Tuesday, May 31, 2011

Housing update: still soft, but probably not a double-dip




The release of the March Case Shiller home price index, which showed the non-seasonally adjusted number falling to a new post-recession low, is apparently confirming the view among many analysts that housing is now in a double-dip. That may be an irrelevant and premature assessment, however, given that the March number reflects the average of prices in the months of Nov., Dec., and Jan. Nevertheless, as these charts show, prices were indeed softening late last year and early this year.

The top chart shows the seasonally-adjusted Cash Shiller series, as well as the Radar Logic home price series. Both are telling approximately the same story. The second chart shows the inflation-adjusted version of the Case Shiller series measuring home prices in 20 major markets, while the bottom chart shows the Case Shiller series measuring 10 major markets, but extending back to 1987. On an inflation-adjusted basis, home prices on average have fallen almost 40% from their peak.

As to whether housing prices are still declining from their January levels, it's anyone's guess, but I am hearing anecdotal evidence to the contrary, at least here in So. California. Three homes in one neighborhood I'm familiar with sold within days of being listed, one for a price I thought was impossibly high. My nephew who is a mortgage broker in the Inland Empire reports that May was his busiest month ever, and he sees evidence of firming prices. Additionally, the chart below is an index of the equities of major homebuilders, and it shows no sign of weakness.


Much has been made of the big May selloff in commodities, but even that appears to have been temporary and not indicative of any economic downturn. The chart below of a diversified index of commodities shows that prices have already recovered over half of their early-May losses. Plus, copper prices have not declined at all in May.


In any event, I would argue that any weakness in housing should be viewed as an opportunity to buy, rather than a reason for despair.

10 comments:

  1. I have one foreclosed home
    for sale on my street...not competitive with other homes for sale...my zip c0de had 43 foreclosed homes for sale on February 14th...today there are
    29 foreclosed homes for sale...

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  2. Scott,

    Do you think the steep drop in the Chicago PMI is telling us we might be in for a slight contraction for the 2nd quarter? They're saying it's the biggest decline since 2008.

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  3. That's a tough call. The Japanese tsunami undoubtedly has something to do with the drop, and in any event the market is already pricing in the expectation of lots of economic weakness. I note that 2-yr Treasury yields have fallen from 0.83% to 0.47% in the past 2 months, a direct reflection of a market that has radically downshifted its growth expectations. So even if the economy slows further in Q2, it's questionable whether that would have much impact on the market.

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  4. Hi Scott,

    As a homeowner and part-time online stock trader, I find these observations about home prices comforting and I hope you're right. My feeling though is that unless we start seeing some wage increases, house prices are fully capable of falling back to where they were in 2001. People have to be able to afford housing.

    That said, is the market that dependent on the price of houses? I'm not sure I'd buy banking stock yet but I think TradingStrategyLetter is right when he calls this a buying opportunity.

    Brian
    Online Stock Trading Buff

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  5. Check back with the 90's Savings and Loans crisis. That time it was commercial real estate. Had you bought property then you'd be well retired long ago.

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  6. Brian: don't know if you've noticed, but wages, earnings, and personal income are all rising.

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  7. Of course prices have been firming. The supply has been artificially reduced by the foreclosure moratorium. Here where I live there is an absolute tidal wave of backlogged foreclosures rescheduled for auction starting in Aug. That's when things will really start to get interesting.

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