Tuesday, August 30, 2011

Housing price update--still consolidating


This chart compares the Case Shiller index of housing prices in 20 metropolitan markets to the RadarLogic index of prices in 25 metropolitan markets (measured on a price per square foot basis). Both are doing a remarkable job of tracking each other, so it's unlikely that they are missing something important. And according to both, prices have been essentially flat for the past two years, after falling by about one-third from their 2006-2007 highs.


This next chart shows the Case Shiller index of 10 major markets, with data going back to 1987 and adjusted for inflation. Here we see that prices have fallen some 38% from their 2006 highs, and have lost a bit of ground in the past two years.

Considering that mortgage rates are now at all-time lows (down by about one-third from the levels that prevailed in 2006-2007), the effective cost of buying a house in the nation's large cities has plunged by almost 60% in the past five years. Taking into consideration that real median family incomes have been generally rising, while mortgage rates and housing prices have fallen significantly, houses have never been more affordable than they are today, as reflected in the chart below. (The most recent datapoint signifies that a family earning the median income has 176% of the amount needed to purchase a median-price resale home using conventional financing.)


The housing market has undergone the most painful and wrenching adjustment imaginable. Prices fell by an order of magnitude early in the crisis, but have managed to hold relatively steady for two years. The excess inventory of housing is declining daily, since new home construction today is only a fraction of the levels that have prevailed for many decades, and less than what would be needed to keep pace with new household formations. Perhaps the rebound in housing will take longer than many, including myself, have expected, but surely by now we can rule out another collapse, can't we? The next surprise in the housing market is likely to be a growth and rising price story, rather than another tragedy.

23 comments:

TradingStrategyLetter - Weekly Summary said...

Nicely done. I suspect that the bottom will be a lot quicker than most expect. It's a valuation story. Many will regret not participating.

Benjamin said...

There are charts on commercial property values, but they look much the same, except maybe worse.

Recently CMBS are selling at about 60 cents.

Is this the Zimbabwe-inflation scenario unfolding?

Dr William J McKibbin said...

Scott, you said the "effective cost of buying a house in the nation's large cities has plunged by almost 60% in the past five years." A 60% decline in home values over a five-year period sounds like a Main Street depression to me...

Benjamin said...

Add-on: Some people think as the Fed is following an "easy" money policy, then we will have inflation real estate will benefit.

Maybe--but if you only look at interest rates, the Bank of Japan has been following an "easy" money policy for 20 years. And for 20 years Japanese real estate has been falling in value. And they have had deflation.

The lesson is this: Once you hit zero bound, then you can have low interest rates and a "tight" money policy. Japan has been tight, and you can see that from the yen and their deflation--even while interest rates are chronically zero.

Only sustained quantitative easing, and some other measures, can unlock monetary stimulus.

Are we are getting Japanned in America?

For now, we are. Equities and property prices are below values of five and even 10 years ago.

Why invest now--maybe you can buy cheaper tomorrow. How do you like that cycle?

Dr William J McKibbin said...

PS: Adding to my last, the ongoing Main Street Depression has created a buying opportunity for real estate -- now is a good time to put lazy dollars to work on rent-earning properties -- buy with confidence and be sure to make offers that are arrogantly below asking prices -- the deals are everywhere and sellers are desperate...

elegantstroke said...

Scott,

With all these distortions created by the Fed, are you serious that only growth/recovery in housing is the way forward?

It may very well be in dollar terms because of Fed financial engineering, but in real currency terms (may be swiss franc or gold -- those that are debased the least), the market will continue to deteriorate. your thoughts?

Benjamin said...

Elegant:

The yen has increased in value in the last 20 years--there has been about 15 percent deflation in Japan in that time frame, based on GDP deflators.

What did the Japanese gain by not "de-basing" their currency after a property bust?

A 20-year-long perma-recession-deflation.

Good luck with tight money. It does not work.

Bill said...

I believe also that rising residential rents will place a floor under housing prices. As rents increase, the case for buying a home becomes more and more clear. As this process continues (and hopefully banks resume lending), real estate values will have to increase.

By the way, would it not be more helpful to show charts of nominal real estate values since increasing prices, even if caused by inflation, will bail out many homeowners who have upside down houses? Where can one find such charts?

TradingStrategyLetter - Weekly Summary said...

When has cheap money worked? The 'fiat' experiment rests on nothing more than faith and confidence which erodes quickly when the heliocopter starts up.

Benjamin said...

Trading-

Many modern industrial nations have flourished with moderate and varying inflation, including the United States 1980-2008.

Those years mark one of the greatest wealth booms of all time.

China is flourishing now with an expansive monetary policy.

Printing money alone is not enough--of course, tax and regs must promote growth.

But preserving the value of money in monetary formaldehyde does not lead to growth.

