Kurt Brouwer May 7th, 2008
Source: Wall Street Journal
The Bullish or Optimistic Case For Housing:
This article from the Wall Street Journal shocked me a bit because it suggests that the housing slump has bottomed out. Now, in fairness the piece mainly refers to new housing construction as the chart above spells out. Housing starts, that is construction of new housing units, have fallen sharply. However, housing starts alone do not indicate the health of the real estate market. Housing starts indicate that homebuilders are slowing way down, but that does not indicate that the inventory of unsold homes is going down. Nor does it suggest that home prices have bottomed.
But, let’s check out what the article has to say about housing [emphasis added]:
Is Housing Slump at a Bottom? (Wall Street Journal, May 6, 2008, Brett Arends)
Is it time, at long last, to head down to Florida to start looking at homes?
Maybe.
And the nearby chart [see above] shows one reason why.
It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.
Of course, even if he’s wrong we won’t know for sure for many months.
But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession.
“It is really remarkable how much where we are today looks like the bottom we’ve had in the last three cycles,” Mr. Case says. “Every time we’ve gone below a million starts, the market has cleared at that moment.”
There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well.
“It’s bottom-fishing time, I think,” says Mr. Case. “There’s got to be bargains in Florida, Arizona and Nevada.”
…It’s important to note that real-estate prices in many areas are far from a historic bargain. And where there is a glut, prices — obviously — are likely to stay lower for longer. It is still a buyer’s market. If you are buying, drive a hard bargain.
Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.
First, there are too many other bargain hunters out there.
Is it really true that there are too many bargain hunters out there?
Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.
Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won’t last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.
Finally, in an age of weak currencies and rising inflation, “real” or “hard” assets are in demand. That should include land, bricks and mortar. Sure, real estate isn’t as cheap as it has been at other times in the past. But are Florida homes any more expensive these days than steel, or copper, or gold? I’m not so sure.
So, this is the ‘kinda, sorta, maybe’ bullish case for real estate prices.
The Bearish or Pessimistic Case For Housing:
From the excellent — and far less optimistic — Calculated Risk blog, we have this take on the premise of Brett Arends’ WSJ article:
Housing: Another Day, Another WSJ Bottom Call (Calculated Risk, May 7, 2008)
First, I think any article discussing the housing “bottom” should start by defining what they mean by “bottom”. Are they talking about starts? New home sales? Residential investment? Housing prices? Or some other metric?
Most people think of the bottom in terms of price, and in most housing busts, starts, residential investment, and new home sales all bottom long before housing prices bottom. The linked article seems to confuse a bottom for housing starts with a bottom for housing prices, and that is incorrect.
Second, we can write the supply side of the equation as:
Supply = new units added - units sold + existing units for sale. Looking at just housing starts provides only one portion of the equation (this leaves out rental units too - a substitute product).
Here is a graph of inventory (new and existing) for sale at year end (March for 2008):
Source: Calculated Risk
I think in this respect, Calculated Risk’s point-of-view makes more sense to me than the Wall Street Journal’s. As long as the inventory of unsold homes continues to build up, calling a bottom in housing seems premature. And, housing prices tend to fall as long as supply goes up. It’s the old supply - demand issue. As supply (of homes in this case) goes up, prices would normally fall until demand perks up enough to draw down the excess supply.
The Wall Street Journal article made some decent points though. First, new housing starts are falling sharply so that means home builders are reacting to the oversupply of homes. Also, foreign buyers, bargain hunters and others are out there. To the extent they feel prices have fallen to satisfactory levels, they will buy. And, finally, for many buyers, it’s not the price so much as the affordability. With interest rates on home mortgages trending down, then new buyers are more likely to come in.
But, the oversupply exists now so I think home prices are going to be soft for some time to come.
