This is exactly what I’m afraid of for the 12 months ahead.
Yesterday’s numbers on home prices suggest that as the economic stimulus money gradually dries up over the next 12 months, the economic recovery will lose some steam. Not enough to send us back into recession mind you. But enough to slow economic growth below the rate that higher stock prices now reflect.
The Standard & Poor’s Case Shiller Home Price Index, according to data released yesterday, April 27, shows that home prices rose 0.6% from February 2009. This marks the first time since December 2006 that the index has shown a year-to-year increase in home prices.
That’s the good news. The recovery in the housing market continues.
But there was bad news in the February numbers too.
Although prices were up in February 0.6% year-to-year, prices in February actually fell by 0.9% from January.
And this isn’t an isolated data point. The month to month sequential decline from January to February is the fifth consecutive monthly decline in the rate of home price increases.
Perhaps this string of declining growth numbers is just a reflection of seasonal trends: Home buying in the winter is frequently less active than in the summer and fall. (S&P has recently said that it prefers the unadjusted index numbers to the seasonally adjusted numbers since it believes they are more accurate because of the volatility in the housing market. I’m following S&P’s lead and using unadjusted numbers here.)
But it could be a sign that a big initial bounce created by a government tax credit for home buyers is slowing down as the tax credit program winds down. (It is scheduled to expire this week.)
That could lead to slower growth in home prices—and a slowing recovery for home buildrs—as the year goes on. First American CoreLogic, which compiles another home price index, is projecting exactly that. Home prices will fall by 3% to 4% over the next year, First American said, unless there’s another round of stimulus from the federal government.
Falling home prices aren’t good for either the economy or the stock market, but it’s the analogy between the housing market and the general economy that worries me. If home prices, and thus housing sector activity, slow their rate of growth as stimulus money is withdrawn, then shouldn’t we expect slowing growth for the economy as a whole as crisis stimulus money starts to dry up toward the end of 2010 and in 2011?
That question is tough to answer, which in itself is one reason I don’t expect that Federal Reserve to raise interest rates any time soon.
The analogy also suggests that the fiscal 2011 year that begins in October 2010 might be too soon to begin cutting the deficit, as much as in the long-run that’s what the economy needs.
Tightening monetary and fiscal policy too quickly even as the economy slows on its own would be exactly the wrong thing to do.
If only we knew exactly what home prices are trying to tell us.
bstacy – Bush tax cuts were for the wealthy not the “lowest wage earners”; why should housing values increase above inflation and population growth combined? local demand may cause price increases above trend (eg. so-cal); end of the federal tax credit will have a noticable negative effect on home sales – I’m shorting the sector over the next 12 months.
BTW lenders are still allowing qualified buyers/bids on homes to languish – there must be some perverse incentive(s) to facilitate bankruptcies instead of sales…
Let me see if I’m adding this up right. Some reports are saying there is enough REOs and preforeclosures (people behind in their payments 6mo or more) to last 9 YEARS. Unemployed plus underemployed is equal to 17-18%. Bush tax cut are getting ready to expire so even the lowest wage earners will get to pay tax. YES! Thirty seven states are on verge of bankruptcy. The protectionist talk/real Chinese inflation will lead to higher prices at Wal-Mart by at least 20%. And there is a giant sucking sound coming from the PIIGS in Europe to the tune of $670 billion. The Dow should be at 36,000 by the end of the year.
PRINT Benny PRINT.
I think we are looking at a two-fold issue with housing prices, one people haven’t mentioned.
UNEMPLOYMENT – There is no way that housing prices are going to recover until sometime in 2011. This number needs to be down around 7% for the prices to start picking up.
In this window of opportunity once prices start picking up I think we also see INFLATION. Why this definitely will help the price of houses, it will push the borrowing costs well above the current 5%. I think this will keep CPI above inflation in the housing numbers. Takes a whack out of money earned here. The positive side is all of those people who are underwater in homes will get that value back…
Will be an interesting ride. I’m still looking to be a buyer, especially once unemployment starts to come down (I see long term rental rates going up for the next few years). Could be similar in commercial real estate
In addition to my above comment, government’s “incentives” have been keeping the home price artificially high. The price has to and will come down. My guess, the price on average is 20-30% too high.
Lastly, why do we all have to own a house? I own one, but I found it’s nothing but hassle and unpleasantness. Everyone involved in the housing business (realtors, builders, contractors, repairmen, mortgage brokers/lenders, title co. etc.) are utterly unpleasant to deal with! I dealt with them all, I found used car dealer are actually much better.
