A pick-up in this spring’s housing data doesn’t seem to be translating to much in terms of housing prices.  Case Shiller reported another decline in housing prices through January as year over year declines showed a -3.9% drop.   They said:

Data through January 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January. Sixteen of 19 MSAs also saw home prices decrease over the month; only Miami, Phoenix and Washington DC home prices went up versus December 2011.

“Despite some positive economic signs, home prices continued to drop. The 10- and 20- City Composites and eight cities – Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa – made new lows,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Detroit and Phoenix, two cities that have suffered massive price declines, plus Denver, saw increasing prices versus January 2011. The 10-City Composite was down 3.9% and the 20-City was down 3.8% compared to January 2011.”

If we take a step back and look at some longer-term data we can put this in perspective though.  I like using the Shiller CPI adjusted housing price data as well as the owner equivalent rent data from the monthly CPI reports.  These two charts will help put the declines in perspective.   As you can see below we’ve made significant progress in the mean reversion process.  According to both indicators housing prices are overpriced by roughly 15%.  This likely means there is more downside risk in the coming years, but the bulk of the declines are definitely behind us.

I think the more likely scenario is the standard post-bubble workout period where prices will not “bottom” (as many have called for), but will rather flat-line for many years.  Pull up a chart of the Nasdaq or Nikkei or Shanghai or any other number of bubbles if you’re trying to imagine what I am referring to.  What would be HIGHLY unusual is for prices to snap-back or “bottom” in a dramatic event process that leads to a surge.  Rather, we’re far more likely to see the high inventories work off slowly while prices moderate and incomes grow to bring the market back to some semblance of normalcy.

The bottom line – if you’re buying a home to LIVE in then buy it and LIVE in it.  If you’re buying a home to invest in then you’re gambling.  If you’re an actual/professional  real estate investor then you don’t need my advice….



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Hope and Change

    The news media continues to slant the housing recovery and the NAR are total liars who got caught over stating homes sales by 10%. Now years later I see the same homes listed, de-listed and re-listed again in California. I drive a car for my work and I also ride bicycles as a hobby. I can see vacant homes everywhere, more and more. I have spoken to the local firemen because I’ve been seeing a few burned out homes. I was told there were arson investigations because the homes were in foreclosure. When I ride bicycles in my area I see more vacant homes. There are 4 foreclosures on my block, my neighbor who is renting told me they foreclosed on his home but the owner tells him they are wrong and keep sending the rent check. The owner hasn’t made a payment in over a year! I went through a short sale, what a scam process that was. The house inspection is at the end and in most cases the banks sell as is. The house needed $85k in repairs wasn’t worth it. Then I went for a BoA foreclosure, after the buyer dropped out because they found out he worked for BoA. Not only was I already pre-approved but BoA had to pre-approve me. Another scam I was told my offer was a back-up and the house will go into escrow in 3 days, that was 1 month ago. Guess what it’s still on the market in backup but when I inquire they will not sell it to me. All these homes status is backup but they are not selling. I’m not sure what the deal is, do they really want to sell these homes? I live in middle to high-end income area in the Conejo Valley, Southern California. But I see this everywhere in SoCal. How can these talking heads in the media as I’m watching CNBC now report housing has bottomed and coming back with a straight face.

  • Coolidge Low

    Until the Fed get us off the zero bound you need to have your head examined to think real estate is anywhere near a bottom.

    “If low interest rates induce investment projects that are only profitable at such interest rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient. While central banks have typically conducted monetary policy by treating a potential growth rate as exogenously given, when the economy is under prolonged shocks arising from balance-sheet repair, we may have to take into account the risk that a continuation of low interest rates will affect the productivity
    of the overall economy and lower the potential growth rate endogenously”.

  • B Ferro

    And yet ITB is up 300 bps on the session…

    SPX Homebuilders index is a mere ~24% of the high it printed in 7/05…

    The average for assets that have popped from bubbles ~340-345 weeks after the high print is ~45%.

    The index would need to rally another 70% to hit the 45% level; so, despite the double off the Aug lows for homebuilders, looks like there’s a lot of runway left…