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Monday, February 06, 2012


calculated risk calls a bottom

with some qualifications, but a bottom call nevertheless. this is not to be taken lightly. bill is the best working commentator on US housing markets, and his calls have been very good indeed.

in general i might agree. five years ago i wrote, piggybacking on CR's work:

one might expect, if precedent holds, for starts to bottom and inventory (as measured in months of supply) to peak around 2010 -- three years from now -- to be followed at some distance by a bottom in prices. this roughly comports with the new york times analysis, which shows house price downtrends to be persistent events lasting at least 14-16 quarters (ie, well into 2010). calculated risk there also notes, however, that the frothiest markets experienced longer corrections, lasting up to six years.

it turns out that starts may have bottomed somewhere between early 2009 and early 2011. new home sales bottomed in 2010.

i further wrote in 2009:

i rather expect that collar-county housing will more or less totally collapse under all the supply and get really, REALLY cheap as we move through 2011 into 2012 or 2013. particularly if there's a strong second leg to the recession -- as i expect there will be, probably starting in 2010, accompanying the decline of fiscal stimulus spending levels from current (-12%) of GDP -- mid-to-high-end house prices might fall shockingly far. there's such a huge supply problem!

as CR notes, that supply problem is diminishing. though there may be considerable shadow inventory being held back from the market, the data on actual supply makes it clear. so things have gone according to hoyle, as it were, so far -- and if they continue to do so, we probably are close to a low in house prices.

and one would do well to note that, regardless of the reasons why, mortgage rates are unbelievably low and that has made houses very affordable. this from dataquick in december:

The typical mortgage payment that home buyers committed themselves to paying last month was $935. That was up from $931 in November. October's $924 was the lowest since at least 1988. It was $1,055 for December 2010. Adjusted for inflation, last month’s figure was 58.2 percent below the spring 1989 peak of the prior real estate cycle. It was 66.1 percent below the current cycle's peak in June 2006.

that is way, way down. positive carry for buy-to-let investors is now a reality.

we never did get a 2010 "double-dip", though we came close. but the risk case for housing prices, it seems to me, is that expressed by richard koo with respect to the balance sheet recession, fiscal policy and the drive for austerity. this is koo:

In 1996, the year before Hashimoto's fiscal reforms were launched, Japan recorded an economic growth rate of 4.4 percent, the highest among the G7 countries. Encouraged by this strong growth, asset strippers from New York rubbed shoulders with ethnic Chinese investors from Hong Kong in Tokyo hotels in late 1996 as they looked for real estate to buy. They came to Japan because land prices had fallen so fast that, relative to rents, properties had become attractive investments even by international standards. If the government had not scaled back its fiscal stimulus in 1997, the growth momentum from the previous year could have been maintained, and asset prices would likely have formed a bottom with the help of foreign investors.

Instead, fiscal consolidation torpedoed the economy, which proceeded to shrink for five consecutive quarters. This economic meltdown prevented foreign investors from carrying out due diligence, and drove them out of the country. (Due diligence involves verifying the profitability of a potential acquisition through careful estimates of future revenues and expenses. An economic collapse makes it impossible to forecast revenues, rendering due diligence, in turn, impossible.) Their departure, in turn, triggered a renewed slide in asset prices. Instead of stabilizing with the help of foreign investors in 1997, commercial real estate prices started falling again. From 1997 to 2003, commercial property prices plunged another 53 percent, further aggravating the balance-sheet problems of Japan's corporate sector.

This additional 53 percent drop in real estate prices was an unprecedented blow to the Japanese economy. Although property values in 1997 were down substantially from their peak, they were still no lower than in 1985, some six years before the bubble peaked. At that level, most Japanese companies could still absorb the losses and move forward, and for many firms, it was simply a case of paper profits disappearing or turning into small paper losses. But a further 53 percent decline from the levels of 1997 took real estate prices down to levels last seen in 1973. No company (aside from those that were debt-free) could escape serious balance-sheet damage in the wake of such a massive decline in values.

it bothers me that, in spite of the greatest housing bust of all time, price-to-rent ratios haven't really gotten very cheap but have more or less reverted to mean. as noted, long-run ratio means become the mean by the ratio staying below as much as above them -- and if there was ever a chance to reverse the expensiveness of recent years with a period of prolonged cheapness, you'd think this would be it. and indeed perhaps rising rents will drive such a move in spite of flattening house prices. any serious attempt at fiscal austerity in the united states could, i think, bring on exactly such a condition through another serious contraction of mortgage finance and thereby house prices. but political paralysis has prevented, thus far, real action against deficit spending -- which is why the US has outperformed the UK and the eurozone economically.

UPDATE: and more from CR -- noting that real prices (as opposed to nominal) may lag the bottom by as much as five years. given the deleveraging of the housing complex -- which has continued steadily through the most recent z.1 update -- and the disinflationary impetus deleveraging imparts on the economy as a whole, i'm not sure there's much room for nominal increases if real prices are down unless government deficits are made to pick up markedly from the current ~9% of GDP.

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