The Mortgage Corner
In spite of warnings from such as Robert Shiller of Irrational Exuberance fame that housing values could remain stagnant over the next ten years, housing prices are making a comeback, which is boosting economic growth. Some of the worst hit bubble cities have the largest price increases, and diminished inventories. Even better news is that housing prices have returned to historical levels as measured by the price-to-rent ratio, which measures the relationship between rents (which are closely tied to incomes) and housing values, signaling that housing values are no longer in bubble territory.
Graph: Calculated Risk
Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices … showed average home prices increased 8.6 percent and 9.3 percent, respectively, for the 10- and 20-City Composites in the 12 months ending in February 2013, said the press release.
“Home prices continue to show solid increases across all 20 cities,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites recorded their highest annual growth rates since May 2006; seasonally adjusted monthly data show all 20 cities saw higher prices for two months in a row – the last time that happened was in early 2005. Home sales aren’t doing badly either.”
For instance, we can say that housing prices in California cities, San Francisco, Los Angeles, and San Diego have recovered more than half their values lost since 2000. And the Price-to-Rent ratio is back to 1 to 1, meaning that the historical ratio held since January 1983 is probably the best indicator that prices have now stabilized for the longer term.
Graph: Calculated Risk
Some economists, including Dr. Shiller, seem to be puzzled by the price surge, in particular. But what about the return to more than 1 million plus new households being formed in 2012—a tripling of the recession lows, when children fled back to their parents homes because of the hard times?
And we mustn’t forget that employment has improved substantially, with some 6 million jobs now added to payrolls since the Great Recession. Dr. Shiller’s latest conclusions are based on surveys and his theories that much of consumer behavior comes from hearsay and not much research into investments, hence the housing bubble.
Dr. Shiller, an Economics Professor at Yale University, also says the biggest home price increases now are seen in multifamily rather than single-family homes which reflects a shift from home ownership to renting. The buyers are investors who rent their properties, in other words.
“Most of the increase in households in this country has been met by an increase in renting,” says Shiller. “My own survey data with Chip Case confirms that people feel more positive about renting.” He suggests that those investing in real estate are buying homes most suitable to convert to rentals, which means price increases will be more closely tied to rent increases, which means closely tied to inflation. Hence he is intimating the price-to-rent ratio should remain stable around its historical 1 to 1 ratio for years to come, which means housing prices won’t rise faster than rents.
But whether rental or primary residences, housing is contributing to overall economic growth. The First Quarter contribution by the U.S. Bureau of Economic Analysis shows that housing contributes more than 2 percent of GDP growth, and is on the upswing, particularly in single-family construction. Home improvements and broker commissions provide slightly less, while office and shopping mall investment provides contribute little at present, due to the high vacancy rates still prevailing, an overhang from the Great Recession.
Needless to say, construction spending means greater construction employment, and spending has been surging. Construction outlays rebounded 1.2 percent in February after dropping 2.1 percent in January. Private residential construction jumped 2.2 percent. For the latest month, the new one-family component was particularly strong, gaining 4.3 percent, following a 3.6 percent boost in January. The new multifamily component fell back 2.2 percent but followed a robust 6.1 percent jump the prior month. Public construction gained 0.9 percent, following a 0.2 percent rise in January. On a year-ago basis, overall construction was up 7.9 percent in February compared to 6.1 percent in January.
Single-family investments is about to surpass home improvement outlays, says the BEA, with multifamily outlays still a minor component. So will Americans give up their home-ownership dream, and become a nation of renters? In fact, the current 64 percent home ownership rate is the long term ownership rate, which is one more factor that should tell us the housing bubble mentality Dr. Shiller so warns against has been deflated.
Harlan Green © 2013
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