Why I don’t believe housing has put in a secular bottom
Case-Shiller came out with some numbers earlier today, showing they too will soon be confirming the housing recovery in the US. Take a look at the numbers here at the Wall Street Journal.
The composite 20-city home price index, a key gauge of U.S. home prices, was up 2.2% in May from the previous month and fell just 0.7% from a year earlier. Although prices continue to fall on an annual basis, the rate has slowed indicating that home prices may be close to posting year-over-year gains. Twelve of the 20 cities posted annual increases in May.
“We have observed two consecutive months of increasing home prices and overall improvements in monthly and annual returns; however, we need to remember that spring and early summer are seasonally strong buying months so this trend must continue throughout the summer and into the fall.,” said David Blitzer, chairman of S&P’s index committee.
None of the cities posted a monthly decline in May…
The housing bulls must be ecstatic.
Here’s the thing though. As I put it in an email to friends in April:
For the bottom to be in you have to believe two things from a macro perspective. First, you have to believe that the overshoot phase to the downside has been arrested. Most bubbles end with a significant overshoot that makes it a no-brainer to tip a toe in the market. I think we are approaching those levels in markets like Phoenix. But we never really got down to reasonable levels in places like Washington or New York. Second, you have to believe any US recession is both remote in time and mild in duration/severity. I question this. I think any US recession will re-start the house price decline dynamic because consumers are still overindebted, interest rates are at zero percent, and mortgage rates are as low as they can get. My point is that from a cyclical perspective 2012 is as good as its going to get. Calling a bottom at the top of a cyclical bull market in asset prices and the economy is folly. Wait until the bottom of the cycle to make those calls.
I’ll say what I said about munis in 2010: If we see recovery through to the end 2014 and beyond, there isn’t likely to be a crisis in housing. But, there is huge potential for serious losses when a spate of defaults does begin in the next downturn. Remember that a recession means bad things for municipal government, municipal pension funds, and pretty much everything else municipal. This will mean HIGHER local taxes and fewer services (and bankruptcies like mad). And that’s extremely negative for household demand and housing. Count on it.