Tuesday, January 25, 2011

Real estate update--no sign of a double-dip

According to the two indices of real estate prices in this chart, both residential and commercial estate prices have been roughly stable for more than one year, after having suffered brutal declines of 30% and 40%, respectively. While many observers are extrapolating the marginal weakness displayed in the Case Shiller-20 index (shown above) in recent months, and calling for a second wave of price declines, I offer the following chart, which is a subset of the index above, and which reflects prices in the 10 largest metropolitan areas. Despite the fact that this chart is also adjusted for inflation, the trend since early last year or so is flat, if not slightly rising. The nominal value of this index is now almost 5% above its April '09 low. The real estate market is always one in which local conditions can predominate, and the fact that one's selection of markets can paint two different pictures suggests that on balance it's likely that not much is going on.

I continue to believe that the correction in the real estate market has run its course. It's been 5 years since the peak, which is plenty of time for the market to adjust to new realities. Residential construction has plunged by 75%, leaving new home construction far below the level necessary to keep pace with new household formation, and thus effectively taking a lot of excess housing inventory off the market. Borrowing costs have also plunged, and real personal incomes have risen, raising housing affordability to levels not seen in decades (chart below). An index of homebuilders' stocks is up 150% from its late-2008 lows, and lumber prices have more than doubled since March '09, both of which point to a nascent recovery in the construction market's fundamentals. Finally, I note that the economy is clearly improving, and household net worth has risen significantly in the past two years.

There may well be a significant increase in the number of foreclosed properties being brought to market this year, but there is a price that will clear any market. Whether it will take significantly lower prices for the market to clear this year is the key question. I doubt it, but those who are skeptical of the economy's ability to grow believe that real estate prices will need to fall by enough to cause new concerns about the health of the banking sector and new concerns about household net worth. Only time will tell, but I think the preponderance of evidence continues to suggest that the worst has passed, and optimism makes more sense than pessimism.


Fullcarry said...

The bear mafia is going to be all over you for this ;).

Benjamin Cole said...

mandExcellent wrap-up by Scott Grannis.

The collapse of commercial real estate is a puzzler--it is supposed to be an "adult" market, dominated by high net worth individuals and institutions. No Fannie. No Freddie. Little government intrusion on federal level. Yet it had a mirror collapse to residential, or even worse if you believe these charts.

This undercuts arguments that Fannie and Freddie caused a residential real estate collapse.

While I continue to support a phase-out of Fannie and Freddie, we may have to find other reasons for the real estate collapse. It could have simply been a free market bubble--bubbles happened before the US federal government was created, and they will happen after our empire is vanquished. Bubbles are inherent in man's optimism--and we have to be optimistic to start businesses, buy houses etc.

To see what pessisim about property values brings, see Japan.

I see house prices in Seattle are at 2005 levels--not a good sign.

The goods news is that with soft, soft housing prices, and low interest rates, the cost of living is way down.

The Fed has a lot of room to run before running into inflation. Property markets appear several years away from inflation, at best.

brodero said...

I believe the focus is shifting
more to locales than a national situation. I check Trulia.....


Type in your zip code...find the number of homes for sale...then find the number of foreclosed homes for sale. In my zip code there are 216 homes for sale of which 53 are foreclosed homes almost all in the lower priced category. In zip code 89031 (which is North Las Vegas) there are 3,928
homes for sale of which 3,232 are foreclosed homes almost all are of the lower priced category.

septizoniom said...

who cares if there is or isn't a double dip. only you could turn the continuing bust and flatness into a positive spin. the bust has materially deflated wealth for the vast majority of us. the fed would have been better to buy everyone's home at 2004 prices. now that would have been a monetary policy.

Lori said...


Can we race the real estate bust to the weakness in the US dollar?

Lori said...

Trace that is.

Benjamin Cole said...

I don't think so. A "weak" US dollar should encourage foreigners to buy property here, source operations here etc.
(I dislike the term "weak," it leads people to conflate a "strong" exchange rate with a strong economy, or an exchange rate good for the USA).

Why real estate collapsed is a puzzle, perhaps sparked by a lack of Fed vigor in boosting the money supply when needed.

Obviously, poor underwriting in both commercial and residential sectors was standard.

Yet there was a global bust in real estate, across governments and cultures, although certainly Australia and China were exempt, and Japan real estate has been in the toilet ever since they started experimenting with zero inflation targets 20 years ago.

The good news is that I think we have a great run in front of us, with a "weak" dollar and Bernanke at the helm. Inflation and interest rates will stay low, growth will be good, and foreign capital will flow to the USA.

As people regain confidence in America, we should have a sustained bull market.