Housing and jobs: these are the two keys to the economic recovery really taking off, and while we’ve gotten some positive news on the jobs front recently, real estate prices have more or less continued to decline steadily since their peak in 2007. Housing represents a huge portion of yearly GDP, but more than that it is most consumers main source of wealth. If home prices are rising, so are American’s net worth, and increased wealth will usually lead to increased confidence and spending.
No wonder, then, that the media and economy watchers have been so concerned with tumbling home values. Many have been eager for house prices nationally to reach a point at which they stabilize and start to creep back up. The information superhighway is littered with the corpses of pundits who have erroneously called the “bottom” of the real estate market, but hope springs eternal. This week produced two reports which have analysts optimistic that we’ve reached that point.
The first is from Zillow Inc., which said that though home prices declined in the first quarter of 2012, they actually rose in March. In addition, Zillow is predicting the real estate market will see “a definitive national bottom later this year or early 2013.”
The analysis went on to say that home prices in many markets including Boston, Dallas and Philadelphia, have already seen prices reach their nadir. Zillow says that rising rental costs and low mortgage rates are the main factors encouraging price stabilization:
“In addition to high home affordability and low mortgage rates, rising rents will make home buying more attractive, increasing the longer term demand for homes and helping to put a floor under home values.”
The National Association of Realtors Pending Home Sales Index also predicts an uptick in home sales. The index is a “forward-looking indicator based on contract signings,” and it jumped 4.1 percent in March to 101.4. Any number above 100 indicates a healthy sales market. According to Lawrence Yun, NAR’s chief economist, “First quarter sales closings were the highest first quarter sales in five years. The latest contract signing activity suggests the second quarter will be equally good.”
So do these data describe a housing market that’s hit bottom? Possibly, but we’ve heard this song before. Despite these optimistic reports, there’s still plenty of reasons to be dubious.
Barry Ritholtz, CEO and Director of Equity Research at Fusion IQ and financial columnist, has been a consistent critic of housing-market bulls. He outlined several reasons in The Washington Post earlier this month why we shouldn’t believe the housing market has bottomed out just yet. It’s well worth it to read his entire analysis, but he has four main reasons for doubting the housing bottom:
- The shadow inventory: There exists a massive backlog of homes that still have to go through the foreclosure process. As these homes do eventually hit the market, the added supply will suppress home prices
- Consumers can’t qualify for mortgages: Many factors, from high unemployment to tightened lending standards, mean that banks won’t lend to prospective home buyers.
- No real income growth: The Average Joe hasn’t seen his income rise in a decade, and with so much slack in the labor market, he shouldn’t expect a bigger pay check any time soon. If consumers aren’t increasing their income, they can’t spend more on necessities like housing.
- The mechanics of the housing bubble: According Ritholtz, after bubbles pop they usually fall a long way:
“Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap.”
So even if analysts consider home prices currently “fair”, they may have to get much cheaper before consumers jump back in the market.
Sobering stuff, but even if you think that Ritholtz’s analysis is too pessimistic, remember everyone who has called a housing bottom to this point has been wrong. And even if housing prices have stabilized, it doesn’t mean that they have to start rising again any time soon. It may be that we have to wait for employment to drag us out of the housing mess rather than the other way around.