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Housing Woes

Over the past two years, thousands of scholars and academics have put forth a wide variety of opinions regarding the root of the financial crisis. Because I personally consider the housing bubble--and, of course, the resultant mess of subprime mortgages--most culpable, today’s major headline in the Wall Street Journal (as in nearly all other business-related media) is particularly alarming. In the article, simply titled “Home Prices Decline, Hit Bubble Low,” authors Nick Tamiraos and S. Mitra Kalita report the arrival of a “double dip” recession in the housing markets, as the S&P/Case-Shiller home price index has recently hit a new post-bubble low.

As of late, the term “double-dip” has been utilized to describe not only the recurrence of poor macroeconomic performance, but also the repeated sluggishness of more specific sectors and industries. Here, of course, we are referring to the US housing market. As noted in the above article, Radar Logic, a technology-driven data and analytics business that produces a daily spot price for residential real estate in major U.S. metropolitan areas, bluntly asserts that the 4.2 percent decline in the index in Q12011 does not represent a so-called “double-dip,” but, rather, the fact that the housing market has not experienced a credible recovery since falling from its March-June 2007 highs. This claim is worthy of further analysis.

A look at the seasonally-adjusted 20-city composite S&P/Case-Shiller data (spreadsheet extracted from Standard and Poor’s website) by month since 2007 reveals Radar Logic’s opinion to be one backed in truth. Although a chart plotting the percent change in home prices versus the prices of one year ago depicts the classic “3/4 W” formation, we must remember that prices from 2009-2011 were still decreasing from their levels one year prior, albeit at a lesser rate. When looking at the historical 20-city composite C-S index levels, the March 2011 reading of 141.2 is less than 2 points from that of July 2009. Although there was in fact a modest 2.7 percent increase in home prices from July 2009-July 2010, this is largely due to the government’s stimulatory tax credit program for first-time home buyers. There really hasn’t been much--if any--progress.

The main take away from discerning the reality of the housing markets’ “double dip” is that statistics are rarely black and white. The Economist, in its 2007 Guide to Economic Indicators, said it best: “Economic figures can be manipulated to demonstrate almost anything.” Though a seemingly simple and straightforward message, it highlights the importance of educated skepticism when interpreting complex statistics and data. Housing numbers, along with consumer confidence reports, are two of the most important measures of economic progress--essentially all facets of the economy and business landscape are working in tandem when a new home is built. Think banks and mortgages, consumers and spending, construction and lumber companies. The construction of new homes requires the confidence that they will be met with solid demand. Moreover, buying a home is a serious decision for the average American, as it should be. For this reason, housing-related economic data is a critical gauge of the nation’s well-being.

"I think -- I hope -- we'll be O.K"

Yesterday's New York Times reports that “housing prices fell in March to their lowest point since the downturn began.” This new low is indicated by a 0.8% drop between February and March in Standard and Poor’s Case-Shiller Index, an economic indicator which surveys the price of single-family homes in the nation’s largest cities. This is a troubling -- but not altogether surprising – sign for an economy whose recovery continues to sputter. Last summer, in the Bloomberg BusinessWeek article, “Krugman or Paulson: Who You Gonna Bet on?” Hugo Lindgren, asks his readers to compare – and hedge their bets on – the differing economic outlooks of John Paulson, a hedge-fund manager, and Paul Krugman, a Professor in economics and Nobel Laureate.

Krugman, back in July of 2010, “went all in on Keynesian orthodoxy,” claiming that given the lack of federal spending, the economy will slip into a third depression characterized by slow, sporadic growth and high unemployment, resembling the Long Depression of the late 19th Century. Paulson, on the other hand, was bullish on the future. “We’re in the middle of a sustained recovery in the U.S…I think were about to turn a corner,” he claimed during the summer of 2010, “it’s the best time to buy a house in America.” Given the lack of growth over the past year and the downward spiraling housing prices evidenced by today’s Case-Schiller Index, one would have been wise to bet on the wisdom of Krugman over Pauslon.

This news is compounded by the release of a report by the National Association of Realtors which shows an 11.6% decrease in sales – significantly worse than the organizations prediction of a 1% drop. With such disappointing news, the future remains uncertain. Despite this, Douglas Yearley, the CEO of Toll Brothers, has advised us to be cautiously optimistic. In a presciently guarded remark, Yearley muses, “I think – I hope – we’ll be O.K”.