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.
When 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?
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)
“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.
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.
[listing mls=”OC14161589″]
Robert Shiller is somebody I respect. I read his book “Irrational Exuberance” several years ago. Some of my economic theory comes directly from his book, especially when referring to income ratios to equities and home prices to income.
With that said, I know he knows the truth. I wish he would stop being so reserved when interviewed on CNBC. Why not just tell the idiots that watch that idiotic channel the truth. America has been on an unsustainable economic path since Greenspan, and we’re now at the end of the path.
There is no economic recovery with the Fed Funds rate being ZERO percent for 6 years.
Currency debasement does NOT equate to reform, so the players have been played. Too bad. The reversion is going to be painful.
The only way we can have true reform is by-means of pain. I still believe that America is the greatest country on the planet. I still believe in free markets. I still believe that we are the most creative, productive people on the planet. America is an extraordinary experiment. People that say otherwise are cynical fools and should be ignored.
When the reset happens, there are going to be consequences … painful consequences. But I do believe we will recover.
Irrational Exuberance is required reading for anyone who really wants to understand economics. Efficient markets theory fails to explain what happens in the real world. It sounds plausible, and it panders to our desire to believe people are rational with important decisions, but it simply doesn’t mirror reality. Robert Shiller proposes a theory of behavioral economics that says people aren’t rational, and they often act as herds taking cues from what others are doing, making the assumption everyone else must be right. His theories explain financial manias whereas efficient markets theory would claim manias are not possible.
Shiller may be reserved when he’s on CNBC, but he still makes some very blunt statements counter to prevailing economic consensus. I find his commentary refreshing even if he is a bit timid about the way he says it.
So, non seasonal prices rose by 1.1% last month. Doesn’t that mean that prices INCREASED? Prices just didn’t increase as much as they normally do in May. And the May c/s numbers are really for contracts signed in the first quarter, which saw economic contraction.
Yes, prices did go up, but not as much as normal.
Case-Shiller also has a significant lag with reporting. The May numbers average March, April, and May and compare it to March, April, and May of 2013. My reports have the same lag issue. It won’t be until November when the Case Shiller numbers will look really bad because when June, July, and August of 2014 is compared to 2013, we will likely see YoY declines because prices haven’t gone up since interest rates went up.
The raw Case Shiller data shows that prices have continued to increase since September 2013, the first month when rate increases would have been baked in. Of course, rates have been in gradual decline ever since that time.
Up in May, down in July.
http://www.deptofnumbers.com/asking-prices/us/
Same pattern as 2007-2012. In each of those years, prices continued to fall for at least the next 6 months.
Will we get the usual rebound in Spring 2015? Keep an eye on rates (and China?).
…and the Dow. Ouch.
FOMC tapers another $10 billion
The Federal Reserve will continue to taper and reduce its pace of bond purchases by another $10 billion as labor market conditions improve and the unemployment rate declines further, the June Federal Open Market Committee meeting minutes said.
However, the FOMC cautioned that there remains significant underutilization of labor resources, with the recovery in the housing sector moving at a slow pace.
Since the committe believes there is sufficient underlying strength in the broader economy to support ongoing improvement in the labor market, beginning in August, the committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month.
“The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate,” the minutes said.
The federal funds rate will maintain the current 0 to 1⁄4 percent target range.
The last minutes showed the Federal Reserve is debating having the final reduction come in a single $15 billion reduction, or in a $10 billion reduction followed by a $5 billion reduction, which would make the final reduction in October.
Only “Number Jesters” report 2Q economic growth at 4% pace
Economic revisions infuriate
While on the surface of it Wednesday’s economic news from Reuters, as reported by FOX Business, “U.S. Economy Grows at 4% Pace in 2Q,” seems positive, I am not holding my breath given the fact that early reports like this one have been revised downward time and time again. In the FOX piece they quote the Commerce Department as indicating on July 30that, “Gross domestic product expanded at a 4.0% annual rate as activity picked up broadly after shrinking at a revised 2.1% pace in the first quarter.”
How convenient it is that these latest numbers seem to offset the dismal contraction number of 2.9% from the first quarter, I’m sure it’s just a coincidence — right?
As has been articulated by others, I suggest that if an economist or economists continue to miss the mark by under-forecasting economic growth and then back-pedal by saying the revised numbers were “unexpected,” they should disqualify themselves from being called economists.
“Number-Jesters” would seem to be more appropriate.
In a completely related article in USA Today, written by Paul Davidson also on July 30, “Economy heats up in Q2 after harsh winter,” the writer comments on all of the seemingly optimistic information put out by the Commerce Department as reported on by FOX Business, but ends the particularly “spun” article with the following:
“Bad weather has not been the only culprit [regarding sluggish economic growth so far this year]. Wage gains have barely kept pace with inflation, holding back consumer spending. And the pace of housing’s recovery has fallen behind last year instead of accelerating as forecast. Many economists expect both wage increases and the housing market to pick up in the second half of the year.”
Who wouldn’t want to trust the forecasts of these “Numbers Jesters?” At least they acknowledged the falling housing “recovery.” And does anyone still believe it was bad weather that drove the bad economic number in the first quarter?
