Jim Cramer said six months a year ago that housing would bottom on June 30. He’s been declaring victory ever since.
Meanwhile, another group of analysts–Barry Ritholtz, Whitney Tilson, ourselves, et al–think Cramer & Co. are hallucinating. Prices have at least another 15% to fall!
Part of the disconnect here is a failure to define exactly what one means by a “bottom.”
When prices continue to fall into next year, as they almost certainly will, those who say housing is bottoming now can always say they were talking about housing activity, not prices. Housing activity, as measured by housing starts, new home sales, and other similar measures, does appear to be bottoming.
House prices, meanwhile, are not bottoming. They are just falling at a slower rate. And they’ll likely be falling for at least another year.
In the last housing cycle, prices did not bottom for five years after housing activity bottomed. So McMansion owners who are holding off on selling “until the market comes back” may be waiting a while.
Calculated Risk has been hammering on the difference between these two kinds of housing bottoms for the last year. He also has argued that the bottoms will not take place at the same time. Here’s his latest entry:
There will probably be two bottoms for Residential Real Estate.
The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. Sometimes these bottoms can happen years apart. I think it is likely that we’ve seen the bottom for new home sales and single family starts, but not for prices.
It is way too early to try to call the bottom in prices. House prices will probably fall for another year or more. My original prediction (a few years ago) was that real house prices would fall for 5 to 7 years (after 2005), and we could start looking for a bottom in the 2010 to 2012 time frame for the bubble areas. That still seems reasonable to me.
However it is important to note that some lower priced areas – with heavy distressed sales activity – might be at or near the bottom.
And here’s the evidence. First, a look at three measures of housing activity.
For the first bottom, we have several possible measure – the following graph shows three of the most commonly used: Starts, New Home Sales, and Residential Investment (RI) as a per cent of GDP.
The arrows point to some of the earlier peaks and troughs for these three measures. The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. But this says nothing about prices.
And now, prices:
The second graph compares RI as a per cent of GDP with the real Case-Shiller National house price index.
Although the Case-Shiller data only goes back to 1987, look at what happened following the early ’90s housing bust. RI as a per cent of GDP bottomed in Q1 1991, but real house prices didn’t bottom until Q4 1996 – more than 5 years later!
Something similar will most likely happen again. Indicators like new home sales, housing starts and residential investment will bottom long before house prices.
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