Tuesday, March 30, 2010

Housing market stabilizes

The evidence continues to suggest that the housing market has stabilized, and may even be improving. The Case Shiller Home Price Index for 20 major metropolitan markets hit bottom in the second quarter of last year and has been rising gradually ever since. Given the lags used in constructing the index, this means that prices likely hit bottom around March of last year. Even after adjusting for inflation, as this chart shows, home prices are up at a 3% annualized rate over the past 8 months.

We're now seeing the dimensions of the housing "bubble" with more clarity: in real terms, prices rose about 54% more than they should have, from 2002 through 2006, but now that they have fallen by 35% we have returned to some semblance of normality. Markets have found their new clearing price. Excess home inventories are being rapidly reduced due to an unprecedented decline in new housing starts. Since the rate of new household formation is still way above the current pace of construction, we should expect to see a pretty impressive increase in new construction over the next year or two.

This is excellent news all around, but the market still seems very reluctant to buy into the notion that the housing market might actually be improving. In typical bull market fashion, the market continues to climb walls of worry.


alstry said...


If government could only double the wages of the 50,000,000 govt and health care employees.....could you imagine how housing would go from stabilization to boom times like we havn't seen in at least a few years.

It is amazing how easy it is to stablize conditions when government and Wall Street are borrowing $3.5 trillion per year.....now imagine what happenns if interest rates rise with over $55 trillion of public and private debt?

John said...


I think we are looking at aggregate prices here. Scott can correct me if I'm wrong but Case-Shiller measures home prices in a few large metro areas around the country. Also, to bottom does not necessarily imply rising prices, only that prices IN AGGREGATE have stopped going down. It also does not mean there are no falling prices. Falling prices in one area can be offset by rising prices in another. Real estate is local. Your area indeed may not have seen its nadir but overall prices appear to have stabilized. I believe this is good news for banks. Allowance for loan losses should decrease over coming quarters and as inventory is worked down foreclosures should lessen and new, better underwritten loans should be increasing. I think we are on the cusp of a multi year bank bull market. We just need these real estate markets to stabilize for awhile longer to build confidence. Its coming. We just need a little more time. Chairman Ben, please hold off on those rate hikes a little longer please. Confidence is still shakey.

Gary said...


ZIRP is just one more indication that the **financial** markets haven't stabilized. It doesn't appear that any of the money center banks is economically viable without this implicit taxpayer support (borrow from taxpayers at zero, lend back to taxpayers at the 10yr rate). You can't argue for ZIRP and in the same breath argue that things have bottomed. For the markets to have bottomed, they need to be able to stand (and eventually recover) on their own without subsidy.

Banks are no more "recovering" than GM. They need a new business model, and their CEOs are too lazy and unqualified to realize it.

As for housing, thank you for your insulting explanation that IN AGGREGATE allows for some places to still have falling prices while others are rising. Now tell us where these places with the rising prices are.

I know of several such places; however, as a percentage of the AGGREGATE real estate market they are a very small number. There are far more places where prices are still falling.

There are IN AGGREGATE still a lot of markets where banks are holding on to housing inventory and/or not foreclosing on defaulted loans -- because bank selling would cause prices to plummet.

In short, in quite a few markets, housing prices are being artificially propped up by insolvent banks that require continuous yield curve subsidies. That is far from a healthy housing market.

Real investors look beyond the aggregate statistics and understand the underlying business trends. Big banks failed in that regard -- MISERABLY.

Consumers may not be able to explain skewed distributions, non-market pricing and other MBA/CFA nomenclature, but they instinctively understand that all is not well in the world.

Too bad the bankers don't get it.

John said...


May I suggest some puts on the XLF? You could also try some on the SPY. If you are right you'll clean up.

Good luck.