Economist Online

The latest housing price,  as captured by the Case-Shiller Index, continued to fall in October. Here are two sharp charts from Calculated Risk.

Time trend:

Accumulated price fall by major US cities:

Combined with latest sales figure, the inventory of existing home sale, after a faked jump due to government’s incentive program, seemed starting to move again.  However, the new home sale is still very much depressed.

According to PNC’s Stuart Hoffman, 2012 will be a transition year for the housing market.  The hope is that the gradual fall of the housing price may eventually clear the inventory,  six years after the last housing peak.

If the economy turns weaker in 2012, the Fed may eventually be forced to buy more mortgage-backed securities. However, the likelihood of any household debt relief program is dim, considering the current fiscal situation. In 2012, we are likely to see a continued muted growth in the US. Now people began to appreciate the importance of housing in driving business cycles. Without robust recovery in US housing market, any talk of V-shaped recovery only sounds foolish.

America’s housing recovery is still mired in a long slog.

The Wall Street Journal’s latest quarterly survey of housing-market conditions found that prices declined in all of the 28 major metropolitan areas tracked during the fourth quarter when compared to a year earlier.

As of Nov. 2010, housing prices declined in all major cities except for Los Angeles, San Diego, and Washington DC. See the chart below (courtesy of CalculatedRisk).

(click to enlarge)

It seemed that the earlier government’s home buying credit stalled the normal housing market correction. Now the law of physics kicks in again.

As a side phenomenon, the housing woe fuels a surge apartment rental market.   The slow recovery in labor market and the direction of housing price are the major culprits.  People rationally substitute rental for owning a house – which tends to create a negative feedback loop and dent the housing price further.

WSJ reports, with millions of families switching from being homeowners to renters, apartment-building values have soared. Investor demand is so intense, prices of some properties are approaching values last seen in mid-2007…Values of apartment buildings rose 16% in 2010, according to brokerage firm Marcus & Millichap, after falling 27% between 2006 and 2009.

When I moved out of Boston in the summer of 2009, the apartment rental market was quite dismal.  I spent a few month trying to sublet my apartment and eventually I took a hit of at least 20% .   But now the fortune reversed.

In a longer term perspective – after a big bubble, it’s no longer profitable to use housing as an investment.  Or you have to be very very patient.  Buying a house will just be buying a house; don’t expect to make money by flipping it. No more.

Here below is a long-term housing price chart, from Bob Shiller. It’s quite telling: you can see the recent housing bubble was really an anomaly by historical standards.

Finally,  I included an interview by Bob Shiller at Davos, Swiss. He gives you an update on his view on the housing market trend.

CBNC reports in 2011, we are going to see a spike in foreclosures nationwide:

Value investing conference hosted at Darden Business School of UVA.

Some nice big-picture views of the current economy.  Pay attention to the interesting analysis on housing market – among the 56 million US residential mortgages, it’s estimated that 20% of them, or 11 million, will eventually default. Housing price is set to decline by another 5% at least; if without government support, probably by 10%.

What year have housing prices corrected to?  By cities.

(click to enlarge; Source: Calculated Risk)

Bob Shiller, economics professor at Yale University and a pioneer in behavior finance talks about the importance of confidence in economic recovery.  He thinks with lingering high unemployment, the national morale is sinking.

And we have to admit we simply do not know many things in the working of our economy.

New home sales is making new historical lows,

and existing home sales reached the lowest level since 1996.

(click to enlarge; graph courtesy of Calculatedrisk)

After the expiration of home buying credit, this was expected.  But the magnitude of decline still shocked people.  Due to slow sales, inventory of unsold homes starts to ramp up again.

And this is happening despite historically low mortgage rate.  Two things might be working against potential home buyer’s psychology: 1) Is my job secure?  2) Will the house price keep falling?

(click to enlarge; graph courtesy of Northern Trust)

Ed. Chancellor of GMO (in Boston) has put out an excellent piece on the Chinese market and the “red flags” for investors.

The paper addresses how to identify the proper “speculative manias” and associated financial crises in the country. Chancellor sums it into key points, breaking down the bare essentials:

1. Great investment debacles generally start out with a compelling growth story.

2. A blind faith in the competence of the authorities is another typical feature of a classic mania. In other words, you can’t always trust the numbers that a government is putting out.

3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria.

4. Great booms are invariably accompanied by a surge in corruption. Countrywide, anyone?

5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.

6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.

7. Crises generally follow a period of rampant credit growth. In the boom, liabilities are contracted that cannot subsequently be repaid. The U.S. will ultimately be a perfect example of this.

8. Moral hazard is another common feature of great speculative manias. Greed isn’t necessarily good and we tend to act irresponsible during intense periods of speculation.

9. A rising stock of debt is not the only cause for concern. Investments financed with borrowed money don’t generate enough income to either service or repay the loan (what Minsky called “Ponzi finance”).

10. Dodgy loans are generally secured against collateral, most commonly real estate. Thus, a combination of strong credit growth and rapidly rising property prices are a reliable leading indicator of very painful busts.

Housing prices turned down again. Be beware of double-dip.

(click to enlarge)

A Great chart on the history of cost of home ownership (courtesy of Visual Economics).

As measured by the percentage of income devoted to mortgage payment, we are at historical low. This is a great time to own a house.

Caution to house speculators: do not hope for a quick price recovery.

(click to enlarge)