program has been extended and expanded, but still we are seeing the biggest drop in existing home sales in 40 years
Can the Home Price Rally Be Sustained?
In November, housing prices increased by 0.24% on a seasonally adjusted basis for (the) Case Schiller city indexes… (P)rices appear to have bottomed out in May and the CS Composite-010 is now up 3.76% and the Composite-20 3.38% off the bottom.
While such improvement is encouraging, it will be a very long time before housing prices get back to their April 2006 peak levels. The C-10 index is now 30.4% below its bubble highs, while the C-20 is off 29.5%….
The big question is: how sustainable is the housing price rally that we have seen since May? There has been extraordinary government support for the housing market. This has included the “first time” homeowner tax credit, which has since been expanded to incude “move-up” buyers, and the Fed buying up just about all the GSE-backed mortgage-backed securities out there.
The Fed program is to buy up to $1.25 trillion of residential mortgage backed paper, or about 25% of the outstanding issued by Fannie, Freddie and Ginnie, and is scheduled to be completed by the end of March. So far they are about 92% of the way there. That program has probably reduced mortgage rates by close to 50 basis points (based on historical spreads relative to the 10-year T-note).
What happens to housing prices after the Fed stops buying and mortgage rates rise? What happens when the tax credit expires this spring?
Ultimately, over the long term, housing prices have to be related to incomes and to rents. The biggest red flag that we were in a housing bubble was when those relationships got way out of whack with historical norms. Now prices are back close to normal relative to both incomes and rents, but are not particularly cheap from a historical perspective, even after a 30% drop….
The Monster Chicken and Egg
Unfortunately, historically the primary driver for getting the economy out of a recession is residential investment. Residential investment is primarily new home construction. But if there is a glut of housing on the market, it does not make a lot of sense to build more.
This then creates a monster “chicken and egg” problem. You can’t get the housing market healed long term without an improvement in the labor market, but you can’t get the labor market really going without an increase in residential investment.
Case Shiller: Just Five Housing Markets in Twenty Show Price Increase
We can speak of year-on-year gains in house prices in some markets (Dallas, Denver, San Diego, San Francisco) but on the whole, things are going in reverse. As I mentioned in the last two months, the number of markets where prices are rising has dwindled. This continues to be true.
* When the Case-Shiller index began increasing in July, 14 of 20 markets were showing an increase.
* Case-Shiller reported in August that 18 of 20 cities showed price increases.
* When Case-Shiller reported in September, 18 of 20 cities showed price increases.
* Then, in October the number turned down slightly to 17 of 20 markets.
* In November, the number really turned down. Only 10 of 20 markets rose in the data (for sales through September)
* Last month, it was 8 markets in twenty (for sales through October).
* This month it is five of twenty for data through November.Can I give these numbers a positive spin? Sure: prices are moving more in line with reality. They need to come down further in bubble markets like Washington D.C. where I live. Maybe then, we will see a market-clearing price.
The telling number is the year-on-year composite numbers now at –4.6% for the Composite-10 and –5.4% for the Composite-20. These are still improving.
So, it is unclear where this is headed over the near-term. December existing home sales were way down when reported Monday and price action is negative in 15 of twenty major markets. But, this is the Winter. Things will be different when the selling season begins in the Spring.
Housing Price Bottom Still Holding
The Case Shiller home price index in November rose for the sixth month in a row. Even after adjusting for inflation, home prices are up. And given the nature of the index, which operates with a significant lag, the message here is that home prices in 20 major markets hit bottom sometime around last March or April, after declining 36% in real terms from the high of early 2006. The housing price bubble popped, but it is no longer deflating. Prices have come back into line with incomes (actually, housing affordability is near an all-time recorded high, according to the National Association of Realtors) and interest rates have fallen to historically low levels. This is how markets adjust to changing circumstances. The $500,000 home that turned into a deadweight albatross for the guy who bought it in 2006 is now a $320,000 dream house for the guy who buys it today.
