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Saturday, April 10, 2010

Shiller: "Don’t Bet the Farm on the Housing Recovery"

by Calculated Risk on 4/10/2010 10:46:00 PM

From Robert Shiller in the NY Times: Don’t Bet the Farm on the Housing Recovery

MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?

Alas, the evidence is equivocal at best.

The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum.
Momentum only goes so far. And I think it is likely that prices will fall further in many bubble areas later this year as more distressed properties hit the market.

Shiller also argues prices might fall:
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.

The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
Usually I graph the total NAHB Housing Market Index. Here is a graph of the NAHB traffic of prospective buyers and two home prices indexes: the Case-Shiller Composite 10 (seasonally adjusted) and First American Corelogic's LoanPerformance HPI (NSA).

NAHB Traffic and House Prices Click on graph for larger image in new window.

Although Shiller is correct about traffic index peaking in 2005 and declining sharply in 2006 (when prices started to fall), I think this isn't a reliable indicator of future house price movements. I think a better indicator that prices were about to decline in 2006 was the rapid rise in inventories in the 2nd half of 2005 and into 2006 - and I think we should watch inventory levels again this year.

I think the NAHB does provide hints about housing starts.

HMI and Starts Correlation This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the February data for starts.

This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

For house prices, I think we need to watch inventory levels - especially distressed inventory.

Shiller concludes:
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.

Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.