S&P Case Shiller Report
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.
From a small northwestern observatory... 
Maybe household formation “should” be positive, but maybe it isn’t. I’m afraid I don’t have time to try to find data, but news reports are that young adults are doubling up or moving back home, and net immigration from Mexico is break-even. Combine these trends with declining preference for homeownership and reduced ability for young borrowers to qualify for a loan, and it’s no wonder that demand remains stagnant. There’s a good article to be made out of quantifying these trends.
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Vince Slupski, MAI
June 27, 2012 at 9:59 am
There appears to be a general assumption in the US – and also here in the UK – that high levels of home ownership are beneficial and a positive economic indicator.
While I broadly concur , there must surely be a ceiling to an economicaly positive effect and I canot believe that it is at 100%. Personal home ownership brings security to the owner ( perhaps less so if they have borrowed excessively for the purpose ) and promotes a degree of responsibility in maintaing the property and , for many owners , in supporting the neighbourhood and environment in which they live. On the other hand home ownership ties up large amounts of capital which may have other more economically productive uses and may lead to a NIMBY culture by those seeking to maintain the value of their asset to the wider public detriment.
I would be intersted to know if there is a generally accepted ” golden proportion ” between ownership and tenancy which is generally accepted by the academic community. If not perhaps it is something for your students to consider as I have little doubt that a generally accepted number , be it universal or of local applicabilty , would have signficant social end economic policy uses . One of which that comes to mind would be in the measure of statutory protection for tenants – as most people would accept that at least some is required – without making the market uneconomic for landlords to enter.
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Mark Dooley
June 28, 2012 at 5:14 am