A pick-up in this spring’s housing data doesn’t seem to be translating to much in terms of housing prices. Case Shiller reported another decline in housing prices through January as year over year declines showed a -3.9% drop. They said:
Data through January 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January. Sixteen of 19 MSAs also saw home prices decrease over the month; only Miami, Phoenix and Washington DC home prices went up versus December 2011.
“Despite some positive economic signs, home prices continued to drop. The 10- and 20- City Composites and eight cities – Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa – made new lows,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Detroit and Phoenix, two cities that have suffered massive price declines, plus Denver, saw increasing prices versus January 2011. The 10-City Composite was down 3.9% and the 20-City was down 3.8% compared to January 2011.”
If we take a step back and look at some longer-term data we can put this in perspective though. I like using the Shiller CPI adjusted housing price data as well as the owner equivalent rent data from the monthly CPI reports. These two charts will help put the declines in perspective. As you can see below we’ve made significant progress in the mean reversion process. According to both indicators housing prices are overpriced by roughly 15%. This likely means there is more downside risk in the coming years, but the bulk of the declines are definitely behind us.
I think the more likely scenario is the standard post-bubble workout period where prices will not “bottom” (as many have called for), but will rather flat-line for many years. Pull up a chart of the Nasdaq or Nikkei or Shanghai or any other number of bubbles if you’re trying to imagine what I am referring to. What would be HIGHLY unusual is for prices to snap-back or “bottom” in a dramatic event process that leads to a surge. Rather, we’re far more likely to see the high inventories work off slowly while prices moderate and incomes grow to bring the market back to some semblance of normalcy.
The bottom line – if you’re buying a home to LIVE in then buy it and LIVE in it. If you’re buying a home to invest in then you’re gambling. If you’re an actual/professional real estate investor then you don’t need my advice….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.