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According to the Case Shiller folks, housing prices in real terms in the top 20 U.S. markets have been roughly flat since the first quarter of last year. Real home prices have fallen 35% from their early-2006 peak, while over the same period 30-year fixed conforming mortgage rates have fallen by a full percentage point, reducing the cost of financing a home by 17%. Price adjustments of that magnitude are hugely significant in my book, and it would appear that they have been large enough to clear the market—large enough to deal with the oversupply of homes, and large enough to compensate for the effects of the recession on family finances. We are four years into this adjustment process, and that is a lot of water under the bridge. Unless there is another unforeseen shock to the system, it is very unlikely that prices will fall further. It's time to move on and stop worrying about the housing market.
16 comments:
As a side note the housing starts
to nonfarm payrolls ratio has averaged 1.1% over the last 20 years...we are considerably below this ratio and have been since 2007. I expect to stay below this ratio
for a long time as we work off the
shadow inventory.
"FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,”
"The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees."
http://www.businessweek.com/news/2010-05-24/fha-home-financing-volume-sign-of-very-sick-system-update2-.html
Hardly the signs of a healthy, stable housing market we should all turn our backs on.
Calculated Risk has the same index showing declines.
http://www.calculatedriskblog.com/2010/05/real-case-shiller-national-house-prices.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29&utm_content=Google+Feedfetcher
The best performing stock in the DJIA today was......(drum rooolll)....HOME DEPOT! It was up something like 2%. Investors in home supply retailers see growth in housing expenditures by consumers. A chart of HD shows only a modest correction from the highs. I think this is one of those fundamentals that is being ignored by panic stricken investors.
I do believe there are legitimate concerns for Europe's problems. I DO NOT mean to belittle them. Over the years I have learned to have great respect for the bears. I 'bear' the scars. I may get some more before this panic subsides but I still think the end of the world as we know it is not upon us.
There are two ways to look at the surge in FHA lending. One, it is a sign of unwarranted government intervention in markets (making loans that require only a 3.5% down payment) and could end up increasing taxpayer's already-huge liability in the event of another housing collapse. Two, it is facilitating liquidity in a distressed market, and the incremental risk of such lending is far less than it was when prices were 50% higher and borrowing costs were 20% higher. When the government was the dominant factor shovelling money into the housing market 4-5 years ago, the risks and the distortions were enormous. Now they are much, much less so. Is that good? Probably not, but it is far from being disastrous.
Using similar logic, Treasury should be borrowing at much longer maturities now that rates are historically low. That would greatly minimize the risks of so much debt in the future.
Either way you slice it, the housing market, which is the government, is on solvency life support.
A 20% decline from here and lookout below below below...
Our family experience confirms your comments. My daughter and son-in-law closed the purchase of a short-sale home in Orange County today. They started the process in January. The appraisal came back 18.5% higher than the purchase price. They could never have afforded this property five years ago. In connection with John's Home Depot comments - they are going to be spending $30,000 on home improvements in the next month, part of which is going to HD.
Public,
If you REALLY think that, you should be buying far out of the money puts on HD. They are long dated and cheap. If you are right they will pay off several times the purchase price.
I respect your opinion. But a 20% drop in housing prices from here followed by a further decline is a MASSIVE profit opportunity and I do not see you taking advantage of it.
"Large pools of capital" invested in Home Depot disagree with your thesis of a 20% decline followed by further declines in home prices. A leveling out of prices for as much as several years is a distinct possibility but the decline you are describing is IMO a very low probibility event.
I am long Home Depot. I am not saying it will not go lower but if it does, I believe buyers will be there to take the stock the paniced sellers are dumping.
This is an anecdote, but when Reagan told one, everyone believed him, so here goes...from LA Curbed, a very good real estate blog that has chortled about price chops in the past....
