I was a big bear on housing for a long time. In August of 2006 I sent out a letter to clients that said:
“The credit driven housing bubble remains the greatest risk to the equity markets at this time.”
I used to have blow out arguments with my friends, colleagues and parents about the housing market and how the fundamentals had become detached from reality. At the time, most people didn’t think house prices could fall. I won’t try to claim that I was some sort of sophisticated real estate investor at the time because I certainly wasn’t. But there seemed to be an undeniable disconnect. How could the appreciation of housing become disconnected from inflation (which is directly tied to incomes) when housing makes up the most important item on the consumer balance sheet? It made no sense. My argument wasn’t terribly complex or sophisticated. But it was right.
Lately, I’ve become much more neutral on housing. I have been telling people to actively buy homes they are planning to LIVE IN whereas several years ago I was telling people to avoid home purchases altogether. So I’ve become much more constructive about residential real estate given the price declines and the improving market fundamentals. But I still don’t understand the recent surge in confidence here. Some market pundits are now declaring the recovery here. As though it’s an undeniable fact. There’s just one problem. The evidence doesn’t support these claims that the recovery has occurred before the fact.
I’ll let the charts do the talking. This is a pretty all encompassing view of residential real estate. If you have another view or items that you think prove me wrong here I am all ears.
Let’s start with prices. A few indices. First, the National Composite Home Price Index. It’s about 5% off its bottom, 45% off its highs.
Case Shiller. Similar story. Flat-lining at best:
New home sales. Off the all-time lows, but lower than any time in history prior to this recession and over 70% off the highs:
Housing starts. Same story. Still a total disaster.
Home ownership rate in the USA. At a 10 year low.
Total private construction spending on residential real estate. Again, off its lows, but barely above the flat-line:
How about employment in construction? Flat.
I don’t intend to rain on the economic parade. I’ve been saying we’d avoid a recession in 2012 for a long time now and the fact that housing stopped bleeding has played a big role in that call, but let’s not go crazy and start declaring victory in the real estate market when the evidence very clearly shows that real estate remains mired in a deep slump. It’s great that there are signs of life and it’s stopped collapsing, but let’s maintain some perspective here as well.