Tuesday, August 31, 2010

More evidence that housing has stabilized

The Case Shiller home price data for June (which reflects a moving average of prices several months before) ticked up, and now show that housing prices, in real terms, have been essentially flat to slightly higher for the past 16 months. The top chart shows an index of 20 housing markets, whereas the bottom chart shows an index of only 10 markets but over a longer time frame. Both tell the same story: increasingly, it looks like the housing market has found a new equilibrium clearing price level.

Housing skeptics are anticipating (as they have been for most of the past year) that this run of relatively good news will soon end, however, thanks to the recent expiration of the government's subsidy for new homebuyers. Those concerns may prove well-founded, but then again they may not. We do know that sales activity dropped significantly in the months following the data included in the Case Shiller release, but we don't know much about how prices behaved in the past few months.

I continue to think that prices have fallen enough to at least hold steady at current levels for the foreseeable future. As the top chart shows, there has been a 33% decline in inflation-adjusted housing prices from their 2006 peak, and that is by far the biggest downward price adjustment in nationwide housing prices in my lifetime. In addition to a one-third decline in home prices, the cost of borrowing money to buy a house today has dropped by 30% over the same period, since 30-yr conforming mortgage rates have fallen from 6.7% in 2006 to 4.7% today. Combine those two price declines and you get an effective decline of 54% in the monthly cost of buying the typical house. 


brodero said...

On another subject....last year in the first quarter of 2009 the banks were stress tested. The Case Shiller 10 city index was used to stress the banking system. Under the adverse acenario by June 2010
this index was to hit 120. Today's
numbers have that index at 160.

Benjamin Cole said...

Brodero: Please translate. Good or bad? What does your post mean?

Public Library said...

Did you actually believe in the 'stress' test or their forecasts?

The ECB did one of those and Europe looked rosy. Now Greek and Irish spreads are at their wides.

Banks are awash in bad debt and the American people keep subsidizing their bad business. The longer we keep it up the longer we keep directing good money into bad + unproductive sectors. Subsequently, the longer we muddle around the bottom here.

John said...


I may be reading this all wrong but the way I'm interpreting Bro's post is that in January of 2009 the Fed stress tested the banks. One of the assumptions was a Case/Shiller price index level one year hence (June 2010) of 120. By pointing out the index today reads 160 things are not nearly as bad as the 2009 stress tests were assuming. I'm sure other measures and assumptions were used as well but Bro has a point if his numbers are correct.

brodero said...

Public you show your lack of knowledge by the use of the word
"forecasts"...it was not a forecast....

brodero said...

An in depth look at the stress test might help...


Benjamin Cole said...

Okay, it is good news. Hey, I will take any good news we can get.
Now, if the Fed would just ease up a bit.

Benjamin Cole said...

SANTA ANA, CA-Grubb & Ellis Apartment REIT has signed agreement to acquire nine multifamily properties totaling 2,676 units in three states from Oakton, VA-based MR Holdings LLC, as well as all of the assets of Mission Residential Management LLC, for $182 million.

I post this as Grubb & Ellis is a good company. They just bought
apartment units at $68k a unit.

Now, can we turn on the money fire houses? $68k a unit? Grubb is no slumlord--these are good-quality units.

My rough gues is that is one-half replacement cost.

Please, anymore of this inflation-fighting, and we will see entrenched deflation.

Rick said...

Case-Shiller is a national average. In my area of Florida, housing prices have fallen to 1997-1999 levels. My home is now assessed about 20% lower than my cost of building it in 2003. And based upon the most recent sales on my block, I could not sell my home today for its assessed value. These sales were arms length and not foreclosure.