Posts Tagged ‘house prices’
A Huge New Call On Housing That You Must Pay Attention To
Pundits and bloggers are making predictions all the time, and usually they should just be ignored.
Today though, the popular economics blog Calculated Risk published a post called The Housing Bottom Is Here. You should definitely pay attention.
Now first, let’s go over the argument.
To start, the post makes the obvious—yet all too frequently neglected—pointed that when it comes to housing there are two “bottoms.” The one that relates to economic activity and jobs is housing construction/new home sales. The other bottom refers to pricing.
In terms of new construction/total home sales, by all accounts we seem to have turned the corner.
New houses have achieved liftoff lately.
And as for total home sales, they’ve now absolutely flatlined.
As for prices—which is arguably the more difficult case to make—Calculated Risk writes:
The problem with using the house price indexes to look for a bottom is that they are reported with a significant lag. As an example, the recently released Case-Shiller index was for November and the index is an average of September, October and November – so it is a report for several months ago. The CoreLogic index is a little more current – the recent release was for December, and CoreLogic uses a weighted average for prices (December weighted the most) – but that is still quite a lag.
Both of those indexes will bottom seasonally around March, and then start increasing again.
There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).
Now you may have disagreements here, but you should absolutely pay attention when Calculated Risk makes a call like this.
The Calculated Risk archives go back to January 2005, so we’re talking at least 7 years of day in/day out coverage of the economy, and the site has always had a special focus on housing.
From 2006-2008, the blog was famously co-authored by “Tanta” (she passed away in December of 2008), who really put the blog on the map with her incredible knowledge of the housing and mortgage markets—knowledge that allowed her to anticipate the bust from miles away.
Throughout this, the main author—the totally un-egotistical Bill McBride (his name is not featured prominently—has plugged away, meticulously chronicling just about every economic indicator there is, from housing starts, the the Architectural Billing Index, the restaurant index, the regional Fed surveys, the ISM, and so on. And by diligently following these measures, he’s gotten to know them REALLY WELL.
Now, speaking from personal experience here, we can say that one of the best advantages you can get in the business of writing about economic conditions is familiarity with the data. So if you’ve covered lots and lots of jobs reports, you’re going to have a much easier time knowing what data is key to suss out, and when you’re seeing a turn.
Since Calculated Risk puts everyone to shame on this front, the blog regularly identifies key twists and turns.
For example, after years of super-bearishness on housing-related activity, it was early last year that McBride started talking about residential construction actually being a net positive contributor to GDP—the first time since 2005.
Also, because Calculated Risk keeps the best data of any blog, it’s always the first with now-classic charts like this one, every time a new jobs report comes out.
The bottom line is: Calculated Risk is exactly what you want in economics reporting. Totally non-ideological, non-book talking, data-driven, incredibly experienced, and just knowledgeable as all get-out.
When a site that got started by famously chronicling the housing bust says that housing is at a bottom, you listen.
Now read CR’s full post here.
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See Also:
- Only One Housing Market In America Saw Prices Gain In November…
- RITHOLTZ: A Housing Bottom? You’ve Got To Be Kidding
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House prices fell 1.3% last year
The latest figures from the Land Registry show that house prices fell by 1.3 per cent in England and Wales in 2011, with the average property costing £160,384 in December.
Prices remained stable at the end of the year, with no change between November and December 2011.
The only place in England and Wales where house prices increased in December was London, where they rose by 0.8 per cent to an average of £345,298.
Over the year, property prices have increased by 2.8 per cent in the capital with estate agents reporting an increase in buyers from overseas who are exiting countries involved in the eurozone crisis, including Greece, Italy and Spain, in order to finder a safer place to invest.
Hartlepool recorded the biggest fall in property values in 2011, with an annual decline of 17.5 per cent.
For the north-east as a whole, house prices fell 7.1 per cent year-on-year in December 2011, more than any other region.
In the north-east the average house cost £99,000 at the end of the year.
