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Has US housing bottomed?

US-housing

November 1, 2012,
Los Angeles, California.

After an almost uninterrupted period of decline over the last few years, US home prices now have some positive momentum.

For one, the S&P/Case-Shiller index of property values in 20 cities has seen its highest increase in more than two years. In addition, JP Morgan CEO Jamie Dimon recently stated that his bank was seeing a surge in mortgage applications.

And perhaps most importantly, the National Association of Realtors has reported that the nation’s inventory of homes on the market has dropped to its lowest level since March 2006, while the median home price is 11.3% higher than a year ago.

These are definitely good signs for housing. But remember, nothing goes up or down in a straight line. Just like a stock market that suffers a serious crash, housing has been due for an upward correction.

But it is a false premise to conflate ‘rebound’ with full blown ‘recovery’. The market could just as easily improve, then decline once again in a few months’ time. Positive data is great, but doesn’t necessarily portend long-term growth.

Here in LA, the median asking price of a home is now $361,390. This is 12.2% higher than in January 2012. Good news. But over the last few years, the LA market has gone through similar periods of growth, followed by more declines.

Between February 2009 and January 2010, for example, the median asking price in LA increased 14.0% from $369,125 to $420,975. Home prices then reversed this trend and declined 20%.

People readily accept that stock markets can turn on a dime and move in the other direction. Fact is, housing can do the same. Over the long-term, it’s fundamentals that count. That means demand, supply, and policy:

1) Demand is ultimately about population and income levels. If the number of households is increasing, demand will increase. If income levels are high, demand will increase. Yet the long-term trend for both of these in the US is negative.

– Unemployment is still high (and surging in the northeast). This typically portends fewer households as people ‘bunch up’ during times of financial difficulty. In fact, the number of adults aged 25-34 living with their parents has exploded to over 40% according to the US Census Bureau.

– Census data further show that population growth in the US is tepid; the nation’s fertility rate hit an all-time low in 2011, continuing a four-year trend. Not to mention, America’s strict immigration policy tends to keep wealthy foreigners away.

– US median household income continues its 4-year slide and is back to 1996 levels.

2) Supply of homes in the United States continues to increase. Since 2002, housing inventory in the US grew 10.7%, far outpacing population growth. As further evidence, the Census Bureau reported that 18.15 million homes in the US are vacant– 13.6%.

By way of comparison, this vacancy rate was about 8.5% during the peak recession years of the 1970s. Bottom line, there’s still a lot of inventory out there.

3) Interest rates are at all time lows, currently around 3.5%; this helps people afford higher priced home for the same monthly payment. At 3.5%, for example, $2,000 per month buys you a $441,000 home. At 7%, it only buys you a $298,000 home.

Consequently, when mortgage rates rise to their historic norms, housing prices could fall drastically.

In the meantime, while low rates make principal and interest payments more affordable, the Fed’s loose monetary policy is pushing up the ‘other’ costs of home ownership– HOA dues, insurance premiums, property taxes, etc.

So in a way, Bernanke is lowering one cost of home ownership, but simultaneously inflating others.

This means that it may be too early to uncork the champagne bottle and declare an end to the housing crisis in the US.

It only takes a few years so build millions of new homes, but it can take decades for demographic shifts to mop up all that supply. It’s foolish to believe that the crisis has abated simply because the Fed has printed a ton of new paper.

No doubt, it makes sense to refinance a home at 3.5% (possibly the best way to bet against the dollar). As does buying high quality, well-located properties at today’s prices. The general rule is if you can buy it for less than construction cost, it’s very hard to get hurt.

But these deals are few and far between. So before writing big checks for mid-grade investment properties, it’s definitely worth taking a long-term view of the fundamentals. On an inflation-adjusted basis, the market still has major headwinds.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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