For all above reasons, I am a long-term housing bear.
davecove and others,
The problem with the “dead bounce” theory is it is only happening in SoCal, that is the point. Las Vegas, Miami, and to some extent San Fran had huge booms and haven’t bounced back yet, they are seeing prices fall still, year over year. I suppose I’m curiouser about the general fundamentals of housing appreciation. Why one area of the country consistently appreciates at 4-5% per year over the long term rather than 2-3% per year which is the case with SoCal. There is HIGHER unemployment than the US average, much more supply than many areas, and still you see appreciation.
Sales of existing homes are in trouble, meaning, values are still deflated. Homeowners and still under water. I don’t see any actual evidence that it is improving. The other problem is there is no way to tell how the current market will treat new homes. Finish building one and watch the value drop before the ink dries. I have an existing home, would like to move, but am under water enough to make it an impractical exercise. Like everything else, it’s going to take time to work itself out…not any time soon…as your numbers indicate. Also, I suspect it is “region” sensitive.
Per robert’s post, I agree “tech” bubble, “housing” bubble, next “financial assets” bubble.
I agree with YX, I’m a bear on housing. Related to supply is this article on Gen Y and what they prefer (not necessarliy what they can afford). They want urban, not suburban sprawl.
http://www.builderonline.com/demographics/can-gen-y-save-home-building.aspx?cid=BLDR100422003
I’m not so sure, Jim. The story I’m seeing in my neighborhood seems to be more about price discovery than the overall economy. A neighbor’s house was put up for sale and traffic was huge for about 2 straight weeks. Sure enough, it is a short sale priced about 15% lower than what other houses were appraising for (arguably deflated as well due to scared appraisers).
I get the gist that people are bargain hunting and know they’re in a “buyers” market. Buyers are going to undercut and sellers without any traffic are going to fold. I know demand should come back with a good economy, but it just seems too hard to overcome the excess capacity from foreclosures.
The way I see it is the lower the prices the more money for other consumption. In other words, falling prices will show up as higher sales elsewhere.
I am a long-term bear on housing. 150 million housing units for 300 million people. That’s too much. US has over-built. I don’t like builders, developers, REIT, Mortgage, though home improvement is different.
robert1234,
Shhh! Not so loud! Nobody is supposed to know that!
If the fed is not going to raise % rates, then does that mean we will have a stagnant economy, with the stock market still going up ?
Er… the easy, low interest rate money from the fed going into stock market speculation, and not into the economy. That causing a move up in the market while the economy withers..
Home prices are still above their historical averages in most of the areas. I suspect we will see 10-15% correction over the next year or two.
SoCal is special: prices are up near the coast line, but are still going down in some remote areas. On average, they go up.
I have been skeptical of this recovery. The main reason that I have been heavily invested in stocks has been my fears of inflation due to gov’t spending. Since the gov’t is about to drop the rebate for first time home buyers, I expect housing prices to drop further.
I thought this was a very interesting article about people spending money they would normally put toward their mortgage. Perhaps it explains the “recovery” to some extent?
http://seekingalpha.com/article/196979-are-strategic-defaults-fueling-consumer-spending
In other news…the Fed votes to keep rates where they are for…wait for it…”an extended period”!
Party on Wall Street! The punch bowl is full! 🙂
“What is it about SoCal that causes this phenomenon?”
Think ‘dead cat bounce’… It happens in most markets. In real estate, it just happens in slow motion because of the slow speed of a ‘trade’.
Looking at housing prices year over year is probably not the best gauge right now. I’d compare housing prices to BOTH the previous year AND the peak of the housing boom. If they’re higher than last year, but nowhere near the peak of the boom, then I’d call it some bargain hunting taking place.
Not mentioned in these figures is the amount of homes held by banks after their owners defaulted. I have seen quotes that there are several years of inventory being kept back for fear of lowering prices even more.
Also not mentioned in virtually all of the articles on housing prices are the benefits of lower prices. Home ownership is one of the surest ways that people can be incorporated into a society and feel they have a vested interest in the economic decisions of government. Renters usually do not make good neighbors.
There is something fundamental about housing prices I don’t understand. WSJ reported yesterday that although housing prices are falling generally, southern california is practically booming again. San Diego homes up more than 7%, LA area up more than 5%. LA spiked to a 300% price increase during the boom, large even for the boom. What is it about SoCal that causes this phenomenon?