Jul312014

Shiller: housing faces “turning point” as seasonally adjusted prices fall in May

Seasonally adjusted home prices fell in may for the first time in over two years. Robert Shiller warns of possible turning point in the housing market.

House_CrashWhen a housing market reaches a top, it’s usually preceded by an unexpected drop in sales during the prime selling season. In June of 2006, sales fell off a cliff, and prices soon followed, and in July of 2010 after expiration of the tax credits, sales again suddenly collapsed, and home prices fell for another 18 months. Here we are in 2014, and sales volumes have been weak all year, and new home sales took a large and unexpected dip. Are we on the cusp of another market downturn?

US seasonally adjusted home prices fall in May: S&P/Case-Shiller

Reuters With CNBC, Tuesday, 29 Jul 2014 | 11:15 AM ET

U.S. single-family home prices fell in May, falling short of expectations of a slight gain, a closely watched survey said Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.3 percent in May on a seasonally adjusted basis. A Reuters poll of economists forecast a gain of 0.2 percent.

Economists were overly optimistic? I’m not surprised, are you?house_lemmings

Nonseasonally adjusted prices rose 1.1 percent in the 20 cities, compared with an expectation of a 1.5 percent rise.

At least housing bulls have something they can be happy about.

“What I find particularly interesting is that on a seasonally adjusted basis, nationally, home prices are falling only a smidgen—three-tenths of 1 percent—but the way these markets go, that could possibly be a turning point,” Robert Shiller told CNBC in an interview on “Squawk on the Street.”

With pending home sales and new home sales down, however, “there’s some clear evidence of a weakening,” he added.

(See: Owner-occupant sales stall while investor sales plummet and New home sales plummet in June 2014)real_estate_bust

“Housing has been turning in mixed economic numbers in the last few months,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. …

Prices in the 20 cities rose 9.3 percent year over year, the slowest year-over-year gain since February 2013 and shy of expectations for a 10 percent climb. …

“The market has been very strong since 2012. It’s up 27 percent since March of 2012. It’s been a huge boom,” Shiller said. “The question is what would end that boom? It might continue. This might be a little downward blip and it might continue going up, but you know, I kind of think it’s not going to go up a lot more—maybe 10 percent more—before a correction.” …
“It seems like optimism about housing is weakening,” he said. …

Meantime, a lack of credit has been a “festering problem” for the housing market, but “inevitable since had a banking crisis,” he said. Credit availability is “not going to correct soon.”

I don’t foresee a substantial correction in house prices. It’s no longer a seller’s market, but conditions are very different than they were in 2006 or 2010. Back in 2006, prices were extremely overvalued, inventory exploded, and early mortgage defaults were making lenders cautious (which later turned into a full-blown credit crunch). In 2010, the market was flooded with distressed inventory, and the removal of the tax-credit stimulus resulted in an easily predictable collapse in demand.a_housing_bubbles

Now in 2014, inventory is still low by historic standards, very little of that inventory is distressed, and much of the inventory is suspended in the clouds by owners who can’t lower their price and pay off the mortgage. Whereas the previous two crashes had an abundance of must-sell inventory, our current market has almost no must-sell inventory, and much of it can’t transact at lower prices. It’s a recipe for a frozen market or a slow decline on very low volume.

This fall and winter may be a good time to shop for a home. A few discretionary sellers exist, and they can lower their price to make a deal. If those sellers aren’t motivated, then sales volumes are really going to drop. Perhaps the rumors of a resurgent economy will cause demand to pick up during the off season, but that would be counter to the normal cycle of the housing market.

I believe we will see a steady market, perhaps with some pockets of decline on very low volume. It’s a market were lucky buyers who find a motivated seller may find a good deal. Happy hunting.

cautiously_optimistic

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