From Barry:
This was followed by a post from another economist named Paul Kasirel, who put up this graph:
He explained his analysis thusly:
“The chart below illustrates why I think owner-occupied housing on a national basis is cheap. The “yield” on owner-occupied housing continues to be above the cost of financing a home purchase. This is actually a rare occurrence. Of course, if the market value of owner-occupied housing were to fall more, all else the same, the purchase of a house would become even more attractive.”
In other words, the cost of buying a home is cheaper then the amount of get you get for the home. In other words, there is a bullish spread between the purchase cost and return on investment.
Barry continued with this point:
Might home sales pick up again in a couple of months? Perhaps, but I doubt it. I simply do not see any compelling reason for the marginal home buyer to make that purchase. By September, we will be fighting seasonal factors. The exception is the key bubble bust regions, where foreclosures are driving prices as much as 50% off the peak prices.
But I am unconvinced about prices in general. My problem with imputed rent is that it is not independent of demand for home purchases; Imputed rents interact with home prices, credit availability, pricing trends, employment, etc.
Indeed, one can easily imagine a scenario where: 1) Home prices are thought of trending lower; 2) Credit is tight; 3) Employment is weak; 4) Wages are flat. This would create an environment of relatively soft demand for home purchases (sending their prices lower) At the same time, this would increase demand for rental units.
Calculated Risk added these two graphs:
And David Altig added this:
Simply going with the "where is a majority of the data" pointing approach (a remarkably unscientific approach), there is far more data pointing to the idea that the market is near the price bottom. Let me add two more charts:
While still very low, new home sales have leveled out for the last two years.
Existing homes sales have a median rate of around a 5 million annual rate (+/- 150,000 or so) -- even when you include the dislocations from the first time home buyer tax credit.
So, we have the following.
1.) A majority of information related to home prices indicates we're pretty close to a bottom
2.) The sales pace for both new and existing homes -- while low for new and while pretty low for existing -- has been at a pretty consistent pace, even when you include the tax credit distortions.
Going forward, I think prices are cheap enough to continue to bring buyers into the market. But, I don't think there will be a big pop in demand because of the overall macro situation. So, I think the current sales pace will continue barring an unforeseen shock and the prices may fall a bit more (say 10%-15%) but that if we're not at the bottom, we're pretty close.
2 comments:
Price/Rent ratio
The difficulty with this number, as an indicator, is that it does not appear to correspond to reasons why people buy homes. Also, most rental living quarters are not very similar to most houses, at least in the places I have lived, so for many people the comparison is between apples and oranges. Furthermore, the districts where there are large amounts of rental property and the districts where there are first-rate schools tend to be different.
If you want to invest, there are markets. Every time in my rather long life I have considered buying a home, within a few years the home market crashed. Mind you, this is only an issue if (i) you sell not to buy in the same market or (ii) you think you can collect profits on your house prior to moving into a nursing home.
I think across the whole market, another 10-ish% down from here is about what I'm seeing as the most likely scenario.
But I also think it really depends on the section of the market you're looking at, especially in the bubble zones. We've been looking to buy something to live in at a lowish cost, comparable to our current rent, in no particular rush but with an eye out for pricing patterns in various neighborhoods. I think the lowest end neighborhoods are pretty close to done falling -- they may fluctuate around a little for a few years, but I don't expect that buying something there would ultimately put us hugely underwater immediately and I also think some of these areas will be early to recover some modest value after 3-ish years of flat. They really have become "better" neighborhoods in the last decade, that does add real value that isn't being priced in at the moment.
But you get into some of the middle class neighborhoods, those folks are still smoking crack. They're looking at the peak price, and they're thinking they've come down like 20%, and it's not occurring to them that the peak price here in super-bubble Sacramento was more like 40-50% totally batshit crazy, and that wages have dropped and unemployment is still very high here. The typical lower middle class 2/1 house cannot currently be purchased for anywhere near the median household income in the area.
They're all convinced that this is the bottom, every single month. And then the "bottom" falls more, because the numbers of distressed properties in these neighborhoods are hugely increasing with time. People statistically can only sit so long on an underwater house -- it's been a long time, during which they may have to move for any number of reasons, they may lose jobs or have wages cut, they may get fed up and walk away (seen quite a few of those lately, actually).
Add to it that you've got flippers all over here who now often can't sell, they assumed a quick recovery and they were hugely premature, wanting to get in while they thought they could make a fortune. So the market is flooded with newly granite-countered-cherry-cabinet-beige things with dryrot under the shiny new paint, and they're just not moving very fast. The original purchase was a "sale," though, so it's in the sales numbers even though it turned right back around to sit on the market and fester.
The plural of anecdote is not data, of course, but what I'm seeing firsthand here is a market that strikes me as massively unhealthy, with a long way to go. The _only_ areas I'd feel comfortable buying right now and figuring I wouldn't lose a chunk of money immediately are the poor neighborhoods. The middle class sellers haven't quite gotten the point yet, and until they do, sales in those areas are going to be choppy and weird.
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