Tuesday, November 27, 2012

Housing update: prices continue to firm

According to the Case Shiller indices of housing prices, the housing market has been consolidating for the past three years, and that comes after 3 years of the most brutal collapse in home prices in modern times. Altogether, the housing market has undergone six years of intense adjustment. With prices stabilizing (and even going up in some markets) and housing starts up fully 65% since early last year, there's ample reason to think that we've seen the worst, and that the housing market is now getting back on its feet. 

Both of these indices of housing prices show year over year gains: the Case Shiller index is up 3%, and the Radar Logic index is up 5%. Moreover, both indices are relatively unchanged for the past three years. 

From a longer term perspective, housing prices appear to have come back down to earth in a big way. Over the past 25 years, housing prices have risen only 15% more than rents, and that seems quite reasonable considering that 30-yr fixed rate mortgages have fallen from over 9% in 1987 to only 3.5% today. It's not a stretch to say that housing has never been more affordable. If anything is holding back the market now, it's the fact that banks are still risk-averse in their lending practices, and regulators have also tightened lending rules.


Benjamin Cole said...

Speaking of monetary policy--

What does the chart of housing price say about monetary policy? BTW, commercial property has done about the same.

How about a chart of natural gas prices? How much natural gas does one ounce of gold buy?

Has monetary policy torpedoed natural gas prices?

Why does monetary policy affect oil prices but not natural gas prices?

Or, maybe the connection between Fed policy and global commodity prices is very, very tenuous.....the connection between real estate and monetary policy is stronger.

McKibbinUSA said...

The current housing market makes a strong argument for clawing together a down payment, and then acquiring your own home to enjoy for the rest of your life -- wise investors will be making the personal sacrifices necessary to get into equities now -- unwise investors will be looking for some "get rich quick" scheme -- however, hard work and savings are more likely than in the recent past to result in rewards -- everyone can win in the current markets -- those with cash are buying right now -- those without cash are acquiring world-class skills that can be converted into equities -- but equities is the name of the game -- the long-term investor with at least a 30-year investment horizon stands to win big in current dividend and rent-earning equities, as well as world-class skills that can be converted into premium wages and equities -- the future looks bright for investors -- gotta wear shades!

Gloeschi said...

"Houses have never been more affordable" - Scott, you are infringing NAR's "intellectual property" here!
The monthly payment might look affordable, but apparently, few people can afford the 20% down payment. Poof! goes the house dream.
Have you ever thought of the possibility that markets may overshoot to both sides? That, just maybe, house prices could fall below trend, after having seen such an excessive bubble?