Tuesday, September 20, 2011

Mortgage, housing update

August housing starts were somewhat weaker than expected (571K vs. 590K), but building permits (which point to future housing starts were a bit stronger than expected (620K vs. 590K), so on balance there's no news here. The larger story is told in the charts above. Housing starts have been bouncing along the bottom of their worst nightmare collapse, and this has been going on for over two and a half years. One chapter of the big story is that housing starts have hit bottom; if they were going to go lower, they would have done so by now. The other chapter is that housing starts are going to have to increase by leaps and bounds over the next several years, if only just to catch up to the demands of a growing population.

The longer starts remain at current levels, in fact, the higher the probability that we could be experiencing a general housing shortage within a few years, since the rate of family formations is running well above the current level of starts. That future housing shortage might collide with an abundance of money (if the Fed is slow to mop up the massive amounts of excess bank reserves it has created) to produce another major rise in housing prices. We can't know the timing of the next upturn in the housing cycle, but increasingly, the question is not whether housing prices will rise, but by how much.

When you can borrow at historically low, long-term fixed rates of 4-4.5% to buy into what could be an impressive runup in housing prices, it matters little whether prices have reached their lows or whether they might drift somewhat lower before heading higher.


Benjamin Cole said...

I hope Scott Grannis is right.

In Japan, residential real estate never recovered from the 1990 collapse. Down 80 percent and still falling.

Tight money has unusual unintended consequences.

Benjamin Cole said...

BTW, there has been a lot of harum-scarum of late about inflation, although certain right-wingers, such as Dan Boudreaux of George Mason, say the CPI overstates inflation.

Here is an interesting tidbit from Scott Sumner:

"So why is housing causing a problem for the Krugman model? The answer is simple; the BLS doesn’t agree with Case-Shiller, they don’t agree that house prices fell 31.6%. What kind of figure did the BLS come up with?

Answer: 7.7%

I can just imagine your reaction: “What!?!?!?!?! They claim housing costs only fell 7.7% over the past 5 years! That’s insane.”

I’m afraid you’d better sit down for this. The BLS doesn’t claim housing prices fell 7.7% since mid-2006, they claim they rose by 7.7%. Just a minor 39.3% discrepancy with C-S."

The CPI as constructed assumes that house prices rose 7.7 percent in the last five years.

Yeah, tell us about inflation.

This also provides a market explanation for the very low interest rates we see. Rates are low as we are in deflation, and lenders know it.

Add on:

BTW, there has been a lot of harum-scarum of late about inflation. Some say the CPI overstates inflation.

And Scott Grannis" "Dr. Copper"?



NEW YORK—Copper prices are showing strain amid worries that Europe's sovereign-debt problems will substantially erode demand and create a surplus of the industrial metal.

Futures on Monday hit a fresh low for the year, falling 3.8% to $3.7715 a pound."

Deflating real estate and copper prices, and unit labor costs flat to down. All manufactured goods getting cheaper all the time.

Just where is the inflation?

septizoniom said...

and you know this how?:\

"if they were going to go lower, they would have done so by now."

stop being a shill to your own ego

John said...

Scott is probbly right about the millionaire housing market. On a broader scale, however, the housing market is tied to the jobs environment, which isn't going anywhere, unfortunately.

Still, corporate profits are looking good.

Frozen in the North said...


Friend just moved to Phoenix and bought a house, looking for a mortgage (non conforming) max offer amount he got was 71% LTV, terms were not that good, instead he got a 50% mortgage.

Americans will need more cash for down payment rules are tighter, and lets not forget the impact of the baby boomers retiring.

In Canada, where there is no housing problem (yet) what is amazing is the number of high price down town condos being built. Expensive ($1,000 -- $2,000 sqf) and focused on the baby boomers that are getting out of the suburban McMansion and getting something more practical and down town. Going from 3,000sqf to 1,600 makes a massive change to the housing stock demands

Rick said...

It took 25 years for the stock market to regain its 1929 level. The NASDAQ has not even recovered 50% of its 2000 crash level. The S&P 500 has not yet recovered its pre-2008 crash high print. There is a huge supply of housing out there separate and distinct from new housing starts. That is why housing starts are at 50+ year lows. There is no quick fix in housing until the excess supply is cleared.

Frozen in the North said...

BTW Scott your comment on houshold formation is correct, although for the first time America has to take in consideration the impact of aging baby boomers' change in their housing demand as part of the equation.

This year 3 million American will turn 65 -- or 8,000 per day. How many will retire, and change their housing requirements?

Squire said...

Scott, please read:
BIS major study says too much debt becomes a drag on growth.

I am looking for arguements why this is so. What actually happens.

Scott Grannis said...

Frozen: re boomers and retirement. One thing is for sure, given the low level of interest rates and the sluggish stock market: baby boomers are going to be retiring at a much slower rate than previously expected. Most are going to be working for a long time to come, far longer than they would have expected.

Squire: too much debt is the by-product of too much government. Too much government means a sluggish and inefficient economy. That's why lots of debt and slow growth go hand in hand.

Benjamin Cole said...

Given the statement of the GOP today, you can kiss real and equities good-bye until after the election.

If we get a GOP president in 2012, then we might see a more-aggressive Fed policy and recovery.

But if the GOP'ers really believe their posturing, we will get permanently Japanned.

Benjamin Cole said...

Lost decade for housing?: Home prices might recover just a portion of what will be lost between 2005 and 2015, according to a new survey, leaving millions of homeowners with little, if any, equity. From the WSJ:

The housing bust has chilled consumer spending--the largest single driver of the U.S. economy--with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer. One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.

Benjamin Cole said...

Required reading


From Northern Trust--very thoughtful piece on Friedman and treason.

John said...


Very, very interesting. Thank you.