In fact, Japan proves the opposite--especially after a real estate bust. Then you have to print money, so borrowers can deleverage.

We will watch the world pass us by if we imitate Japan's monetary policies. And we are.

Benjamin said...

"Case-Shiller Home Prices Back at 2003 Levels"

The S&P Case Shiller home price index shows a -4.5% decline from a year ago over 20 metropolitan housing markets and a -3.8% decline for the top 10 housing markets from June 2010.has slowed.

Okay, so we have the stock market at 1999 levels, and house prices at 2003 levels, and we are frightened of inflation?

Just what is the nature of this inflation? Where does it hide? Does it affect asset values?

Frozen in the North said...

As usual impeccable analysis. However, house price recovery will be very long process, demographic for one will have a major impact, but also the 3-5 million homes that are in process of foreclosure and arrears, the figure this morning was 599 day between delinquency and repossession.

The american real estate capital play is over, a home will be bought for housing purpose and not investment.

of course if inflation comes back then all bets are off

Jeff said...

Benji--Do you ever get tired of making the same arguments over and over on every post?

Junkyard_hawg1985 said...

Housing had a long term secular bull market from 1986 to 2006. We are now in a secular bear. Expect the secular bear to end in the 2020's.

Secular bull and bear markets are long term events. I will use oil as the example. In the late 1970's, energy companies were profitable and all of the estimates were that oil prices would continue to rise. Oil companies were investing large sums of money on this assumption. After oil prices peaked in 1980 (when energy co made up 1/3 of the market cap of the S&P500) and started to fall, people continued to invest in production under the assumption that the lower prices were temporary. By the late 80's, investment in new production was matching output, however, the oil market was oversupplied. We continued in the oversupplied condition for several more years wih underinvestment in production occurring. Because of previous overinvestment and a long term price decline, the assumption becomes that prices will continue to decline. In 1998 when oil was at the bottom and under $10/bbl, the cover of The Economist magazine was why oil was heading to $5/bbl. Prices reversed and rose to $24/bbl in 2000. At that time everyone assumed this was temporary and prices would fall back to $18. Even with the higher prices, it didn't make sense to drill for oil because it was cheaper to buy oil on the stock market. This is why we have Exxon-Mobil, Chevron-Texaco, and Conoco-Phillips. Over time drilling has resumed and investment in oil production is heavy (Slant drilling, oil sands, fracking, etc). People are starting to assume again that price increases will be permanent so overinvestment will occur again. Oil prices should peak in the next few years.

The same cycle occurred in stocks with a secular bear from 1966-1982, followed by a secular bull from 1982-2000. Now we are in the secular bear which based on past performance probably doesn't bottom out for a few more years.

Much like oil, housing had a secular bull that peaked in 2006. Also like oil in 1980, financial companies represented one third of the S&P 500 in market cap. Currently, housing is much like stocks in 2004, or oil in 1985. It is cheap compared to a few years ago, but it still has a lot of dead years ahead because the mentality around home ownership is shifting towards renting.

William said...
This comment has been removed by the author.
William said...

Jeff said...
"Benji--Do you ever get tired of making the same arguments over and over on every post?"

I think Benjamin's postings are referred to among Bloggers as:

"Hijacking a Thread"

Recommended therapy for "Hijackers": ignore them.

brodero said...

Scott..you might take look at the
Housing tracker data...
http://www.deptofnumbers.com/asking-prices/us/

TradingStrategyLetter - Weekly Summary said...

He does seem to have a Japanese thing going on for sure. Heavily indebted nations ultimately have few or no options re: monetary engineering. Persistantly devaluing one's currency is a mug's game with serious consequences. Strong countries have strong currencies. Weak countries have non existant currencies. To expect intellegent or rational behavior from today's fearless policy makers is beyond the pale. Look at the lovely result we now face after all the masterminding and manipulation. The 'free lunch' becomes VERY expensive!

Benjamin said...

Sorry guys--when I see my country doing a Japan, I get restless.

Scott Grannis said...

brodero: thanks for the pointer

robert mayes said...

I haven't seen any statistics to back up what I'm about to propose but could it be that some of the stablization in housing prices be due to foreign buyers. I've heard that one of the largest buyers of homes/condos in Miami are Brazilians.

Scott Grannis said...

I think there is little doubt that foreign buyers are helping the housing market to stabilize. Between the huge decline in housing prices and the historical weakness of the dollar, U.S. real estate must be seen by many foreigners as an incredible bargain.

TradingStrategyLetter - Weekly Summary said...

Dead on Scott. From the Cdn perspective it seems like taking candy from a baby. Mortgage lenders up here are super aggressive and accomodative. Valuations are sky high - at least double yours and up. Cdns represent up to 50% of buying in selected regions (Las Vegas, Florida, and Arizona). Large consortiums and funds making huge package purchases. These valuations won't last.