Tuesday, September 29, 2009

More signs of a housing bottom

The Case Shiller Home Price has risen for the past three months. In fact, it rose at a 15% annual rate over the past three months, and the August value of the index was higher than it was last February. In real terms, the index has fallen almost 35% from its peak, and is back to levels first seen in March 2002. The housing bubble has popped, and could indeed be beginning to reflate.

This is very bullish news for financial markets, because it means that the health of the world's banks, and that of any financial institution which holds a significant position in mortgage-backed securities, has improved significantly. Take away the risk of falling housing prices, and you immediately improve the valuation of securities backed by residential mortgages. In addition, you improve the prospects for household net worth and consumer confidence.

Of course, many people still worry that this is not a real bottom in housing, because there is a wave of foreclosures yet to come. I think that prices have fallen by enough to stimulate demand, especially considering that mortgage rates are very near all-time lows. Housing affordability, both in nominal and real terms, has improved hugely, enough to mark a bottom, in my estimation. Demand has improved enough to absorb the wave of foreclosures.


Public Library said...
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Public Library said...

Housing is supported 100% by the FHA and their 3.5% down payments. This is neither sustainable or wise risk management.

The FHA default rate is skyrocketing and their liquidity cushions plummeting. I have a friend who just did this on a $400K home in Dana Point.

Their ability to absorb any kind of downturn or jobless is puny.

We are setting ourselves up for another downleg in the housing market via the subprime FHA portfolio.

Talk about learning zilch from the past...

Scott Grannis said...

But if housing and the economy continue to move higher, then this will be fuel for the inflationary fire. Borrow now, while prices and rates are low.