September 29, 2009
Home prices stabilized, but...
The S&P/Case-Shiller home price indices registered another month of increase in July. That's a critical bit of favorable news, since continued declines in home prices would mean further increases in default rates and new stresses on financial institutions.
On the other hand, the decline in existing home sales for August, future rise in foreclosures already baked in the cake, inventory of unsold homes, and expected continuing increases in unemployment all raise the possibility that house prices could resume their descent.
In other words, I don't see the fat lady singing just yet.
Posted by James Hamilton at September 29, 2009 09:16 PMdigg this | reddit
A return to 2000 nominal prices would seem like the best one could hope for in the short run. My guess is that asset prices will hold there for a while and then really collapse during the boomer liquidation phase in 2020-2030.
Posted by: The Money Pit at September 29, 2009 10:41 PM
just to put into perspective the home annualized MoM appreciation: $175 or tossing in with the sale a cheap electical mower.
Posted by: baychev at September 30, 2009 03:32 AM
I am not sure the price of home sales has much meaning. The only people buying right now are those who are financially secure and so they can afford to pay a little more. The other considerations the professor mentions are much more important and perhaps the most important is the unemployment rate.
It is interesting to note that I just heard a report this morning that a major restaurant chain just opened their new corportate offices that were in part financed by $5 million from the government. The justification was it would add new 500 jobs. Only the government would take $10,000 from the taxpayers to fund minimum wage jobs. Since government only realizes about .25 on every dollar collected (.75 goes to "overhead") that means that each job cost more than one years salary and will probably put at least 500 out of work. And then there is the high probablity that the jobs will not even materialize.
Oh, but we have a beautiful pile of glass and steel glistening in the sun.
Posted by: DickF at September 30, 2009 04:17 AM
It still amazes me that prices of homes in DC have quadrupled in the last 9 years. While prices have come down 10-15% recently, it's still unfathomable how people can actually afford a house. Like NYC, I guess everything is a jumbo loan and the market depends on lawyers and power-brokers to keep things going.
Posted by: Ken at September 30, 2009 04:49 AM
Overhead is a fixed cost.
That means that you shouldn't divide the marginal revenue by 4.
Posted by: Simon van Norden at September 30, 2009 07:12 AM
The other shoe will drop in 2010 and 2011 when the Alt-A and Option Adjustable ARM's reset to the tune of several hundreds of billions of dollars. When the teaser rates vanish and the resultant mortgage payment is doubled or tripled, it will be lights out. The commercial real estate debacle could easily equal this next residential downturn is scope.
Posted by: Erik Rose at September 30, 2009 08:31 AM
Looks like a very odd discontinuity on an otherwise fairly smooth chart.
Posted by: Keith at September 30, 2009 12:16 PM
I have to wonder whether increasing prices reflects a signal of inflation.
If Fed increases interest rates materially (eg, = 8% on a 30 year fixed mortgage), housing will get hammered again.
Pro forma, we should have an overshoot to the down side. We haven't seen that yet.
Posted by: Steve Kopits at September 30, 2009 01:03 PM
The home building permit still seems to be weak. Look at this visualization. case shiller
Posted by: sc at September 30, 2009 01:43 PM
"Looks like a very odd discontinuity on an otherwise fairly smooth chart."
I see what you mean. I also would not be surprised to see a few more bouts of unsmootheness in the next few years.
I apply these ideas carelessly:
1) IF net employment is decreased X%, AND most households are living paycheck to paycheck, THEN net ability to pay mortgage dropped X%.
2) IF a certain percentage of the population will resist being renters for non-financial reasons, AND they choose houses based on the maximum amount they can pay monthly (setting up a paycheck to paycheck situation), THEN housing will rebound when incomes are restored.
And I guess that the FED and the Treasury:
1) Do not think they can reduce unemployment to increase income.
2) Do not think they can safely increase money supply faster than it is being decreased by defaulting debt to reduce real expenses.
