Popular Economics Weekly
Why are stock prices rallying? Maybe it’s because though housing price increases have slowed, consumer confidence is soaring for the holidays. The prospect for future job and income growth looks good, in other words
Home prices contracted for a 4th straight month in August in Case-Shiller 20-city data, down 0.1 percent vs expectations for a gain of 0.1 percent. This is while consumer confidence rose to a post-recession high, a good sign for increased holiday spending.
Month-to-month prices declined in just 3 of the 20 cities, monthly—Charlotte, NC, San Diego, and San Francisco—with San Francisco, Las Vegas and Miami prices up the most year-over-year.
So though the 20-city monthly average fell sharply, annual year-on-year overall prices are still a plus 5.6 percent from plus 6.7 and 8.0 percent in the two prior months for the 20-city index. The 5.6 percent rate is the lowest since November, says Econoday.
This is while the Conference Board’s Consumer Confidence Index for October is at a new recovery high of 94.5, up from an upwardly revised 89.0 in September and surpassing the previous recovery high of 93.4 in August. The last time the index reached this level was in October 2007, right at the beginning of the Great Recession.
October's gain is concentrated almost entirely in the expectations component, which jumped 8.6 points to 95.0 in a reading that is close to February 2011's 97.5. The strength in expectations reflects optimism in the outlook for both jobs and income, both of which show convincing gains in this month's report.
Despite improved housing conditions and low interest rates (as low as 3.625 percent for the conforming 30-yr fixed rate today), tight credit conditions continue to be a barrier for some buyers, as we have said in past columns. Of the reasons for not closing a sale, about 15 percent of Realtors in September reported having clients who could not obtain financing, reports the NAR.
Lastly, the so-called price-to-rent ratio tells us that prices are again rising faster than rents, and are above the long term ratio of 1:1. This means that housing prices are growing faster than rents again. Ergo, prices cannot continue this trend for long, since rent increases mirror actual income increases, whereas prices rise or fall for a number of reasons. This includes the perception that housing prices will continue to rise (due to irrational exuberance, which is an early sign of housing inflation) and perhaps ultra-low interest rates, which must eventually rise to more normal levels.
On a price-to-rent basis, the Case-Shiller National index is back to February 2003 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to July 2003, reports Calculated Risk.
So are we at the beginning of another housing bubble? Probably not, because the main cause of the current price increases is inadequate new home construction to meet the demand for housing (which is rental housing, at the moment), rather than oversupply of new homes that caused the housing bubble.
Harlan Green © 2014
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