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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (1402)	3/6/2004 4:43:55 PM
From: excardog	Read Replies (2) \| Respond to of 116555

On housing...Where I live (Portland,Or) we're seeing no inflation in fact we've seen some deflation on the higher end. Of course we have one of the highest unemployment rates nationwide.

To: mishedlo who wrote (1402)	3/6/2004 6:10:58 PM
From: CalculatedRisk	Respond to of 116555

Thank you for the excellent and informative post by Splotto. Caveat: I am not a RE expert, but I am focused on the RE market because I think that will be the leading indicator when the economy REALLY starts to slow. A few comments: 1) Looking at pricing as Splotto suggested, it is possible that we have already seen the peak in median New Home prices last November. 2) I like New Home Sales as an indicator (outside of the industry) since it is historically the first number that shows a decline. I agree with Splotto; housing starts are too late. NOTE: New Home Sales are reported when a contract is signed (before ground is broken), housing starts when ground is broken. Existing home sales lags New Home Sales by about 2 months (reported at the close of escrow). In the industry, I talk regularly with a local builder (everything is fine), some RE agents (the market is still hot) and, IMO one the earliest indicators: architects (still busy). These last indicators sometimes give a head fake too (a small sample). 3) A huge driver in RE has been the move from renting to home ownership over the last few years (due to low interest rates). Here are a couple of tables: Rental vacancy Year____Q1______Q2______Q3______Q4 2003____9.4_____9.6_____9.9____10.2 2002____9.1_____8.4_____9.0_____9.3 2001____8.2_____8.3_____8.4_____8.8 In Q4 2000, the vacancy rate was 7.8%. That was a fairly normal rate for the entire 90s. Homeownership % Year____Q1______Q2______Q3______Q4 2003____68______68______68.4____68.6 2002____67.8____67.6____68______68.3 2001____67.5____67.7____68.1____68 Home ownership was rising in the second half of the 90s, to these historically high levels. Of course, this doesn't mean that they can't keep rising! As rents decline (landlords will reduce rents to compete with home ownership), this will slow the move from renting to owning. The rental market is a more efficient market than housing (one of the least efficient). Landlords will compete! 4) One of the important aspects of housing is that it is a very inefficient market when prices are declining. Splotto touched on this when he wrote: “when underlying home prices level and fall, the demand will falloff much faster”. This is because home sellers demand a price as high as or higher than recent sales in their neighborhood, and are reluctant (for psychological reasons) to sell for less. Yet buyers, sensing prices are falling, demand a significant discount. This is very different than an efficient market, like for corn, where buyers and sellers know the price. New home builders will adjust their prices (to some degree), but existing home sellers will reluctantly accept a lower price. And if buyers feel prices will continue to drop, they will not even start looking. My conclusion: Usually home sales start to slow when interest rates are rising, and reach a point where buyers demand lower prices (as opposed to steady prices). It is important to note that most buyers are only concerned about the monthly payment, as opposed to the price of the home. So they demand a lower price when the monthly payment is too high (compared to their current situation). I do not think rising interest rates will be the cause of the slowdown this time. (That is actually a bold statement). IMHO, as the economy continues to weaken, the psychology of buyers will change. They will be worried about their jobs and/or salary and pull back on their expenditures. The timing is hard to predict, especially since I believe there is another rate cut (or intervention) coming with the first sign of weakness in the housing market. My current guess is 2005, but earlier is possible.