Practical Economics
Three Reasons for Optimism on Housing
Don’t get buffeted by changing winds. The housing recovery is real.
By Richard DeKaser, Contributing Economist, The Kiplinger Letter
May 27, 2010
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The housing market rebound that began a year ago is very much intact, so don’t get sidetracked or confused by recent and almost unprecedented volatility due mostly to on-again, off-again tax incentives. The 2009 tax credit -- worth $8,000 for first time buyers -- hugely lifted sales. And even though it was followed in November with a more generous package, sales collapsed from December through February because most of the bargain hunters had already made their move, and time was required for others to respond. They did respond, however, with sales rising sharply this spring. Looking ahead, I expect we’ll see another mini-collapse of home sales in the June-July period, after the current program winds down.
Not surprisingly, the volatility in data led to manic depression, with waves of ebullience followed by crashing confidence. Neither is correct. Filtering out the distracting noise reveals an underlying signal of steady, if unspectacular, improvement. For example, even the relapse in home sales during the dismal December-February period showed purchases running at an annual rate of 5.5 million units. That represents an 11% improvement over the first three months of 2009 -- before any meaningful incentives were in place. This is as close as I can get to an apples-to-apples comparison.
Home prices are another area of confusion, with data allowing optimists and pessimists to selectively make their case. The median sales price for new homes, for example, was down 9.5% in April, compared with one year ago. Not good!
Close examination, however, shows that April sales were skewed toward the South and Midwest, where prices are below the national average. A better measure that controls for such distortions is the Case-Shiller Index, which looks only at identical properties that sold more than once. Its result: Prices were up 2% in the year ending in the first quarter, compared with a dismal 15% decline over the previous year. Not bad!
So, home sales are rising and house prices are rising. More importantly, the outlook remains favorable, and the recovery will endure, even after the latest tax incentives die out.
Here are three reasons why I believe the recovery will continue:
•First, house prices are exceptionally affordable. It now takes 18% of the typical household income to meet principal and interest payments on a single-family home, which compares fabulously with the long-term averages of 26%. Even if mortgage rates immediately jumped from 5% to 6% (which I doubt), the carrying cost only goes to 21% of household income.
•Second, confidence is improving. While sentiments aren’t critical for all consumer purchases, they are when taking on expensive, long-term commitments. And according to recent surveys from the University of Michigan, about three-quarters of Americans believe this is a “good time to buy.” If near-term results reinforce the view that prices are on the mend (as I expect), this should only improve.
•Third, credit conditions will ease up. According to the Federal Reserve’s April Survey of Senior Loan Officers, “most banks reported essentially no change in their standards on prime and nontraditional mortgages over the past three months.” Even though it was the first time in four years lenders weren’t tightening, that’s not good enough. But just as buyers want to be convinced of price stability before buying, lenders want the same assurance before lending. At the moment, that conclusion is tentative, but I expect it will firm up in the months ahead, with credit flowing more freely as a result.
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Reader Comments (15)
Posted by: Chris M. at 05/29/2010 09:18:45 PM
I don't understand your optimism in the face of such mediocre data. I can understand why some bottom feeders and flippers might find some good deals through foreclosures and short sales. But what normal person in their right mind would consider buying a house and taking on a 30-yr mortgage in this environment? Home prices are expected to keep falling and there is virtually no long-term economic security for most people. I'm not underwater but have lost a lot of equity. If I ever escape from my current mortgage-house prison, I will never buy another home unless I win the lottery, don't have to worry about a mortgage, and money sunk into a house means nothing. I doubt I'm alone.
Posted by: yoink flotsam at 06/05/2010 12:11:54 PM
Generally, housing prices need to fall another 20-35% minimum, before any market stability will be achieved. This market correction should take about five-to-eight years.
Posted by: Chuck T at 06/05/2010 12:15:31 PM
Yet another unqualified analysis by a journalist with no formal economic training or experience.
Posted by: Kirkus at 06/05/2010 12:16:31 PM
1> House prices are exceptionally affordable: This depends on where you live and if the economy is actually recovering. In mid to high priced areas prices are still falling. The economy could easily see another leg down as all this stimulus fades and Europe faces major hurdles. 2> Confidence is Improving: Confidence in 2005 was at record levels right before the bubble collapsed. This is meaningless. Optimism is not a fundamental. 3> Credit conditions will ease up: Interest rates aren't going to stay low forever. The fed has to offload billions in RE derivatives at some point which won't help. If FHA runs into problems like Fannie and Freddie did it will be near impossible to get a loan without 20% down. That would crush home prices.
Posted by: Kevin at 06/05/2010 12:17:47 PM
With all due respect, you might want to get a thorough medical and psychiatric examination to see what might be causing your impaired judgment. Exceptionally affordable? Confidence improving? Credit conditions easing up? Wrong! Wrong! Wrong! Maybe things are looking up for the top 1% of the population like Warren Buffet and the execs at AIG, but for everybody else, it remains a terrible time to buy. Housing prices DOUBLED in ten short years and completely detached from all fundamentals. Many responsible families were left by the side of the road. It will be a long time before it is a good time to buy again, and that's not even factoring the possible collapse of the dollar. Get that exam and when you are feeling better you can write an article titled "Guns, Wheat, And Gold: Surviving The Coming Collapse of Everything."
Posted by: joseph at 06/05/2010 12:47:58 PM
I agree with Chris. Though I make enough and my credit is good, most of the people I know who own properties are willing to part because of the losses and move into apartments. This writer is not the only one trying to convince people to buy homes on poor information. Expect prices to fall until fall 2010 early 2011.
