Tuesday, June 22, 2010

Housing market continues to stabilize

Sales of existing homes "fell unexpectedly" in May, according to today's headlines, but as the top chart shows, they remain 15% above what appears to be the floor level of sales for the past two years. The housing market is almost certainly not in a V-shaped recovery (I'm discounting strong sales during the April-May period because they were likely influenced by the expiration of the $8,000 tax credit program), but neither is it showing any signs of another collapse. This is a drawn-out "U" shaped recovery if anything. The important things to note are these: the housing market peaked about five years ago; sales and prices declined for about three years; and things appear to have stabilized for the past two years. We're five years into this downturn in the housing market, and sufficient time has passed and enough adjustments have occurred (median home prices have fallen roughly 25% since 2005) to support the view that things are going to slowly get better instead of getting worse.

You don't need to see housing moving up to be optimistic, you only need to know that the housing market has stabilized. Stable prices come first, then higher prices. (Actually, prices in May were up about 2% from a year ago.) As long as prices no longer decline, then the prices of mortgage-backed securities can stabilize and eventually rise. (And actually, some home-equity-backed security prices are up 17% from their year-end levels.)


septizoniom said...

in your view is housing a consumption item or an investment item?

Benjamin Cole said...

Good commentary. Property markets, including commercial, went through a depression, not a recession. But, we are on the comeback trail.

狂猪 said...

Hi Scott,

I saw your link to home-equity-backed security on www.markit.com. Is that related to mortgage back securities (MBS)? Does that mean MBS are also up?

I know nothing about asset back securities. The reason I asked is I am currently interested in a very speculative bet. Freddie Mac announced it will get delisted from NYSE on July 8, 2010. As a consequence it's prefers stocks are now trading around 2 pennies on the dollar.

Freddie Mac has a lot of MBS on it's books. If home-equity-back securities are up does that mean MBS are up too?

I know it is a very speculative bet that Freddie Mac will eventually recover.

Scott Grannis said...

The home equity-backed mortgages I referred to are not typical MBS securities. Freddie Mac almost certainly does not hold any. The MBS that FM does hold are probably doing OK, but the main risk is the default rate on home mortgages.

Scott Grannis said...

I would have to say it's both. Buying a home is an investment since it tends to hold its value for a long time, not to mention the land which is forever, and it has the potential to appreciate in real terms if the land is well located. But houses need a lot of maintenance, and that ongoing cost is money down the drain, as with consumption.

Paul said...


This story paints a pretty bleak picture.

What am I missing?