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Real estate update--no sign of a double-dip




According to the two indices of real estate prices in this chart, both residential and commercial estate prices have been roughly stable for more than one year, after having suffered brutal declines of 30% and 40%, respectively. While many observers are extrapolating the marginal weakness displayed in the Case Shiller-20 index (shown above) in recent months, and calling for a second wave of price declines, I offer the following chart, which is a subset of the index above, and which reflects prices in the 10 largest metropolitan areas. Despite the fact that this chart is also adjusted for inflation, the trend since early last year or so is flat, if not slightly rising. The nominal value of this index is now almost 5% above its April '09 low. The real estate market is always one in which local conditions can predominate, and the fact that one's selection of markets can paint two different pictures suggests that on balance it's likely that not much is going on.


I continue to believe that the correction in the real estate market has run its course. It's been 5 years since the peak, which is plenty of time for the market to adjust to new realities. Residential construction has plunged by 75%, leaving new home construction far below the level necessary to keep pace with new household formation, and thus effectively taking a lot of excess housing inventory off the market. Borrowing costs have also plunged, and real personal incomes have risen, raising housing affordability to levels not seen in decades (chart below). An index of homebuilders' stocks is up 150% from its late-2008 lows, and lumber prices have more than doubled since March '09, both of which point to a nascent recovery in the construction market's fundamentals. Finally, I note that the economy is clearly improving, and household net worth has risen significantly in the past two years.


There may well be a significant increase in the number of foreclosed properties being brought to market this year, but there is a price that will clear any market. Whether it will take significantly lower prices for the market to clear this year is the key question. I doubt it, but those who are skeptical of the economy's ability to grow believe that real estate prices will need to fall by enough to cause new concerns about the health of the banking sector and new concerns about household net worth. Only time will tell, but I think the preponderance of evidence continues to suggest that the worst has passed, and optimism makes more sense than pessimism.

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