Monday, January 03, 2011

Housing Price Trends

Despite dire warnings for the just-finished year 2010, the S&P500, according to today's Wall Street Journal, posted a 15.06% return for the year.

Yet home prices continue to be a sobering economic backdrop for the US economy in 2011. Thursday's Journal featured an editorial by Peter Schiff entitled Home Prices Are Still Too High.

Schiff details the meteoric rise of the Case-Shiller 10-City Index gains of an average of 19.2% per year from January, 1998 to June, 2006. Schiff contrasts this with the index's co-creator, Robert Shiller's calculation that the average US home price increase for 1900-2000 was only 3.35% per year. Using this datapoint, Schiff's Big Point is that the current Case-Shiller Index "remains well above the long-term trend."

Doing the math, Schiff contends that "this would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line."


Schiff adds these observations,

"From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.

In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with."

Listening to quite a few economists, one is reminded that, while sectors like technology have continued to grow, housing in the US remains mired in recession, or at least a doldrums. Schiff makes reasonable points concerning the government's continued actions to unrealistically prop up housing values and (unfairly)discriminate in favor of current homeowners, rather than prospective ones, at lower prices.

That 20.3% further decline, even if only in the once-hottest real estate growth markets, would seem to portend some economic pain for 2011. And just a few weeks ago, pundits, including S&P's David Blitzer, have warned of the second part of the notorious 'double-dip' recession.

Sometimes equity markets feast on short-term trends, amidst larger, longer and more painful economic trends. There was at least one equity bull market during the Great Depression of the 1930s.

With an allegedly more fiscally conservative Republican House majority and the US at record levels of foreign-held debt, it's unclear how much longer the federal government can mask the true weakness of the housing markets. We know that the nation's large commercial banks continue to sit on many properties which should be foreclosed and resold on public markets, which will almost certainly drive prices down again across many areas in the US, thus causing more damage to household net worths and, probably, spending.

Whether this purported housing sector weakness, as Schiff suggests, will spill over into the general economy in 2011, is something to seriously consider.

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