Tuesday, October 26, 2010

Housing price stability

According to the Case Shiller index of home prices in 20 major markets around the country, housing prices have been roughly stable for 18 months. In nominal terms, prices have actually risen by almost 5% from last year's lows (on a non-seasonally adjusted basis they are up about 7%); the chart above shows prices in real terms, which are up only slightly. Relative to early 2000, when the housing boom was only just getting started, prices in real terms are up only 16.5%, but real personal income is up 20.6%. And since mortgage rates have fallen from over 8% in 2000 to a mere 4.25% today, housing affordability has skyrocketed; homes today are effectively cheaper than they have been in many decades. It's not surprising, therefore, that the housing market is clearing, and has been clearing for quite some time.

I am well aware of all the many forecasters calling for a renewed bout of housing price weakness, to be brought on by banks dumping tons of foreclosed homes on the market. But I am more impressed by the confluence of positive fundamentals: We've had 18 months of relative price stability, which no doubt owes something to the lowest mortgage rates in history. The housing market has had almost 5 years to adjust to new realities, and during that time, home building activity has dropped nearly 75%. Residential construction is now by far the smallest relative to the overall economy (2.5%) that it has ever been. As a consequence, excess home inventories have been reduced to a substantial degree, and prices in real terms have adjusted downwards by more than one-third. The economy has been recovering from recession for 16 months; incomes are rising, and employment is rising. All measures of money are growing at very healthy rates, and the Fed is undertaking extreme measures to ensure that monetary conditions present no obstacle to further recovery.

Taken together, these facts strongly suggest that the housing market stabilization we have observed over the last year or so is the real thing, not just a chimera.


John said...

The median is different than the mean. I think you use the mean for both your real estate price and income growth, both of which are skewed by the high end market.

Can you clarify? What's your central tendency?

Scott Grannis said...

It is my understanding that the Case Shiller data represents a weighted repeat sales index, and thus is not the mean of all housing prices nor reflective of the median home price.

The personal income data I'm referring to come from BEA, and reflect total personal income.

Frozen in the North said...


On the case-shiller you are right. However, don't forget that it represents the 3 month weighted average for June, July and August. You are probably right that if house price are not as low as they will, the downward trend is closer to the end than to the beginning.

The question is with inventory at very high levels, household formation at very low levels, and new building at 20 year low, it doesn't represent a very healthy sector. I would guess that house price recovery will take a decade or more, as such Americans will not feel wealthy for a long, long time.

marmico said...

Amherst Securities says that there are 11.6 million homes at risk of liquidation.

Your inventory argument is factually weak. Dudley at NYFed says that "excess" inventory is 3 million units. Interpolated census data would say 2.5 million.

The Case-Shiller data is stale. Clear Capital issued a special release.

It's a chimera. But Frozen is right. It will be a long slog and real prices are closer to the bottom than the top.

John said...

Regarding that "mountain of cash" left on the table or languishing because "risk takers" can't handle the "uncertainty," wouldn't those sitting on cash benefit from deflation? Vindicate their decision to "park it?"

I remember my dad, who was around during the Great Depression saying, "when the shit hits the fan, cash is king."

Scott Grannis said...

John: Holding cash in a deflation would be a winning strategy, all other things being equal, but so far it has been a huge loser (zero returns on cash vs. very strong returns on almost everything else). One rationale for holding cash of course has been the fear of deflation. But so far it has not materialized. Plus, you might need some serious deflation (e.gl., 5-10% per year) before cash would be the obvious "king" of investments.