Tuesday, February 25, 2014

The housing recovery is not at risk

According to S&P/Case-Shiller, U.S. home prices in the fourth quarter of 2013 were up 22% in nominal terms from their post-recession low, but still down almost 20% from their 2006 highs. It's likely that home price appreciation has stalled or slowed significantly in recent months, but this does not alter the bigger picture, which is one of a gradual but sustained recovery from a horrific downturn. 

The chart above covers home prices in 20 major metropolitan markets beginning in 2000. In real terms, home prices as of last quarter (the December 2013 figure released today is a composite of prices in October, November, and December) were still down 30% from their early 2006 highs. In my view, it's premature to suggest that another housing bubble exists or is in the process of forming. As the chart shows, real prices today are about the same as they were in late 2002. The recent price upturn is pretty much what you would expect to see several years after a harrowing collapse.

The above chart covers prices in only 10 major markets, but extends back to 1987. Here we see that in real terms, prices today are about 35% above their 1990 highs—an annualized gain of only 1.3%.

Given that mortgage rates are still considerably lower today than at anytime in the past (the past two years excluded), and real disposable personal income has risen at an annualized 2.7% since 1990, housing today is far more affordable than it was in 1990 (when typical 30-yr fixed rate mortgage rates were 10% or so). If the economy continues to recover, there is no reason to think that the current level of housing prices is vulnerable to a decline, even if interest rates rise by several hundred basis points in the next few years. Remember: higher interest rates are the natural by-product of a stronger economy; if rates go up in the next few years it will likely be because the economy is strengthening, real incomes are rising, the population is growing, and the demand for home ownership is rising. Higher interest rates only threaten the economy when they are forced higher by contractionary monetary policy. We are still many years away from such as situation.

UPDATE: The stocks of major home builders are doing quite well, having risen 245% from their March 2009 low, as the chart below shows. XHB, an ETF based on an equal-weighted index of homebuilders stocks, is now at a new post-recession high, having risen 314% from its March 2009 low (the Bloomberg index of home builders' stocks shown in the chart is a cap-weighted index). Bad weather and seasonal adjustment issues could be obscuring the true underlying progress of the housing industry, but these indices are driven by investors' bottom up analysis of actual sales and earnings and thus should not be ignored—they say the housing recovery continues.


Benjamin said...

Great post.

The bust was one of the all-time great windows to leverage up and buy a house. Oddly enough, our mortgage-lending system will lend you money easily near any market top---and is loath to give you a loan near any market bottom.

Going forward, lots of tough calls out there in equities, property and commodities--in fact I say flattish for a long while in all three categories.

It may be time to find find good dividend stocks and sit tight. Maybe REITs.

Or, if you have a shot at a hands on good operating business, take that shot.

Passive income may be a tough play.

William McKibbin said...

Thanks for posting these useful charts -- I was just hunting around in Zillow for an updated chart just like you already created -- again, thanks...