Barron's is Wrong, Housing Is Not Bottoming

Barry Ritholtz attacks the increasingly popular “housing is bottoming” argument, in this case made by Barron’s. Barron’s noted that:

  • The U.S. housing market typically begins to improve after housing starts have fallen by a million units (which has now happened: See “Silver Lining in Plunging Housing Starts: Now Close To Prior Recession Lows”)
  • Prices rose rose slightly in April in eight of the 20 markets covered by Case Shiller index
  • Sales activity seems to be picking up. NAR reports sales rose 2% in May from April’s levels, the second month in the past 10 to have seen an increase.
  • Fannie and Freddie might be nationalized.
  • The NAR expects home prices to be steady by years end.

Ritholtz discredits these arguments point by point:

  • The explosion in home construction this cycle has totally exceeded all previous home construction booms. Its so much larger than any expansion over the past 40 years as to make the prior 1M drop meaningless
  • Median Sale Prices are rising not because home prices are going up, but because less of the inexpensive homes are selling (i.e., smaller starter houses) . The mix of homes — not price increases — are skewing the numbers
  • Sales have ticked up several times, only to be revised lower in subsequent months. And, the selling season improves each month, from January (the slowest month) to August. Seasonal adjustments sometimes seem to not fully reflect this.
  • A takeover of Fannie and Freddie is somehow a positive? All that would accomplish is restoring mortgage purchases back to where it was in March 2008. So what?
  • These same analysts who are calling for stability in second half of 2008 have been incorrectly expecting home prices to stabilise for years; why will the recession make home prices stabilise?

So when will the housing market stabalize? Ritholtz thinks that prices need to drop another 10-25%:

Look for another 10-25% over the next few years — or the inflation adjusted equivalent, sideways action for the next decade.



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