Posted by: Loki at 06/05/2010 12:58:11 PM
This must be a joke. With real wages still dropping and no change in unemployment where are the people going to come from to buy these houses. In many parts of the country housing prices are still overinflated. The dirrerence between the investor class and the rest of us is that the invester class thought inflated housing prices were great, while the rest of us had to work multiple jobs in order to get into a very moderate home. Real wages for most Americans have dropped over the last 30 years, so ho could home prices keep increasing?
Posted by: kommencents at 06/05/2010 01:12:11 PM
Irrational... The bubble of 08 was 5 yr arms that came due and the holders could not afford the jump in payment...well,at the time of the creation of the bubble there were two ARMS one was 5yr the other was a 7yr...Guess which one is about to be readjusted in 2010 ? Foreclosures are on the rise and the new home Permits( the really important statistic) are falling like a stone...Prices are going to diminish futher and real recovery will only begin after the upswing in new permit apps. is sustainable.
Posted by: Tom S. at 06/05/2010 01:20:04 PM
Chris M. is exactly right. Since the tax credit expired on April 30 sales have tried up completely. Strategic defaults are everywhere and the market is getting worse, not better
Posted by: ian at 06/05/2010 01:58:28 PM
3 reasons for pessimism: lack of job recovery, next peak in the wave of loan resets in 2011, shadow inventory and latent foreclosures. Check the prices on housingtracker.net, prices have dropped around 8% year/year. The crash is still in progress.
Posted by: SBR at 06/05/2010 08:15:12 PM
This is a ridiculous post. I wish I could agree with the sentiment of the author, but the arguments to support his points are weak at best. Those three "reasons" are not enough to compensate for the fact that most of the sales have been pushed by low interest rates, low prices and the tax exception. As long as unemployment doesn't go down, the situation will continue to be dire for the housing market.
Posted by: JC at 06/06/2010 11:11:01 AM
I echo the comments by Chris M. This article is a diservice to the changes in the global economy and the shift in the future living choices we may all have to make. Again, it goes back to jobs!!!....and good paying jobs to be able to afford a house today. Get real. People are having to make decisions to be more mobile to find work and renting should and can be a better option. Sounds like a lobbyst for the National Realters Association.
Posted by: gibby at 06/09/2010 10:22:09 AM
i have to agree w/ most of the bloggers/comment providers. This was a huge, housing bubble, and you are not mentioning this and for that reason alone, i have written to you.
Posted by: Merrill at 06/09/2010 10:50:46 AM
I have three (2 new and 1 used) homes, for one simple reason, they are the best investment right now. Remember buy low and sell high? You can't buy anything during these inflationary times at below cost except for homes. Gold, hah, its outrageously high and real estate historically moves along with inflation like gold. They should be moving together not inversely. It's pretty simple, buy homes instead. Homes have no where to go but up. Supply/Demand is currently moving to a sellers market and it won't be long until it is a sellers market again. Foreclosures indicate that they are not much of the big factor everyone thinks they are. Banks with practically free money can sit on them forever and are therefore competitive with the market. When you can buy at 20% to 40% below cost, anybody buying right now would be stupid to have a builder build one for them. I can guarantee in most markets your costs will be much much more. Instead buy a new spec home from a desperate builder. That's what I did. I plan to increase my sales prices by 10% a year until they sell. I've got the money invested. I can and will wait, but I don't think it will be long before I get my 10%/annum. Slam dunk. BTW: In an up market at its peak, there are those who predict the market will continue up to unexplainable new heights. The same is true in a down market for ridiculous lows. I have used these unrealistic predictions as an indicator of a turn around point for years now and it is perhaps the best indicator I've ever seen. Works in any market. These predictions of decreasing home prices continuing well into the future have long since passed. This means the turn around has already passed. Like to admit it or not, most people are wrong about future markets and that is why I choose the opposite approach to predicting the future. For example, when the vast majority feel the market will be desperate for years to come, that is the precise time to buy. The opposite is true of a peak in the market (for the best time to sell). The other thing is that the quicker a market declines, the quicker it goes back up. Check historical charts if you dont believe me. When the current inventory dries up including foreclosures, and people realize what it costs to build new and finally decide to lock in the lowest interest rates in many many years you will see prices rebound rapidly. Once government programs get going the job market will kick in as well. Coupled with new jobs from a new housing market, unemployment will drop like a rock. I would not be surprised if inflationary pressures move home prices to higher highs than the peak of the boom (about 2006) within just a couple of years. Good luck and happy home buying.
Posted by: The Practical Economist at 07/03/2010 10:16:14 PM
These are very weak arguments for believing in a housing rebound. There are two essential problems: (1) home prices are no longeer cheap relative to personal income and (2) it's difficult to forecast any appreciable increase in personal income for the foreseeable future. We could spend a lot of time debating point #2, but I think in the end, it's a point that's increasingly being embraced. If you need to know nothing else, the Employment Rate in May was tied for the second-lowest month on record. That's pretty bad. Credit conditions may ease up a little, but I'm not optimistic about that pace. Credit eased up considerably last month--it's likely a result of new mortgages for the first-time homebuyers. The next two months will be important--frankly, I doubt that we'll see any real loosening there. The banks are still struggling with a lot of derivative exposure related to real estate, the value of which just isn't rising. I'm afraid it's going to be a long time before we come out of this.