Tuesday, March 27, 2012

Home prices decline but the future is looking bright

According to both Case Shiller and Radar Logic, U.S. housing prices were still declining late last year and early this year (both series report prices with a considerable lag). Nominal prices have fallen by one-third, while real prices have fallen by 41% since their mid-2006 highs. Ouch.

This all sounds pretty grim, but not when contrasted with news today that bidding wars are breaking out in Seattle, Silicon Vally, Miami, and Washington. To sum up the current state of the housing market, we are in the midst of an important inflection point in which prices are no longer uniformly declining but in some areas prices are now rising. Focusing on where housing prices were several months ago is missing the larger picture, which is that we have seen the worst of the housing debacle and the future is looking brighter. Obsessing over the historically miserable 700K pace of housing starts is to miss the more important fact that starts are up 35% in the past year.

The stock market figured this out long ago. Homebuilders' stocks are up 160% from their recession lows; and REITS have returned 240% since the market bottomed in early March 2009, about double the 123% total return on the S&P 500. In short, housing prices are a terribly misleading picture of the dynamic that has been playing out in the market for the past several years. Prices are way down, to be sure, but that is the way the market deals with an excess inventory of housing. Housing prices are now incredibly affordable, and the excess inventory has been completely worked off in at least several markets around the country. It won't be long before bidding wars start erupting in nearly every market, and when the news of rising home prices finally makes the headlines, there could be a buying stampede.

UPDATE: Add Phoenix to the list of cities with rising home prices. HT: Chris Lee


Squire said...

I live on the SF Peninsula. I previously mentioned an old not updated 2 bedroom 1200 sq ft house listed for $625, now sold for $575. Well, heck, it was a corner lot.

Scanning craiglist for 2 bedroom apartments they are going for $1700 for lesser neighborhoods to $2200 for average neighborhoods to $2400 and up for the nicer neighborhoods and well above that in many listings for Menlo Park, Palo Alto, Belmont, San Carlos, San Mateo, and Burlingame.

Good times are here again. In mid peninsula it is hard to find a non chain cheese burger under $10. I know a place but I am not telling.

Unknown said...

Scott - you are wrong on housing prices (on housing starts I concede, but not prices).


Loan owners are $3.7 trillion underwater. That’s not the amount of debt outstanding, that is the amount Americans are underwater.

There are 6M homes in some stage of the foreclosure process.

The $25B mortgage settlement is 0.67% of the total value of underwater mortgage debt. And most of the settlement money will go toward writing off short-sale losses.

Prices can’t go up as long as so much distressed debt is in the system. The distressed debt translates to distressed sales, and those distresssed sales keep prices down and prevent any meaningful appreciation which would translate to increased equity.

It’s difficult to grasp the depth of this problem. For years, many of us writing about this issue have lamented the mark-to-fantasy accounting by lenders, but if they were to truly mark these loans to current market value of the homes, our entire banking system would be insolvent three-times over.

Some markets are probably a great buy right now. Las Vegas, Phoenix, Miami. But not here locally - look for a 20% further price reduction in California before all is said and done. It may take 10 years but it will happen.

Benjamin Cole said...

Sure, Detroit housing, and maybe Phoenix, will be cheap for a while. Florida.

But most places have been flat to rebounding for months.

Believe me, this has been one of the great real estate buying opps of all time.

I guess we can thank Bush jr. for something: Never has such a great chance to buy real estate been afforded to so many.

Anonymous said...

I'm not surprised at the Seattle bidding wars article. I wish I could drive some of you around my north Seattle suburbs. Home construction around me is - dare I say - practically booming recently. I'm starting to see a lot of new houses sold before they've even started construction.

Something is definitely going on out there.

John said...

There are spikes of prosperity here and there, but the housing market is a proxy for the jobs market. They are joined at the hip and the working man and woman are in a very weak position.

But corporate profits are up!

brodero said...

My home price model based on the Case Shiller 20 and average wages
has homes undervalued by 6%

Hans said...

Will the real Ben Jamin and Shiller, please stand up!