The Land Registry also reported a fall in the number of completed sales in 2011.
Meanwhile, a survey by estate agent Rightmove suggests that 60 per cent of people who are moving house believe it is a buyers’ market, while just 13 per cent believe the balance of power is in sellers’ hands.
People in Scotland are most likely to perceive the housing market in this way and Londoners are the least likely.
Miles Shipside, director of Rightmove, said: “While parts of the stock-starved South, and London in particular, are feeling relatively bullish about prices, the turmoil of the last few years has wreaked havoc in parts of the buyer-blocked North.”
Rightmove’s ‘Consumer Confidence Survey’ was based on 32,111 online responses in January 2012.
ROBERT SHILLER: A Housing Bottom? What Are They Thinking?
I spoke with Yale professor Robert Shiller in Davos earlier this week.
Shiller has correctly identified (in advance) two major price bubbles in recent decades–the stock market bubble of the late 1990s and the housing bubble of the late 2000s.
One of the key attributes of most bubbles is that, when they finally burst, prices tend to “overshoot” on the downside, crashing well below fair value until all the exuberance is wrung out of the system.
So is that what’s going to happen to house prices this time? Or, as many people think, are house prices finally “bottoming” and getting reader to blast higher again?
BLODGET: A lot of people have just called the bottom in the housing market in the United States, and there’s been some okay data recently. Is that your take? That finally housing prices are bottoming?
SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level.
BLODGET: One thing that people are saying is that we have finally absorbed the excess inventory, and with just the general growth of the population and families in the United States, we’re getting close to where we are meeting supply and demand. Is that true?
SHILLER: Well, one simple model of home prices is the construction-cost model. Traditionally, home value was about 15% land and 85% construction costs. The land component has gotten bigger with the bubble. That might be kind of a long run equilibrium. If you believe that, that’s an oversimplified model, then it probably suggests we’ll just stay where we are.
BLODGET: And where are house prices relative to long-term historical trends? I’ve tracked at a lot of measures and it looks to me like we’re finally starting to close in on fair value. But it’s not as though we’ve crashed way below fair value.
SHILLER: It depends what you mean by fair value. If you take account of the very low interest rates, you might think that housing prices should be higher than historically. But then on the other hand, that model hasn’t worked very well historically. That would be like the Fed model applied to housing. But it doesn’t seem to fit. But I think the construction costs model says that housing should track the costs of construction. It doesn’t depend on interest rates, doesn’t depend on the economy. That’s a model, I’m not saying it’s the only model.
BLODGET: And what about price-to-income and price-to-rent?
SHILLER: Those things have come down a lot. I don’t know exactly where the middle is but it’s not like we’re overpriced anymore. Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.
BLODGET: And you’re an expert in bubbles and I’ve looked at some on your work going back several hundreds of years on housing. Have you ever seen a bubble where there wasn’t a major overshoot?
SHILLER: Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics. We’d like to be statisticians but in fact the world is always changing on us. So we end up having to use judgment. We’re not very good at that.
BLODGET: Going back to the point about interest rates… People make a huge to-do about the affordability of houses. In your research on house prices, do interest rates actually matter? Or is mortgage finance such a new concept in the history of home ownership that you just don’t have enough data?
SHILLER: I think historically, if you look at it, interest rates don’t seem to matter very much in determining home prices. In terms of forecasting, which you’re asking me to do, to forecast the change, the big thing in forecasting home prices is momentum. It’s different than the stock market. So if it’s been going up it will continue going up and if it’s been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down.
BLODGET: That’s encouraging! And what about stocks? You pioneered or at least have really popularized the “cyclically adjusted price-earnings ratio,” which looks at prices relative to smoothed earnings over ten years. Recently, over the last few years, a lot of people have come back and said, oh no, it should be sixteen years or it should be five years. Your friend Jeremy Siegel says no, you shouldn’t normalize them at all and so forth. Are you still comfortable with the CAPE as a good measure of base value?
