Genuine Housing Recovery or Relief Rally?
May 29, 2013
Chad Karnes, Chief Market Strategist
This week the S&P/Case-Shiller home price index showed a continued recovery in home prices as the average rose 10.9% in March 2013 from March 2012. Many media networks are extremely excited about the headline numbers as one headline suggests, “Largest Gains for Home Prices in Seven Years!”
The headline gain is on the composite average of 20 markets across the United States, but the data may be misleading depending on your location or the size of your home.
The average market has rebounded from its March 2012 price lows, however, the upper end of that rebound has been concentrated in markets that were at the epicenter of the housing bubble in the first place.
Phoenix, San Francisco, and Las Vegas are the top three gainers as all had average sale price gains over 20% from their March 2012 levels.
A Look Behind the Curtain
Markets (NYSEARCA:IWM) don’t move in straight lines. They ebb and flow and move up and down.
Many times the further a market declines, the larger its bounce. Mathematically this is necessary, as a 50% decline requires a 100% advance just to return to previous price levels.
This is what has occurred with the stock market (NYSEARCA:VTI) since its ’09 lows, and it is generally what is occurring now in the housing market. A 10.9% gain may seem huge, but given a low starting point, it may be misleading. To put it into perspective, another way to describe the recent housing price rebound is to say, “Housing prices are now only down 27% from their peak decline of 34%”.
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We should recognize that the markets that are driving the majority of the housing growth are the same markets that had the largest downside in the first place. A higher rebound is mathematically expected from them.
The chart below puts this into perspective and supports the thesis.
The 20 markets measured by the Case-Shiller index are shown in order of their highest to lowest March 2013 y/y price rises in blue. The markets that declined the most during the financial crisis are the same markets that just rose the most since March 2012. Each market’s peak year over year decline during the crisis is shown by its corresponding red bar.
The red trendline shows that generally the more a market declined in the first place, the more it has rebounded, and the markets that were more immune to the housing crisis are the ones rebounding less. For Example, Dallas only had a 6% maximum year over year decline during the crisis. Boston’s was only 8%. Dallas and Boston’s rise the last year are two of the lowest at only 7%, trailed only by Cleveland and NYC (which also saw fairly low peak declines).
The largest markets now driving housing price gains are the more speculative markets that lost the most ground in the first place.
To Excite or Not Excite, that is the Question
So should we get excited about the recent rebound in home prices? You may or may not, depending on your market, but longer term this rebound looks to be nothing more than a relief rally that is natural in the ebbs and flows of markets.
Many of the long term fundamental reasons for housing growth are still missing in this recovery.
Median household income remains down and employment still is not growing at near the levels needed. Mortgage rates (NYSEARCA:TLT) also have started to creep up and may no longer be as big a catalyst for home purchases. Building costs (NYSEARCA:ITB) are not growing near as fast as existing home costs (NYSEARCA:XHB) , and rental costs too will likely join that party. (For more on the recent crash of lumber prices and its affect home prices, see my article “Timber! Watch out for Falling Lumber Prices”)
The final chart below shows that from a purely technical perspective the recent price rises are nothing out of the ordinary (nor anything to get too excited about). It also shows that new housing starts and single family home transactions are still well below any level reached in the 2000’s.
The chart above puts into perspective the lack of rebound in sale prices since the housing low point and in reality how puny it has been.
Single family housing transactions and starts also show a similarly very small rebound. The last time housing starts and transactions were at levels this low was the recession of 1990, and even then it was only a few month blip on the radar, not a three year sideways grind.
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