Dr. Robert Shiller Says No Housing Boom

The Mortgage Corner

Dr. Robert Shiller, Yale Econ Professor, and co-creator of the Case-Shiller Home Price Index, has become very cautious in his latest articles. Don’t expect much in the way of a housing boom in 2013. He isn’t even sure even prices will continue to rise as they have over the past 3 years given all the headwinds, such as tighter mortgage regulations, a declining percentage of homeowners versus renters, and low consumer expectations in general.

This is in spite of the fact that home sales are up some 5 percent, and his own price index is 5.5 percent higher in one year, for the strongest year-over-year growth since August 2006 with increases in 19 of 20 cities..

“On the one hand, there were sharp price increases in 2012, with the S.&P./Case-Shiller 20-City Index, said Dr. Shiller, “which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market.”

“But some of these changes were seasonal,” he continues. “Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.”

Yet he cites a consensus of some 100 economists that real prices will rise 1 to 2 percent over inflation in coming years. Folks, that is the historical norm for housing prices in the 20^th century that Dr. Shiller himself cites in his second edition of Irrational Exuberance.

Why so much pessimism from the Oracle who actually coined the term ‘irrational exuberance’ that Fed Chairman Greenspan used in his famous speech so many years ago?

Graph: Calculated Risk

I believe he is neglecting what is behind the current surge in home buying—pent up demand, and record low interest rates that the Fed has vowed to keep low until the unemployment rate falls to the 6 percent range from the current 7.8 percent. Pent up demand is a powerful driver of home building, for one thing. And household formation is predicted to double to some 1.3 million per year in coming years from a low as 350,000 annually during the Great Recession.

That, and real interest rates make homes the most affordable in history, according to the National Association of Realtors. While this won’t bring us back to boom times, it will at least restore housing to its proper place in the economy.

Even though national existing-home sales declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, sales are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

Graph: Calculated Risk

The result is total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing, as we have said in past weeks. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

Graph: Econoday

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

Hence we do not share Dr. Shiller’s uncertainty about the direction of home prices. Extremely tight housing inventories mean demand has picked up substantially. It all might depend on one’s definition of a housing ‘boom’. No one expects a return to the bubble years when consumers borrowed more than they earned. Maybe it’s a relief just to return to a more normal housing market?

Harlan Green © 2013

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2012 Housing Recovery Fuelled by Affordability

The Mortgage Corner

Housing prices needs one more year to begin to recover, according to several pundits and economists, including Barron’s Magazine and Professor Karl Case, co-creator of the S&P Case-Shiller Home Price Index. And that mostly depends on two factors—increased household formation and record housing affordability. Employment shouldn’t impede the recovery, as the unemployment rate will continue to drop, while the Fed is committed to keep interest rates low through 2014.

JPMorgan Chase CEO Jamie Dimon also said the U.S. housing market is very close to a bottom and there are already signs its improvement is giving a boost to the overall economy, in a CNBC interview. “"I believe we’re very close to the inflection point. People look at prices that are still coming down but all the other signs are flashing green," Dimon said during a job fair in New York for hiring veterans. Housing is more affordable and "the shadow inventory everyone talks about is lower today than it was 12 months ago. It will be a lot lower 12 months from now," he said.

This is mainly because housing affordability conditions have reached the highest level since recordkeeping began in 1970, according to the National Association of Realtors. NAR’s Housing Affordability Index rose to a record high 206.1 in January, based on the relationship between median home price, median family income and average mortgage interest rate. The higher the index, the greater the household purchasing power.

Affordability rose so high in January because the median existing home price fell to it lowest level since the recession--$154,400—while the 30-year fixed mortgage rate held at 4.37 percent. This meant that the monthly payment as a percentage of median income fell to just 12.1 percent.

NAR President Moe Veissi said this latest data underscores buyer opportunities in today’s market. “This is the first time the housing affordability index has broken the two hundred mark, meaning the typical family has roughly double the income needed to purchase a median-priced home,” he said. “For buyers who can qualify for a mortgage, now is a very good time to become a homeowner.”

And household formation is projected to grow from approximately 600,000 in 2011 to the more historical average of 1 million households per year in coming years, says the U.S. Census Bureau.  This should soak up excess existing and new-home inventories that have already dropped to 6 months’ levels.

“According to one recent estimate, the number of excess vacant housing units in the existing housing stock can be attributed to a steep decline in demand during the Great Recession,” says the Census Bureau report. “Household formations (e.g., adult children leaving parents’ households, singles leaving shared housing arrangements, etc.) are the largest component of demand for additions to the housing stock. These new households are accommodated by additions to the housing stock when vacancy rates are low, and are absorbed into the existing vacant stock when vacancy rates are high. Since 1965, the number of households in the US has grown at an average annual rate of 1.5 percent, adding an average of roughly 1.3 million new households per year, according to the Census Bureau’s Housing Vacancy Survey.”

Graph: U.S. Census Bureau

And the Pending Home Sales Index, a forward-looking indicator based on contract signings, eased 0.5 percent to 96.5 in February from 97.0 in January but is 9.2 percent above February 2011 when it was 88.4. The data reflects contracts but not closings.