It is also worth noting that within the FOX piece it was stated that “A separate report showing private employers added 218,000 jobs to their payrolls last month, a decline from June’s hefty [their description] gain of 281,000, did little to change perceptions the economy was strengthening.” What a shock, since, as we have said on numerous occasions, that these numbers are not impressive on the surface, let alone when scrutinized. After all, the vast majority of these jobs are either part-time or lower paying jobs that have little if any positive impact on the economy in general, nor the employees hired in particular.
And I loved reading this within FOX’s report: “Solid demand, which underscores the economy’s firming fundamentals, led to some pick-up in price pressures in the second quarter, a welcome development for Fed officials who have long worried about inflation being too low.”
I have a message for the Fed: HELLO! Millions of middle-class Americans DO NOT believe that inflation is too low! Have you been to the super market lately, people? But wait, there’s more, as stated in this same report, “A core price measure strips out food and energy costs at a 2% pace…” Well, add in food and energy and then tell us inflation is “too low.”
Relative to the housing “recovery” and foreclosure activity I offer the following observation: Amy G. Dix, broker and co-owner of The House Store, a successful Knoxville, Tennessee-based real estate company reports to me that REO assignments are on the rise.
“We have received one or two assignments each day over the past couple of weeks,” said Dix. “Some are coming from asset management companies that we hadn’t received assignments from in quite a while.”
While in West Palm Beach for an industry seminar recently I had the opportunity to visit with over 30 members of the National REO Brokers Association, who were among over 400 real estate professionals at the session. Most of the NRBA members also reported increased listing activity on REOs. This is, perhaps, only anecdotal evidence of a worsening housing market and general economy, but it is clear to me that the downturn that I and other industry observers are predicting may be closer than anyone thought.
I always wonder when I hear this…
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.”
Is lack of CREDIT the problem or lack of PURCHASING POWER (income)?
Lenders are laying off workers…you would think that if there were qualified borrower/buyers ready to buy there would be huge demand for loans and the loan business would be strong. If lack of supply is the problem then prices should be going up – scarcity combined with purchasing power results in increased prices. But prices are not going up.
rates are in the low 4s. credit is flowing.
the problem lies in savings rates. rates are artificially low and nobody is incentivized to be a saver.
Many consider the tight lending standards a problem because if they lowered standards, they would qualify more people and complete more transactions. That wouldn’t necessarily cause prices to go up because the newly qualified borrowers will only be able to borrow what their incomes can support.
I think Matt138’s observation is a good one too. Many qualified borrowers aren’t buying because they don’t have the down payment necessary to complete the transaction, even the paltry 3.5% down on FHA loans.
More proof that seasonally adjusted ‘anything’ is useless data, and belongs in the same dust-bin where the median home price metric and other sell-side marketing tools currently resides. Facts are stubborn.
-el O
+1
Much appreciated.
Market took a dive when Argentina default yesterday. I guess confidence in bonds must be shaking a little. The mantra to all bond holders is that this [default] could happen to me. This could force rates to go up long term if the Argentina settlement process is messy our there’s more countries default / technical default in the future. They maybe the first but definitely not the last. That is actually a deflationary event as billions will get wiped out. Confidence is the name of the game.
many on this blog feel the economy must be strong before rates can rise. is argentina an anomaly?
For now I believe Argentina is an outlier. US economy is relatively strong compare to the rest of the world. Stocks will get a much needed correction and will ramp up further. I’m still waiting to buy back in. Watch Europe. Their debt load is a power keg that they try to defuse with negative rates to devalue the currency. China debt is also high but economic growth should blunt most of the impact. The FED probably will raise short term rates some time next year and that is where I expect housing to run into a brick wall as it will have some impact to the long term rates.
Man does that 2005 David Lereah book just keep on giving or what?
Whenever I need a good chuckle, the Amazon reviews provide great material:
http://www.amazon.com/Are-Missing-Real-Estate-Boom/dp/0385514344
My personal favorite: “I found the pages much softer than Charmin, though not as soft as Quilted Northern.”
A guaranteed money maker!
Wise investors will profit from this book. File it away for 20 years, then sell it for the collectible it is. The only way to lose money buying this book is to follow its advice.
LOL!
If you bought the book you already lost money. But I do digress that since the book is wildly un-popular it will become a collectible item since everyone else already trashed their copy. As a bonus the books will be worth it weight in gold if you can get the John Hancock from the ‘notoriously bad it’s not even funny’ author.
He’s one depression and a decade late. Many are still not back to 2005 level and might never will a la Detroit. Right up there with historic books on investing in the Tulip Bubble and the Mississippi Company Mania. One for the ages to come.
“Your Yugo Will Run Forever and How to Set the Land-Speed Record With It.”
“Back in 2009-2011 I worked in an industrial paper shredding plant. I remember shredding this particular text very fondly”
‘I purchased this book (0/5 stars) as a gag gift (5/5 stars) a while back- the family should’ve been drawn directly under the home. Here’s some suggested titles for the author:
“Gold Is the New Black – Why Precious Metals Will Never Go Down”
“Oceanfront Property in Arizona – Invest Now to Retirement Riches”
“This Buddy of Mine Has an Investment That Can’t Lose – Let Me Introduce You to Bernie”
“How to Lock Yourself in a Burning Barn After the Horses Have Bolted”‘
[…] The only reason prices have gone up is due to restricted inventory. Though broad economic measures have improved from the depths of the recession, the economy is not strong, and fundamental demand remains weak, as evidenced by declining home sales volumes this year. […]