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MacroMarkets June 2010 Home Price Expectations Survey

Friday, June 25th, 2010

On Wednesday (June 23) MacroMarkets released its June Home Price Expectations Survey results.

Here is the Press Release (pdf); the accompanying chart is seen below:

As one can see from the above chart, the expectation is that not only has the residential real estate market hit a “bottom” as far as pricing; but that steady yet mild appreciation will occur through 2014.

The survey detail is interesting.  The most “bearish” of the forecasters is seen as Gary Shilling, with a forecast of 18.78% cumulative price decline through 2014.  A couple of other forecasters are close to this forecast, including John Brynjolfsson, with a forecast of a 18.08% cumulative price decline through 2014; and Mark Hanson with -17.37%.  Of note, all three of these most “bearish” forecasters see the preponderance of losses “front-loaded” (i.e. occurring over the nearest years, 2010-2012).

For a variety of reasons, I believe that even these “most bearish” of forecasts will prove too optimistic in hindsight.  Although an 18% decline is substantial, from a longer-term historical perspective such a decline is rather tame in light of the wild excesses that have occurred over the years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people have an optimistic view at this time regarding future residential real estate pricing trends, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, there exists outsized potential for a price decline of severe magnitude, unfortunately.

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Residential Real Estate Market Characteristics

Thursday, June 3rd, 2010

I found this MacroMarkets web page to be an interesting characterization of the U.S. residential real estate market.

Here is an excerpt:

“With an aggregate capital value of $16.6 trillion at the end of 2009, real property owned by United States households comprises the largest real estate marketplace – and one of the largest asset classes in the world.”

There is also investment performance information on the page, with a table showing relative performance of various asset classes.  Of note, the table encompasses a timeframe of June 1987 through December 2009.

In my opinion, one needs to be very careful when assessing price data of residential real estate due to a variety of factors.

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MacroMarkets Home Price Expectations Survey

Monday, May 24th, 2010

On May 19 The Wall Street Journal had an article about a new housing survey called the MacroMarkets Home Price Expectations Survey.

From the MacroMarkets.com website:

“MacroMarkets has assembled a distinguished panel of over 100 economists, investment strategists, and housing market analysts who are surveyed every month regarding their 5-year expectations for future home prices in the United States.”

The Wall Street Journal article summarized the May 2010 survey results as follows:

“The analysts surveyed by MacroMarkets on average expect home prices, as measured by the S&P/Case-Shiller national index, to rise about 12% in the five years ending Dec. 31, 2014. As of Dec. 31, that index was down about 28% from its peak level in mid-2006.”

However, if one looks at the detail (pdf), one sees a significant differing of opinions, with the highest cumulative gain (through 2014) expected to be 36.74% and the lowest a loss of 17.99%.

This survey should be interesting to watch as it provides a relatively broad view of housing price expectations on a recurring basis.

As for the survey results – I find them interesting.  The overall consensus view on housing seems to mirror this survey’s average forecasted results – that of mild but steady home price appreciation over the next few years.

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I’ve written extensively about housing, as it is of the utmost importance to our economic situation.  Our national real estate problems are vastly complex and highly problematical.  Perhaps my overall view on the situation and the path of housing prices is best summarized by my January 8, 2010 post.

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Home Prices Vs. Gold

Wednesday, April 28th, 2010

On April 23, chartoftheday.com had an interesting chart, shown below, that compares the median home price vs. the price of Gold:

Traditionally, houses have been viewed as “hard assets.”  However, as one can see above, their recent (from a long-term historical perspective) price pattern seems more geared to that of a “paper asset” – i.e. strong performance during the ’80s and ’90s, while significantly underperforming Gold for roughly 7 years.

There are many other observations and interpretations that can be made from this ratio as well.  It certainly “frames” home prices in a different light, especially from an investment standpoint.

Going forward, it will be interesting to see how this ratio evolves…

________

My previous posts on Gold can be found under the “Gold” tag.

