Tuesday, February 23, 2010

Housing Market Stabilizes... For Now

The Good

After the collapse in the housing market over the past two years, we are seeing what appears to be the beginning stages of a bottoming (at least on a seasonally adjusted basis).

The Concern

But as Ed from Credit Writedowns pointed out, the bottoming thus far appears to be concentrated in those areas that experienced utter collapse:

What is clear from the numbers is that the markets in which prices are now doing the best are mostly the same ones that had both experienced the greatest carnage and had also experienced a prior price bubble. This includes Phoenix, LA, San Diego, San Francisco, and Las Vegas. You see yearly home price increases in California for example. Moreover, the only four markets where prices increased month-to-month were in the previously devastated bubble markets of Phoenix, Las Vegas, San Diego and Las Vegas.
I agree with Ed that another leg down is not all that unlikely. Along with all the economic problems that remain, there is evidence that the rental market will continue to put downward pressure on the price of homes (valuation issue), while the bottoming we have experienced thus far is due to a number of items that aren't sustainable (technical issue).

Rental Market

Calculated risk details the shadow rental market, which is driving down rental prices nationally:
The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been over 4.7 million units added to the rental inventory.
When rental prices decline, it increases the price (ownership) to rent ratio. The price to rent ratio soared to an unthinkable level during the height of the housing bubble when it became easier to own then rent in some areas of the country. Since then it has collapsed, but still remains above levels seen throughout the 1990's, which Calculated Risk says:
suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.
Sustainability of Recovery

So we're normalizing. But the question is why we are normalizing. Peter Boockvar (via The Big Picture) shares his longer-term concern, which is similar to mine.
The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test.
Source: Case Shiller

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