From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘home prices

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

U.S. housing market — good news and bad

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The good news, such that it is — home sales are inching up — a 0.7% rise in January from the previous January.

Now, for the bad news — the median home price in America, measured on a January-to-January basis, just hit its lowest point in 10 years, according to a recent announcement from the National Association of Realtors.  Indeed, 35% of home sales were “distress sales”, driving the median home price down to $154,000.

graphic courtesy CNN-Money

This represents a 6.9% price decline from 2011, and a drop of 29.4% since the peak in 2007.

Why would anyone buy a house during this free-fall?  Actually, even in a falling market, buying a home makes some sense.  For one, interest rates are at amazingly low levels, and if you have great credit, loans are available.  On the other hand, rental rates are on a sharp increase, due in no small part to the lack of apartment construction in recent years.  Putting the two together (and if you buy into rational expectations), then buyers who look at an alternative of renting would find that buying a house, even in a declining market, may make some economic sense.
Second, a LOT of the distress-sale buyers are investors who plan to convert former “owner-occupied” stock into rental homes.  Indeed, we will probably see a significant increase in the stock of rental homes in America in the coming years.  Again, the rapidly rising rental rates induces investors to want to get on that bandwagon quicker rather than later.  Since investor-buyers are usually in for the long-run, eventual re-sale prices are inconsequential to the decision.
The real challenge is for appraisers.  They are typically backward-looking in forming sales adjustment grids, and assume both linearity and continuity in market conditions adjustments.  Neither of these assumptions are valid today.  PLUS, when appraisers “get it wrong” in a declining market, they are often held to blame.  In short, appraising a $100,000 house today which turns out to only be worth $92,000 a year from now can get you in hot water, even though, following good appraisal practice, the house legitimately pencils out for $100,000 today.
Oh, and let’s not forget the challenge faced by tax assessors.  In some jurisdictions (like the one I live in), tax rates can rise when assessment rates fall, so that county and city budgets remain constant.  In other jurisdictions, however, either legal constraints or public opinion keeps tax rates flat, and thus a 30% decline in property values translates into a 30% decline in local budgets.  Since property taxes fund police, fire protection, and schools in most jurisdictions, this translates into some real pain for local officials.

Written by johnkilpatrick

February 22, 2012 at 10:26 am

Home Prices Decline — Why?

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Our neighbors down the street,, just released a report showing that home prices nationally fell by 3% in the first quarter, or a total of 8.2% from March, 2010. The cumulative national average decline from the market peak (June, 2006) is 29.5%, and this quarter’s decline was the worst since 2008.

By the way — and this may seem totally obvious — but one of the biggest reasons people buy homes is because they are expected to go up in value, not down. Hence, a home is expected to be a storer of value and a hedge against inflation, not a dissipating asset. A buyer in June, 2006, would have reasonably expected his or her home to increase in value by 5% or so per year. For example, as Zillow’s chart shows, even back in the 1990’s, a home bought in 1996 (where their chart begins) went up by a total of about 20% by 1999 — slightly over 5% per year compounded. In five years, 5% compounded annually totals about 28%. Hence, not only are homes going down, they are totally contra to expectations by a total (28% plus 29%) of nearly 60%.

It sounds trivially obvious, but bankers also expected that. It’s one of the reasons why they fearlessly (and yes, foolishly) made loans to anyone who could sign their name (or make a “X”) back in the bygone days, because if the loan went sour (and they KNEW some of them would), they could always dump the collateral for more than they had in it. “Heads, we win. Tails, we don’t lose.”

CNBC had a nice piece on this topic this morning, featuring (among others), Dr. Susan Wachter, of U. Penn, who we’ve had the pleasure of knowing for many years. All of the talking heads agreed that banks won’t loan money today unless they’re absolutely sure of creditworthiness of the borrower. Hence, fewer people can borrow today, so fewer homes can get sold. Values decline due to lack of demand (pretty simple ECON 101 stuff happening here) and, as Prof. Wachter put it, the spiral will continue downward until an equilibrium is reached.

I’ve opined about that equilibrium in this column for quite some time. There is some significant albeit anecdotal evidence to suggest that the equilibrium home ownership rate will constitute the floor in all of this — probably somewhere around 64%, which is where we were back in “normal” times of the late 1980’s to mid-1990’s. I wish we had more data, but systemically declining housing markets don’t happen very often.

Written by johnkilpatrick

May 9, 2011 at 9:20 am

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