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“I Can Own Cheaper Than I Can Rent”

Thursday, March 4th, 2010

One of the commonly stated reasons for buying a home now, as opposed to renting, is that “I can own (a home) cheaper than I can rent.”

This is no doubt the case in many areas of the country, especially those that have experienced large declines in residential real estate prices.

Is this condition, where one can own cheaper than renting, a valid justification for buying a home?

I would argue that it is not, for many reasons.  Here are three of the many reasons:

First, “I can own cheaper than I can rent” usually refers to the condition that the monthly mortgage payment is cheaper than the monthly rent payment.  Is this the main criteria that one should use when evaluating what is likely the largest financial commitment one will ever make, that of buying a house?  Of course not -  there should be many factors that weigh into such a decision.

Second, as indicated in the real estate valuation story in my last post, historically when house prices fell to or below the equivalent rent levels, a “bottom in (home) prices” had either been realized or was close.   However, as I have written in previous posts, our national real estate situation is far dissimilar to that of prior years.  As such, comparisons need to be adjusted accordingly.

Third, one should be very mindful of one’s ability to sell real estate in today’s real estate market, should one need to.  Normally, the ability to sell real estate in a timely fashion, and at a “decent price,” is not a major issue.  However, for many people currently looking to sell a house, it has become a very significant factor.  While I could post some statistics with regard to unsold home inventories and the like, I will not do so as I feel these statistics are significantly skewed (and as such unrepresentative) due to a variety of factors.

For these three reasons, as well as many others, I feel that on an “all things considered” basis, the fact that one “can own cheaper than renting” in many areas is to be considered more of a “red flag” than a “green light” as far as buying a house is concerned.

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An Interesting Article On Housing Prices

Tuesday, March 2nd, 2010

I came across an interesting Fortune Magazine story dated February 16 titled “Where’s housing headed? Follow rents.”  The link can be found here.

Of course, given my previous posts on residential real estate I don’t agree with many aspects of the story, especially the statement “Given that analysis, it’s likely that prices will fall another 5% or so nationwide.”

However, I do find the story interesting as it portrays a case for the commonly-held belief that the residential real estate market decline is nearly over.

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SPX at 1121.91 as this post is written

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Characteristics Of The Housing Bubble

Friday, January 8th, 2010

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals.  It shows the equity and mortgage debt situation.  The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble.  Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation.  I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years.  Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful.  However, (economic) life is not that simple.

From an ”all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst.  It appears to me that it has somewhat deflated.  I base this view on a variety of fundamental and technical factors. 

Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense.   I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion.  The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity.  The second possibility is a collapse of the residential real estate market with accompanying economic repercussions.  As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble.  Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006.  Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

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Posted in Bubbles (Asset), Intervention, Real Estate, Sustainable Prosperity | 1 Comment »

More On The Fannie/Freddie Developments Of December 24

Thursday, January 7th, 2010

Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac.  This editorial provides some new perspectives on the matter:

http://online.wsj.com/article/SB10001424052748704152804574628350980043082.html

My original comments on these developments was on December 28.

I feel it is critically important to understand the extent of intervention as it pertains to the housing market.  Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts. 

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Redefaults

Tuesday, June 2nd, 2009

This was an interesting editorial in The Wall Street Journal a few days ago concerning the “redefault” rate:

http://online.wsj.com/article/SB124338503008056785.html

These statistics are problematical, especially if one believes the economy will stagnate or worsen from this juncture.

It also raises the question as to the effectiveness of intervention measures on default rates and housing prices.  Many of the current interventions are geared toward stemming foreclosures, either directly or indirectly.

For those who have not yet seen it, David H. Smith has put together a Household Initiative Plan, found here:

http://householdinitiativeplan.blogspot.com/

I find it appealing in many regards; perhaps chief among them is that it promotes the idea of having homeowners spend their own money on their own real estate, instead of solely relying on government bailouts and interventions to assist financially troubled homowners. 

In ways it’s akin to the investment idea of investors having ”skin in the game.”

I’ll be commenting a lot more on real estate on a going-forward basis, given its importance and that there are a lot of complicated dynamics in that market.

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