The Bloomberg index of major home builders' stocks is once again at a post-recession high, up almost 150% from its March 2009 low. That low occurred right around the time that home prices, according to the Case Shiller index, hit bottom (considering the 2-3 mo. lag built into the Case Shiller index). I also note that the home builders' index peaked in mid-2005, about 6 months before home prices peaked.
Today, many are arguing that home prices are set up to decline to new low levels—given an expected surge in foreclosed homes being dumped on the market—but equity investors are either ignoring that news or (more likely) seeing signs of improvement in the housing market. Since housing starts have been basically flat and at very low levels for almost two years, I think the picture that emerges is one in which the coming supply of foreclosed homes is effectively offset by the combination of a multi-year dearth of new construction and the ongoing increase in new household formations. In short, after a wrenching 5-yr period of adjustment, the housing market has found a new equilibrium, and the equity market is "looking across the valley" of bad news to an impending recovery in home prices.
Scott,
ReplyDeleteHow do you respond to the thesis that housing prices will continue to decline as interest rates increase over the next few years. People buy houses based on what they can afford to pay for the monthly mortgage. If interest rates increase to 6%, 7% or even higher, this will push down how much mortgage people can afford and thus drive down prices.
Not necessarily my belief, but not insane either.
Thanks
For the most part, rising interest rates are a sign of a stronger economy and a stronger housing market. So higher mortgage rates aren't necessarily bad news at all for the housing market, since they are symptomatic of rising prices. Of course, if mortgage rates rise enough (and the Fed tightens enough) then high rates at some point become a negative for the economy. But where that point is I don't know, as it will depend on how fast the economy is growing, how entrenched inflation is, and how hard the Fed is trying to fix things. For the time being, I think mortgage rates of up to 6-6.5% represent no threat at all to the housing market.
ReplyDeletethis type of post is what makes your blog so flawed. the housing market is a collosal burst bubble. it won't be leveraged again for generations.
ReplyDeleteHousing wont recover for "generations", septi? hahaha. Good one.
ReplyDelete