Friday, April 24, 2009

More Evidence that Housing No Longer Crashes

The way I see the data on new home sales (below) and home prices from various sources (here and here), the 2009 housing market is not crashing like the 2008 housing market.

Someone asked why I think that home prices were due to stop crashing in early 2009, and what I thought would happen to housing prices in the longer term. The simple answer is that housing construction cannot remain as low as it was at the end of 2008, because the population continues to grow (and incomes will grow again, too). If housing construction is to rise to more normal levels, the profits from housing construction must be better than they were at the end of 2008, which means that housing prices (more specifically, housing prices expected to prevail at the end of the construction project) have to be higher or construction costs lower (notice that most of my housing price graphs are expressed as a ratio to construction costs).

Moreover, I thought (and still think) demand will catch up with supply sometime this year. So that's why I thought housing prices would not continue to crash in 2009.

In the long term, housing prices (expressed as a ratio to construction costs) may be a bit lower than they are now. But we could well get to that long run outcome via a short run price increase. For the details of that possibility, you have to wait for the release (sometime in May) of my next housing supply paper.


stilettoheels said...

February 2009 pricing was mixed according to Radar Logic. Nine MSAs up, 16 MSAs down, composite index down 0.3% month over month.

stilettoheels said...

The headwinds against demand catching supply in the short run are:

1. Record mortgage foreclosures. Another wave is in the pipeline to make its presence felt this summer after the temporary moratoria lull has worn off. There is some suggestion that mortgage servicers are currently holding some 600K units in shadow inventory.

2. Record rental vacancy rates.

3. Record homeowner vacancy rates.

4. Below trend new household formation due to rising unemployment and lower incomes somewhat offset by higher than normal demolitions/condemneds.

5. Record excess inventory. Calculated Risk says 1.8 million, Lefrak/Shilling say 2.4 million, and Glaeser says 1.3 million. These estimates do not include any REO shadow inventory.