3) Do not think they can reduce mortgage interest rates much lower than they are.
So they are trying gimicks waiting for the income problem to fix itself. I think the games they play will add arbitrary swings to what would otherwise be a predictable crash, overshoot and recovery.
Posted by: KevinM at September 30, 2009 02:51 PM
Posted by: Lee Adler at September 30, 2009 04:07 PM
The $8000 tax credit for first-time home buyers will expire 12/1/09... That will put a damper on the Case-Schiller index in 2010. Home sales are typically high in July and August as people try to relocate prior to their children's school year start.
I'm not holding out any hope for stabilization or recovery of home prices until all the adjustible rate mortgages are reset, and forclosures catch up to mortgage holders in arrears. (3 million currently distressed, more than 200,000 who haven't paid a dime in the last 12 months).
The real trouble is that too much of the housing stock is unaffordable, either because its priced too high or its so remotely located that transportation costs (time and money) are excessive. Distress to the financial system is baked into the cake.
Posted by: MarkS at September 30, 2009 09:01 PM
"Looks like a very odd discontinuity on an otherwise fairly smooth chart."
Case-Shiller price indices are three-month moving averages of unpublished raw data; smoothness is built-in. Put another way, their raw data is looking much more odd right now.
Posted by: Simon van Norden at October 1, 2009 05:34 AM
It is very unfortunate that many otherwise knowledgeable people seem to assume that these Repeat Sales Indicies (C-S and FHFA nee OFHEO) are comparable to equity etc indices (e.g.: Dow, S&P) in terms of concreteness; alas, they are not.
RSI indices are based on calibrating a brownian motion process to observable housing sales pairs, while trying to compensate for housing quality changes, off-market sales, and particular dynamics of individual sales. Further complicating this is the fact that there is no national housing market, but rather the US housing market is composed of myriad local housing markets, each with its own dynamics.
In the present situation, the RSI indicies need to be looked at on a local level, but the sales volumes are extremely low (making the indicies inherently noisy) and many transactions are being further excluded from the index calculations (foreclosures and short sales). Thus, use these indicies at your peril!
But of course, with modern real estate appraisals being largely influenced by AVMs which are themselves driven with the RSI indicies, one can't ignore the RSI indices....
SvN, I'm still anxiously awaiting your perspective on just how much exposure to real estate is appropriate for the financial system....
Posted by: Dr. D at October 2, 2009 12:12 PM
what we have is classic case of policy failure..right now the financial markets are being held back by emergency measures and it is stuck at an artificial level..upper-end US housing is still in a bubble. The Equity/RE bubble in emerging countries like india/china are ginormous esp seen in the context of the financial meltdown.
The equilibrium will be achieved inevitably. Pain of adjustment has been postponed, but my fear is like japan , the duration of the pain will be much longer..Massive voo-doo US financial sector has to retrench by 50% and zombie banks in time would be demolished...
As globalization peaks, US perforce would have to engage in protectionist policy to avert societal breakdown at home. The drama that would have swiftly played out in 2008-09, now will drag on in 10,11,12//
Posted by: andi at October 2, 2009 03:55 PM
Perhaps we are looking at the data wrong.
The recent "upturn" might be more of a correction/bounceback from a temporary extra sharp dip during the worst of the panic. In other words the decline during the last half of 2008 was a bit too steep and we are seeing an adjustment to that dip. ...A bounceback that was boosted by the end of the panic and the arrival of the spring buying season.
I do believe that we are seeing the first phase of the bottom in home prices - which is that the prices of starter homes are bottoming, or have bottomed, and may rise slowly from here. Price direction for mid and upper priced homes should lag by a year or two. So, more declines are ahead.
With unemployment so high, there cannot be a strong real recovery in prices. At this point in the decline I would expect a period of a few years where prices make little change.
Posted by: Zephyr at October 3, 2009 11:26 AM