ROSENBERG: NO GREEN SHOOTS IN HOUSING
David Rosenberg on housing:
The bond market initially sold off and equity market rallied on the release of the Case-Shiller home price data because it is ALL about the second derivative, didn’t you know? Never mind that national home prices were down 0.6% on the month, which merely represents a $100 billion loss of housing wealth on personal balance sheets — at least they are still not declining 2.0% per month or more as they had been consistently since last October, though we would caution against extrapolating one monthly result into the future. It is very likely that the pace of home price devaluation is now in the process of slowing down, but at roughly 10 months’ supply of unsold inventory in both the new and existing housing market, and these are conservative estimates, more deflation in residential real estate is coming our way. Second derivatives do not really mean much when hundreds of billions of dollars of net worth are at stake – the carnage from the mid-2006 peak is now 32.6%.
Not only is it extremely unlikely that we have seen the bottom in home prices until the unsold housing inventory drifts comfortably below 8 months’ supply, but the potential downside from here could easily be another 15% since that sort of decline would bring the Case-Shiller index back to its pre-bubble range in ‘real’ inflation-adjusted terms. (Home prices may well be all the way back to April 2003 levels but the mania in which home prices began to outstrip inflation by 10% or more started in 2000 so there is still, in my estimation, three years worth of bubble activity that has to come out of the system.) Green shoot advocates would undoubtedly point to the fact that this would suggest that we are now two-thirds through this real estate deflation cycle but not likely point out that the last third leg down will drain a further $3 trillion out of household net worth, with a commensurate $200 billion (or 2.0%) hit to consumer spending via the impact on the personal savings rate.
Some pundits may point out that “only” 12 of the 20 cities posted sequential home price declines in April. Maybe that is cause for celebration but when you smooth out the monthly wiggles what you see is that 100% of the cities in the sample are actually still officially in deflation mode.
Source: Gluskin Sheff
