Wednesday, September 16, 2009

Housing bottom in place

Too different views of the state of the residential real estate market both suggest rather strongly that we've see the bottom. The top chart is a survey conducted by the National Assoc. of Home Builders that covers current sales rates, 6-mo. sales expectations, and traffic of prospective buyers. The second chart is a cap-weighted index of the stock prices of 18 leading home builder stocks. More good news and yet another sign that this is a V-shaped recovery. Residential construction spending had fallen 64% from the highs of early 2006, so the rebound from exceptionally low levels could be quite impressive from a percentage change standpoint, if not from an absolute dollar standpoint.


jj said...

Articles in the WSJ the last couple of days paints a picture of housing finance as nearly an entirely government supported ward of the state. How housing finance fares if and when this support is withdrawn is a looming question and will be a major determinate of the shape of the recovery. Scott, do you think that we are nearing a point when the gov't can step back and let the private sector be a larger player in that market? Thx.

Scott Grannis said...

What you are referring to is that the vast majority of mortgage loans are being guaranteed by the government. That's a practice that has been in place for a long time, and we were presented with the trillion-dollar bill for this misguided policy last year when housing prices collapsed. It's a shame our government hasn't learned from its mistakes. Providing artificial support for the housing market just leads to a bubble and then tragic losses. Eventually.

Right now we're only at the beginning stages of what might prove to be another housing bubble, but I don't see that the risks of a tragedy are very large at this point. The government is essentially offering a free put option to homebuyers at this point, at a time when housing prices have fallen dramatically. The odds of that put being exercised are low, especially when you consider how hard the Fed is working to make sure that prices don't fall further.

A smart private sector ought to step in and grab that role away from the government and charge for the put option.