One of the signs that we have not reached a bottom with home prices is that there are so many people out there proclaiming that we are, and for all the wrong reasons. Here’s a couple of lists I’ve seen in the past couple of days explaining why the bottom is in. The first is from Business Insider:
The issue going forward is whether we need another significant decline to allow what is presumed to be a “new wave” of foreclosures to be sold. Put me in the skeptical column, because a) the housing market has had almost 5 years to adjust to new realities, b) prices have adjusted very significantly, c) prices have been stable for over a year, d) mortgage rates have declined by one-third since their peak in 2006, which further reduces the effective cost of buying a home by a substantial amount, e) new home construction has plunged by two-thirds, which contributes mightily to work off the excess inventory of homes, and f) the economy has recovered and we are now seeing job and income gains. That adds up to a giant amount of price and inventory adjustment, and enough time for all sorts of things to be dealt with. Why would we need more?
We would need more because most of these metrics are backward looking. While these are factors that can influence the direction of home prices, even added together, they are insufficient to tell us where prices are headed. Here’s the problem with these arguments:
a) Housing downturns can and do last for many years. There’s nothing magic about being five years into a downturn.
b) How far home prices have already fallen is meaningless when calculating the future of home prices. However much they have fallen, when prices haven’t tempted buyers back into the market, they are going to fall some more.
c) Price “stability” was brought about by the government’s homebuyer tax credits. The credits are gone, and so is price stability.
d) Japan has held interest rates near zero for years, but there’s a limit to how effective this can be. Falling interest rates can stimulate demand, but when rates staying near record lows, buyers are less concerned about them. There’s no reason that this would keep prices from falling going forward.
e) Home construction has slowed, but inventory is not being “worked off”. According to the Commerce Department, new home inventory was down 21% YOY in August. However, sales have declined as well, so months supply has gone from 7.7 months last year to 8.6 months this year. There’s still plenty of new homes to go around.
f) Very little out there is pointing toward “economic recovery”. [Unless you have confidence in highly manipulated government reports.] Even if we were to say for argument’s sake that the economy was improving though, remember 2005? The economy was still in good shape, but home sales plunged. High prices and a saturated market trumped economic activity. Certainly employed people are more likely to buy houses, but we are a long way still from normal employment. Most Americans aren’t confident that things have turned around.
Then there’s this list from Case, as in “Case-Shiller”. He gives the same arguments that we’ve seen above- even though he admits that the Case-Shiller numbers (which are several months old) continue to be influenced by the now expired tax credit. Again, he looks backward for clues instead of forward:
The index of property values in 20 U.S. cities increased 3.2 percent in July from 12 months earlier, the smallest year- over-year gain since March. The gauge is a three-month average, which means the July data are still being influenced by transactions in May and June that may have benefited from the government homebuyer tax credit incentive.
“It’s bouncing along the bottom, it stopped that free- fall,” Case said in an interview today on “Bloomberg Surveillance” with Tom Keene. “The combination of the tremendous drop in prices, the fall in interest rates, the government going all in and buying mortgage-backed securities to keep mortgage rates low, and the credit, of course — it’s not surprising that it’s come to an end.”
Both of these analysts are ignoring the best predictor of home prices- supply and demand. “We’ve already fallen a whole bunch” is worthless information looking forward. Too many sellers and not enough buyers will ALWAYS result in falling prices. We don’t care how “stable” prices have been when the stability was due to an incentive that has disappeared. Record low mortgage rates are meaningless to people who either can’t qualify, or no longer feel that buying is a good idea.
Here’s where the market is with that whole supply-demand thing. [However negligible it might appear to some.] For supply, consider this from the National Association of Realtors:
Total housing inventory at the end of August slipped 0.6 percent to 3.98 million existing homes available for sale, which represents an 11.6-month supply at the current sales pace, down from a 12.5-month supply in July.
Remember that a six month supply is considered a “balanced” market. Months supply has only dropped from “really awful” to “very awful”. There’s still a year’s worth of homes on the market currently, with a lot of foreclosures in the pipeline. There are still too many homes out there- and more are coming.
There’s a reason they call it the LAW of supply and demand. There’s no getting around it- no matter how long and how far the market has fallen. Case ignores the fact that there’s a big space between stability and free-fall, and that’s where the market is going to “bounce” for awhile
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