Thursday, August 27, 2009
There's a very well done story by Barbara Kiviat over at Time Magazine on the subject that is on everyone's mind these days - whether or not the housing market has hit bottom.
While the long-term nature of housing market bottoms and the distinction between a bottom in property sales versus a bottom in prices were, unfortunately, absent from the discussion, it does provide a good summary of the conflicting data recently released.
What should we make of the housing market now? The past few days have seen a cascade of new data about house prices, home sales and troubled loans. The broad takeaway is that the market continues to steady. But behind the headline numbers are plenty of signs that the sector is still fragile — and that our housing-related troubles are far from definitively over.That Case-Shiller home price data really seems to have been the key factor in the recent surge in optimism that the housing market has hit bottom.
The first batch of numbers instilling hope that we've arrived at a bottom shows that house prices are beginning to creep back up. The S&P/Case-Shiller index of home prices in 20 cities saw a 1.4% gain between May and June. That's only the second time the index has risen since the summer of 2006 (the other time was the month before). Once you adjust the data for seasonality — the fact that houses tend to sell for more money in the warmer months — the increase in July was actually the first since May 2006. Home-price data from the Federal Housing Finance Agency, which tracks homes with mortgages owed or guaranteed by Fannie Mae and Freddie Mac, also showed a May-to-June gain, of 0.5%. (See pictures of Americans in their homes.)
It's just too bad that there hasn't been enough emphasis on what housing market bottoms look like (i.e., long and drawn out) which has allowed animal instincts amongst buyers to conclude that significantly higher prices might just be right around the corner.
Really, you don't lose five or six bidding wars on distressed properties and then resolve to outbid any other buyer the next time around simply because you want a place for your family to live. This is clearly a resurgence of the real estate frenzy of years ago, albeit at much lower prices. Of course, after the last two decades of monetary policy, the fact that people are now "trained" to expect another bubble to follow the one that just burst - this doesn't help the situation.
Here are the other recent real estate data along with all the important caveats:
The other number stirring up significant optimism about housing is the Commerce Department's measure of new-home sales. In July, for the fourth month in a row, the number of new homes sold, on a seasonally adjusted basis, rose. July's jump, of 9.6%, seems downright striking.If you've been sitting on the fence for the last six or seven years and, for the sake of a more harmonious family life, want desperately to get into a more reasonably prices home (that is, compared to prices over the last six or seven years) while interest rates are at generational lows and the government is giving away $8,000 to help in the cause, then buying property makes sense today in many areas.
Data on new-home sales, though, are notoriously imprecise and volatile. The margin of error on July's 9.6% gain, for instance, is plus or minus 13.4%. In other words, strictly speaking, the Commerce Department can't be sure the figure didn't actually go down. For that reason, new-home sales are best looked at over five or six months. There's still reason for optimism: a four-month string of increases is starting to get to the point at which one can legitimately call the trend significant. That's especially true when overlaid with data from the National Association of Realtors that show sales of previously owned houses are going up too. Still, what happens with new-home sales in the next few months will be incredibly important context.
Even if house prices and sales are on the mend, that doesn't equate to a clean bill of health for housing overall, since woes in the mortgage sector continue to surface. Another number out this week was the delinquency rate among loans backed by the federal housing agency Freddie Mac. The number of people 90 or more days behind on their mortgages continues to rise — in July, 2.95% of Freddie Mac loans were late, up from 2.78% the month before, and 1.01% a year ago. Furthermore, a new study from the credit-rating agency Fitch found that among people falling behind on payments, fewer and fewer are able to catch up. Looking at a set of mortgages that had been bundled into securities, Fitch calculated that as of July, just 6.6% of delinquent borrowers with prime loans were catching back up on payments. Between 2000 and 2006, some 45% of such borrowers did.
One culprit, of course, is the economy. A person who has lost a job is going to have a tougher time making the mortgage payment. On top of that, a lot of the moratoriums on foreclosures that lenders put into place while the Obama Administration figured out its loan-rewrite program no longer exist. The foreclosure movie was on pause for a while, but that's no longer the case.
But, don't be surprised if, after government incentives are wound down and, over time, the current jobless recovery makes all previous jobless recoveries pale in comparison, even today's prices for low-end housing start to look a bit high.
Bill over at Calculated Risk has a nice housing market bottom commentary as well.