"Just when you think the market is flat and that pricechops rule the day, comes word that a stampede is underway. Or so says our tipster, reporting from the trenches of a recent brokers open house at Museo Lofts. This is that building on Ridgeley Drive in mid-Wilshire, a 52-unit condo project brought to you by the same people behind Universal Lofts and Studio 837. A few months ago, the prices were advertised in the $400,000s and up. We're inclined to think our tipster is authentic and not shrilling. He writes: "Not sure if you've heard what's going on with Museo Lofts. They got 15 offers on the first day they were open (Tuesday a week ago), and continued to have such overwhelming response that by Sunday, they had cancelled the open house and had someone there turning people away. Only people who had already submitted offers were being allowed in." Our tipster also sends word that sales team are "absolutely" going to be raising prices on any remaining units from the pre-sale prices before they go into the MLS. I'm praying they don't try to jack up the prices on units with offers on them..." The voicemail at Museo Lofts is full and not accepting messages. "
The word on the street is that this is real...this somewhat ordinary condo building is selling them out.
Market has bottomed, recovery underway.
It ain't red hot, but growth is better than decline.
Here is another interesting piece on the housing supply/demand dynamics.
http://www.businessinsider.com/anyone-whose-still-bullish-on-housing-clearly-isnt-paying-attention-to-the-real-numbers-2010-5
The housing market isn't going anywhere for a looooong time.
RG32,
Thank you for your comment. Our daughter and her husband have also just bought an existing home and have been 'fixing up' some things they think need doing. Where did they shop? Like your kids,Home Depot and Lowes.
Shelter is a basic need and even people walking away from their homes (its still happening) have to live somewhere. And at some point they will want to own again.
In the markets ANY news only moves the market for so long. It quickly becomes discounted as investors get their collective minds wrapped around the cases being made. The deflation in home prices is an old story. It has been evaluated and discounted for many months. Mountains of data have been sifted and many differing opinions have had time to be weighed. Housing prices have not changed significantly for several months and the bargains are being snapped up (see Benji's post). Its happening all over the country, not just in California. The bids are there and its bringing out the supply that needs to be sold. Its still early and its going to take some time but I am thinking most people are starting to believe the lows are in.
More anecdotal evidence. Just spoke to a good friend who lives in an upscale neighborhood (most homes around $1 million) in the foothills of the Pomona Valley (west of LA). They put their house on the market about a month ago and the very next day had two offers for more than their asking price. Escrow closes next week and they are moving to a nearby retirement community. They are very happy.
I'm not very familur with American things but the place I look over here (Europe) on how property values are moving is the NAV (Net Asset Values) published by property investment companies and REITS.
They tell a much different story from what you will read/here in the media..
UK turned + 9 months ago and now up 15%.
Northern Europe turned + 2 Months ago, now up 2%
Southern Europe (Club Med Countries) OH dear..still on the decline but slowing.
And for America, Crammer called a housing shortage for you by Dec 2011...Anyway the answers lay in the NAV of property companies.
John:
Was watching BP this morning (UK time) but just couldn't do it, I watched the price drop to 4.70p during trading 8.25% div, but really not sure if that Div is safe now, the cost/claims etc are really racking up against our poor little petrol company...Its all Haliburtons fault....So bought a French property company today instead!!
I saw signs of capitulation on early FTSE trading today, people just throwing shares away at silly prices...Hopefully a sign we're near the bottom of this little dip!1
Cheers,
Dave....
Pomona Valley? West of Los Angeles? I was born here in the middle part of the last century, and I never heard of the place.
Well, good on 'em, I hope all the prices zoom in Pomona Valley, west of L.A.
On Catalina Island?
Sorry, I meant to say east of LA. Senior moment.
Scott,
I do that frequently myself. I find that if I stand in the middle of the room, point one finger toward the ceiling, and say 'sometimers not alltimers' three times while circling counterclockwise it goes away.
just tring to be helpful....
If you REALLY think that, you should be buying far out of the money puts on HD.
Sure, if one wants the most inefficient way to express a bearish opinion on the housing market. Home Depot has huge underlying demand from home repair, remodeling is also a far calmer investment series than building, and Home Depot's financial leverage is incredibly tame. If one wanted to get leverage to a decline in home prices, you could buy CDS on structured finance companies, short leveraged builders, short building materials companies, or short the junior debt of these things.
I don't agree with the idea, BTW. I think home prices are selling below par and the yield-to-worst on home prices is the growth in personal income + the accretion of the discount over 3-6 years. In other words, I think home prices will rise 41% by 2015, or at a 7.0% CAGR, given they are trading at a 13.4% discount to their long-term (1968-2000) regression path and given nominal DPI growth of 5.1% CAGR over five years.
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