SHILLER: It’s a powerful predictor of the market. John Campbell and I, my former student who is now the chair of the econ department at Harvard…
BLODGET: Congratulations, you taught him well!
SHILLER: That’s why I am proud of my former students! We found that price divided by ten year average earnings predicts price changes. It really does. Over a long time. It may not say what will happen next year. Right now that ratio is kind of high in the United States and that is a suggestion that its not the greatest, but it’s not super high. So if you look at what our model predicts, it would still predicts positive, good substantial returns, better than the 2% on ten-year Treasuries.
BLODGET: A lot of people argue to me that the CAPE includes 2009 which was a terrible year and includes other aberrational years and that’s skewing the average somehow. Is that not the case?
SHILLER: The analysis Campbell and I didn’t include that year because we did it in 1996. But you have to look at the anomalous years. They have to be part of the analysis. Sometimes you have very big movements in one year.
BLODGET: And that’s the whole point of the analysis–to smooth it out.
SHILLER: Right. I don’t know why people keep using one year earnings. That is the time it takes the earth to go around the sun. I don’t see any other significance.
BLODGET: Part of your argument there is that profit margins tend to regress to means and right now we’re at an all-time high profit margin or very close. Do you think that profit margins can continue going up for U.S. companies?
SHILLER: Profits have been very volatile over the last ten years. They look much more strongly mean-reverting than in the past. So that suggests that the current strong profits might turn out to be misleading.
BLODGET: When you think about smoothed earnings as a way of predicting prices, do you think about it as a predictor of what the price is going to do or is it better to think about it as the likely ten year return for the market is ‘x’ at this particular price?
SHILLER: You could go either way… I think that the returns that we could see going forward are not lousy, they’re low…
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The Weekly Economic Indicators: Still All Looking Good
First, as to the monthly reports, home sales continued poor, but consumer confidence jumped back further, completely regaining its pre-debt debacle levels. In the rear view mirror department, 4Q 2011 GDP was +2.8% although some internal components were weaker. Those few sources who thought a new recession might begin by the end of 2011 were almost certainly wrong.
Turning now to the high frequency weekly indicators:
Weekly employment-related data was mixed.
The BLS reported that Initial jobless claims rose by 25,000 to 377,000, which is still an excellent in comparison with almost any report in the last 4 years except for the week preceding. This is the last report affected significantly by seasonality. The four week average declined by 1500 to 377,500. This is close to the lowest level since mid-2008.
The American Staffing Association Index rose by 3 to 87 last week, the best January reading since 2008, and significantly ahead of last year.
The Daily Treasury Statement showed that withholding for the first 17 days of January 2012 was $138.6 B vs. $132.7 B a year ago. Adjusting +0.27% due to the 2011 tax compromise, for the last 20 reporting days, $162.0 B was collected vs. $156.9 B a year ago, a gain of +3.3%.
Housing data was mixed:
The Mortgage Bankers’ Association reported that seasonally adjusted purchase mortgage applications decreased 6.5% YoY and was also down -9.7% from one week ago. The overall trend remains flat since June 2010. Refinancing fell -5.2% in the last week.
For the seventh week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +3.7% YoY. This is the best reading in close to 5 years.
Sales and transportation continued positive:
Retail same store sales were relatively weak. The ICSC reported that same store sales for the week ending January 21 increased 2.8% YoY, but were down -1.4% week over week. Shoppertrak, did not report, however, Johnson Redbook reported a weak 2.5% YoY gain, the weakest in 6 months.
The American Association of Railroads reported an increase in weekly rail traffic for the week ending January 21, 2012, with U.S. railroads originating 287,734 carloads, up 1.6 percent compared with the same week last year. Intermodal volume for the week totaled 219,706 trailers and containers, up 3 percent compared with the same week last year.
Money supply and Credit spreads were also positive:
M1 increased +0.4% last week, and +2.3% month over month. It is also up 18.9% YoY, so Real M1 is up 15.9%. This is about 5% off peak YoY gain at the end of last summer. M2 was up +0.2% week over week, and up +1.4% month over month, and up 10.1% YoY, so Real M2 was up 7.1%. This is about 3% less than its YoY reading at the crest of the tsunami.
