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How’s the Housing Market Doing? – Depends on What Data You Look At

It’s been over three years since the first signs of trouble began emerging in the U.S. housing and real estate market. Standard & Poor’s just released the latest Case-Shiller Home Price data so where do we stand now? Market pundits have been cheering the percentage price gains in the Case-Shiller Home Price Index for several months and telling bearish investors to forget the past and go right back to the same assumptions that caused the real estate crises in the first place. To support their theory, they simply point to charts like the one below.

Case-Shiller Percentage Year over Year Price Change Index

Unfortunately, the above chart gives a very skewed picture of what is actually happening to U.S. home prices because we are coming off of such a low base. To account for this statistical anomaly, I prefer to look at what actual prices are doing with the chart below.

Case-Shiller Home Price Index

Looking at the first chart would leave you to believe that you’re about to “miss” the next boom in real estate but using the second chart for added context will surely give you pause. The U.S. Government began inflating the housing bubble all the way back in the 1980’s with aggressive home-ownership policies spearheaded by Fannie Mae, Ginnie Mae and Freddie Mac. Wall St. helped the bubble along with financial “engineering” and then the Federal Reserve even stepped in to do its’ part after the dot-com crash by lowering rates dramatically for an unprecedentedly long period of time.

All these factors make it very hard to get a real idea of what housing prices should be because the markets have been manipulated so completely. For a best guess, we can look back to where prices bottomed in the 1990’s or we can look at metrics such as income to home price ratios. Unfortunately, no matter what you look at (aside from the housing bulls’ percentage price change chart), things do not look pretty. The 1990’s levels leave us with a long way to fall and inflation-adjusted median income has fallen.

Let’s just hope that I’m wrong and the housing bulls are right…

-MJB

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The Housing Crisis May Not Be Over…

October 19, 2009 1 comment

After being propped up for the last year or so by the $8,000 new home buyer tax credit, the NAHB’s Builder Confidence level fell in October to 18, rather than an expected 20.  This compares with a level of nearly 40 at its peak towards the end of 2007, and 19 in September of this year.  A reading of 18 shows that fewer than 1 in 6 builders have a positive view on the housing market.

Several things are pushing against further recovery in housing, chief among which is the expiration of the tax credit.  As it stands, buyers need to complete their transaction by December 1 of this year, and it has provided a needed boost to get people to buy homes during a time of falling prices.  Legislation to extend the credit is likely to pass in the next month, with broad support coming from Democrats in both the House and Senate, but curiously the White House is remaining mute on the subject.  This drop is confidence is probably reflective of the lack of significant progress made by the government in the last month on this issue.

Additionally, builders and homeowners alike are struggling to find financing, as the banks remain fairly choosy about the money they give out.  Only the best deals receive the money, and even then the owners are being required to provide significant levels of equity, which is stalling development.

This is bad news for the consumer, as a lot of people equate their personal net worth not by the stock market, but by the value of their home and the money they can borrow against it.  As we come up to this holiday season which will be critical for a number of retailers, the market will look for a rebound in consumer confidence to see whether we can bring this recovery off the back of the government and onto the more organic and normal growth patterns.  If consumers still feel that their house is losing value and choose to spend cautiously (personally, I feel this would be no bad thing for the fundamentals of this country), this could be a very cheerless Christmas for the market.