Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Thursday, March 31, 2011

Housing Market Update

Overall, the housing market might recently have improved slightly from horribly dismal to only moderately dismal.  The Case-Shiller indexes declined dramatically from 2007 through 2009, and have been essentially flat since.  However, the most recent several months show possible  signs of renewed weakness.

Delinquencies are down from the peak, but -
–There are three times the number of loans deteriorating greater than 90+ days delinquent as compared to foreclosure starts.
–There are also three times the number foreclosure starts vs. foreclosure sales.
–Foreclosure inventory levels are over 30 times monthly foreclosure sale volume.

Mixed message, at best.

Based on fundamentals:
• Nominal prices will probably fall some more and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes.

Here is a view of housing price fundamentals:

The finance paradigm holds that an asset has a fundamental value that equals the sum of its future payoffs, each discounted back to the present by investors using rates that reflect their preferences. For stocks, the payoffs requiring discounting are the expected dividends. This approach can extend to housing by recognizing that a house yields a dividend in the form of the roof over the head of the occupant. The fundamental value of a house is the present value of the future housing service flows that it provides to the marginal buyer. In a well-functioning market, the value of the housing service flow should be approximated by the rental value of the house.

The point is that pricing still needs to adjust downward a bit, based on rental expectations.

Here's a look at home ownership since 1965, through the end of 2010.

Update:  Source:  Census Dept.  Table 14 at the link.

Despite the regional differences across time, ownership in all regions peaked in 2005-6.  It's declined since, with no signs of recovery.

Here it is again with long range trend lines for U.S and West region.  Both have been below trend for about a year.  Of course, without the camel hump in '05, the trend lines would look quite different.

To complicate matters, as Delong points out on Pg 25 here, cumulative underbuilding during the bust is greater than overbuilding during the boom.  So, what we have now is a likely housing shortage.  Karl Smith makes the same point in a different way.   Here, Karl points out the long decline in multi-family dwelling construction.  My take-away is the obvious American preference for single the ownership of one's own home, which is not typical always and everywhere.

A further complication Delong points out is that during the boom we built too many of the wrong homes in the wrong locations.  There is a glut of McMansions, and a deficiency of affordable homes and multiple-family dwellings that the hard-pressed middle class will be able to afford in the foreseeable future.

This is both a gargantuan market failure and a grotesque misallocation of resources.

Even if prices sink to rent-justified fundamental levels, there will still be a structural mismatch between existing homes and locations, as compared to affordable homes and reasonable locations.

Sorting this all out will be long and painful.

1 comment:

nanute said...

Add in stagnant/declining wage growth and you've got an even bigger problem. A shortage of affordable housing, rental or otherwise, could lead to further declines in prices. If you can't afford the rent or the mortgage, what's the outcome? Go long on tent manufacturers.