Weekly BAA commercial bond rates declined .01% to 5.20%. Yields on 10 year treasury bonds rose .01% 1.96%. Falling spreads on lower rates is the best signal of improvement, although it is only for two weeks. This spread had a 52 week maximum difference in October and has been tightening slightly in the last few weeks.
Gasoline usage in particular continues to be much lower YoY:
Oil rose slightly to close at $99.56 a barrel on Thursday. This is about at the recession-trigger level calculated by analyst Steve Kopits (adjusted for general inflation). Gas at the pump was flat at $3.39. Measured this way, we are just at or slightly above the 2008 recession trigger level. Gasoline usage, at 8098 M gallons vs. 8632 M a year ago, was off -6.2%. The 4 week moving average is off -6.4%. Since last March the YoY comparisons have been almost uniformly negative, and substantially so since July. It’s at least possible some of this reflects the unusually warm winter most of the country has been experiencing.
Now let’s turn to new high frequency indicators designed to track the global slowdown/recession:
The TED spread is at 0.500 down from 0.520 week over week. This index is slightly above its 2010 peak, but has declined from its 3 year peak of 4 weeks ago. The one month LIBOR is at 0.270, down .007 from one week ago, below its 12 month peak of three weeks ago, and also remains below its 2010 peak.
The Baltic Dry Index at 726 continued to plummet -136 as it has for the last 4 weeks and further continues to decline from its October 52 week high of 2173. The Harpex Shipping Index was declining for a full year, but at 394 is above its 52 week low of 389 three weeks ago. It declined -2 last week. Please note that these two indexes are influenced by supply as well as demand, and have generally been in a secular decline due to oversupply of ships for over half a decade. The Harpex index concentrates on container ships, and has been leading at recent tops and lagging at troughs. The BDI concentrates on bulk shipments such as coal and grain, and has been more lagging at the top but has turned up first at the 2009 trough.
Finally, the unweighted Shadow Weekly Leading Index was slightly negative this week. Next day, so was the ECRI WLI. Once again I not surprised.
Global worries have continued to abate. In the US virtually all the news is positive, but some weakly so, and mortgage applications continue to bounce up and down along their two year bottom. There remains no sign of any present or imminent downturn in the economy right now.
Have a good weekend.
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N&P launches 3.99pc fixed-rate mortgage
Norwich & Peterborough Building Society (N&P) has launched a low rate, low fee mortgage to attract buyers who plan to stay in their property for a longer period of time.
The ten-year fixed rate mortgage offers an interest rate of just 3.99 per cent APR, making it one of the cheapest deals on the market.
It is available to borrowers with 75 per cent loan-to-value ratio and the fee is just £295.
Borrowers will receive a free valuation and either free legal fees for remortgages or £200 cashback.
N&P product manager, Richard Barker, said: “We know that this competitive rate will be welcome news for those who wish to fix for a longer period of time giving them the certainty of what their monthly payments will be for the duration of their loan”.
Earlier this month, Nationwide Building Society launched a two-year fixed-rate mortgage with a loan-to-value ratio of 90 per cent for low-deposit buyers.
Borrowers willing to pay a £900 fee will receive a rate of 5.29 per cent or the mortgage is available with no fee at a rate of 5.69 per cent.
For those with a bigger deposit, a rate of 2.99 per cent is available at 60 per cent LTV with a fee of £900.
Despite the flurry of new offers in the market place providing welcome competition, the Council of Mortgage Lenders (CML) warned that the uncertainty created by the ongoing eurozone crisis makes it difficult to predict how the mortgage market will develop in 2012.
In December 2011 gross mortgage lending totalled £11.7bn, 12 per cent higher than December 2010, but a 12 per cent decline compared with the previous month.
Some analysts are predicting that house prices could fall by up to 10 per cent in 2012.