Home Prices

Home prices fell less than forecasted in April. The 10 City and 20 City indices fell 18% and 18.1% (year over year) respectively. This data is a bit dated, mortgage rates bottomed in April. It will be interesting to see how the market responds to higher mortgage rates going forward.

Average Freddie Mac 30 Year Fixed rate (survey rate)

March: 5.00%

April: 4.81%

May: 4.86%

June: 5.42%

Where is the Housing Market Bottom?

Back on May 26th, I suggested that the housing market would bottom when the lines on the above graph met again. My basic premise was (is) that housing prices should not significantly outperform inflation over long periods of time. A home is a depreciating asset: there are constantly new homes being built and upkeep of a home tracks inflation.

Feel free to debate my choices of housing price index and inflation measure, but I don't think the conclusions would be materially different.

The model incorporates the growth rate of the indices since the housing market top in the middle of 2006. Holding the growth rates constant, home prices and inflation would meet in August of 2010. At that point, prices would be another 19.2% lower than the last reading (March, 2009). An instantaneous drop of 26.2% would do the same job. It is easy to see that dragging this out will have no benefit. The foreclosure moratoriums and shadow inventory are only delaying the inevitable.

At this point, it appears that we have seen the bottom in mortgage lending rates (see previous posts on mortgage payment levels & affordability). The graphs below track rates and spreads, measuring the absolute level of borrowing and the incremental return required for mortgage lending. Help on this front should not be expected.

More On Home Prices

I have commented in the past that one should not expect home prices to outperform inflation in the long run. I stand by that comment.

The above graph tracks CPI versus the Case/Shiller 10 City index. Both indices have been reindexed to 100 on January, 1987 (start date of Case/Shiller). I think that the housing market bottoms when the 2 lines meet again.

Home Prices: Case/Shiller

March data out today: 10 City Composite down 18.65%, year over year & 20 City Composite down 18.70%, year over year.

These numbers were a bit worse than consensus, but the equity market has chosen to rally on the consumer confidence number.

Home prices are now back to levels last seen during the late Spring / early Summer of 2003. What does this mean? It effectively wipes out any lingering hope for mortgage equity withdrawal (MEW) continuing as a source of funds for consumer spending.

In fact, how many people still have ANY equity in their homes? Price drops are on the magnitude of down payments. Principal portions of monthly mortgage payments are quite small on relatively new loans. It is possible that, on average, 60% of the country is upside-down.