From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for June 26th, 2012

S&P Case Shiller Report

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I WISH I could be excited about the most recent home price index report.  I really wish I could.

The news is mediocre, at best — home prices in April rose by 1.3% on average from their record lows in March, and are still down 2.2% (for the 10-city composite) from April, 2011.  Not surprisingly (after March’s terrible news), no cities posted new lows in April.  Of the 20 cities tracked, 18 showed increases (NYC and Detroit being the exceptions).

So, why?  If you read my blog yesterday, you know we have a terrifically supply-constrained market.  This morning’s Wall Street Journal had an article about Chinese investors who are providing about $1.8 Billion in kick-start capital to Lennar to get a big 12,000+ home community underway in San Francisco — a project Lennar has been working on for 9 years.  While I congratulate the Chinese and Lennar for this partnership, it does not at all bode well for U.S. investment liquiity that off-shore capital is needed to get a new project off the ground in one of America’s most dynamic cities.

Recall from ECON 101 that “price” is what happens at equilibrium when supply intersects with demand.  (OK, technically “price” can emerge in disequilibrium, as well.)  Right now, supply is hugely constrained, with a lot of REO-overhang and little new construction.  If demand was healthy and growing, prices should be soaring.  Instead, prices remain flat-lined, suggesting that demand is also stagnant.  However, population continues to grow and household formation should be positive.

What’s taking up the slack?  The apartment market continues to explode, with huge demand for rental units.  What’s the end game for all of this?  I can only think of two results:

1.  The home ownership rate in America continues to languish, finding some new post-WW II low; or

2.  Eventually, home ownership will go on the rise, and we’ll have an overbuilt situation in apartments.

Where would I bet?  Sadly, given the state of the world’s economy, #1 looks more tenable in the long-term.  That doesn’t mean we’re moving from being a nation of home owners to a nation of renters, but it does mean that the tradition of home ownership which has prevailed in the U.S. for decades may be becoming passe.  Either way, in the intermediate term (the next several years), we’re probably looking at the status quo.

Written by johnkilpatrick

June 26, 2012 at 7:34 am

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