Tuesday, June 26, 2012

Housing Prices at the Bottom? ... Even If So, There's a Long Road Ahead

Before we can start to climb out of a hole, we have to stop digging.

But maybe, just maybe, that hole digging exercise is just about over for the U.S. housing market. Let's hope so, even while acknowledging that it's indeed a very deep hole we've dug.

We All Start Small says this:

"Perhaps housing prices have finally hit bottom and even begun to recover. That is certainly the view of a growing number of experts of various kinds, including the very rarest kind – the experts who have avoided such declarations until now.

The latest hopeful evidence comes from the S.&P./Case-Shiller index, released Tuesday, which shows that sales prices reported in April were higher than those reported in March in 19 of 20 major metropolitan areas. Detroit was the exception.

Prices still were down 1.9 percent compared with last April, but the pace of decline has slowed considerably. As the blog Calculated Risk noted, that’s the lowest year-over-year decline since the expiration of the first-time-home buyer tax credit.

But it’s worth keeping a few things in mind. First, we are still standing at the bottom of a very deep hole.
Source: Standard & Poor’s

Second, the April Case-Shiller index is derived from home sales that closed between February and April, which means that many of the deals were struck even earlier than that. This, in other words, is a report about what happened during the winter. Since prices usually start to rise with the temperature, a strong winter generally is seen as an auspicious start to the year. But this was an unusually warm winter, which seems to have given a temporary and misleading boost to a range of economic indicators.

Finally, one big reason that sales prices are stabilizing is that the supply of homes for sale is plunging. The inventory of existing homes for sale has declined for 15 straight months. A lot of people, and companies, are waiting to sell, hoping that prices are turning around. Quite a few have to wait until prices turn around, because they are underwater, owing more than the current value of their home. And as they return to the market, they are likely to dampen, and perhaps even reverse temporarily, any rise in prices."

For more details on today's release, please also see A Look at Case-Shiller by Metro Area  and U.S. home prices jump 1.3% in April: Case-Shiller.

My Take

Housing prices and sales remain in a very deep hole but perhaps it won't get a whole lot deeper. If true, that, of course, would be good news.

However, it's going to be a very long time, if ever, before what many people consider "normal" housing conditions return.

And my long term view is that that's a good thing. We don't need any more bubbles.

For too long many of the world's governments and citizens, including Americans, have considered debt as extremely cheap and easily accessible. A free lunch of sorts.

We've now learned the hard way that it's neither cheap nor free. And no longer is it easily accessible.The "bond vigilantes" are back in town for real.

In fact, the presence of debt subtracts from future economic growth, simply because it has to be repaid with interest. And that money can't be used for either present consumption or future investment.

In any event, it's nice to have some reasonably clear indication that the bottom in housing may be near, if not already here.

Thanks. Bob.

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