NAR chief economist Lawrence Yun said we’re seeing the continuation of an uneven but higher sales pattern. “The spring home buying season looks bright because of an elevated level of contract offers so far this year,” he said. “If activity is sustained near present levels, existing-home sales will see their best performance in five years. Based on all of the factors in the current market, that’s what we’re expecting with sales rising 7 to 10 percent in 2012.”

Harlan Green © 2012

Are We Ready For The ‘Big Data’ Revolution?

Popular Economics Weekly

Is the Information Age intimidating? Have you been struck with information overload? Help may be on the way. There is so much in the news about it, but little on how to manage so much information inundating us daily—not only via computers and emails, but our 24/7 news cycle. But research is beginning to show us how we can benefit from such increasingly available information.

Kinsey and Company consulting has taken the side of businesses in its McKinsey Quarterly report, Are You Ready for the Era of ‘Big Data’? “In 15 of the US economy’s 17 sectors, companies with more than 1,000 employees store, on average, over 235 terabytes of data—more data than is contained in the US Library of Congress”, said its report.

All of this new information is laden with implications for leaders and their enterprises, said the Kinsey report. “Emerging academic research suggests that companies that use data and business analytics to guide decision making are more productive and experience higher returns on equity than competitors that don’t. That’s consistent with research we’ve conducted showing that “networked organizations” can gain an edge by opening information conduits internally and by engaging customers and suppliers strategically through Web-based exchanges of information.”

And the big data revolution will result in much greater efficiency on how private households use information as well. Yale Economist Robert Shiller looks into the future in his book, The New Financial Order, Risk in the 21^st Century. In it Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies.

“Right now we are witnessing an explosion of new information systems, payments systems, electronic markets, online personal financial planners,” he says, “and other technologically induced economic innovations, and consequently much in our economy will be changed within just a few years. Almost all of our economy will be transformed within just a few decades.”

Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, says Amazon’s description of The New Financial Order. “From inequality insurance to intergenerational social security. Just as developments in insuring risks to life, health, and catastrophe have given us a quality of life unimaginable a century ago, so Shiller's plan for securing crucial assets promises to substantially enrich our condition.”

As information becomes more readily accessible across sectors, says McKinsey, it can threaten companies that have relied on proprietary data as a competitive asset. The real-estate industry, for example, trades on privileged access to transaction data and tightly held knowledge of the bid and ask behavior of buyers, information owned by Brokers. Both require significant expense and effort to acquire. In recent years, however, online specialists in real-estate data and analytics have started to bypass agents, permitting buyers and sellers to exchange perspectives on the value of properties and creating parallel sources for real-estate data.

So the results will give us a better understanding of our own finances as well. But greater access to personal information that big data often demands will place a spotlight on another tension, between privacy and convenience, says McKinsey. Their research shows that consumers benefit greatly from data in lower prices, a better alignment of products with consumer needs, and lifestyle improvements that range from better health to more fluid social interactions. The tradeoff is less privacy, as companies collect more information on individual consumer’s behavior.

Professor Shiller is one of the economic trail blazers of the information revolution. Not only did he study U.S. stock market behavior over the last century in his book, “Irrational Exuberance” (Princeton U. Press, Princeton, N.J., 2000) that predicted the dot-com implosion (and the housing bubble, in its second edition). He and Wellesley Professor emeritus Karl Case have set up the S&P Case-Shiller Home Price Index that tracks the historical swing of home prices in 10 and 20 metropolitan markets, which has helped to establish a futures’ market for home prices, and in turn helps to make such market swings more predictable.

Establishing and disseminating the historical record should also help policy makers avoid endlessly repeating history’s mistakes, which is something easy for the general public to understand. I.e., historical study of the Great Depression is one reason Presidents Bush and Obama were able to inject enough stimulus into our economy to avoid another Great Depression. And it helps bring about our own greater awareness of the financial environment that affects us as consumers and investors.

So the information age is a two-edged sword. The greater access of consumers to information via the Internet means companies will collect more privately held information of consumers. But, conversely, as more information becomes public, less can be hidden by insiders such as financial traders, corporate executives, and the like. More transparent financial markets should also decrease the occurrence of busted asset bubbles—two of which we have experienced just since 2000 (i.e., dot-com and housing)—which were mainly based on irrational exuberance—i.e., ignorance of the underlying facts.

How to manage such information then becomes ever more one of individual choice, thereby placing more responsibility on the informed consumer. That is really the sword’s other edge. More than ever, we are living in a ‘buyer-beware’ world of individual decision-making, requiring ever higher levels of education.

Harlan Green © 2012

Will Younger Generation Rescue Real Estate?

The Mortgage Corner

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000, which combined with increasing builder sentiment is a sign that children of the baby boomers—the so-called Boomerang or echo boomer generation—may finally be venturing out from their parents’ homestead. This is 9.3 percent above the revised October estimate of 627,000 and is 24.3 percent above the November 2010 rate of 551,000.

Household formation is the big uncertainty. It hit record lows during the Great Recession, as the offspring of baby boomers stayed at home longer, rather than buy or rent their own living space. But population pressures are building as the echo boomers outnumber their parents—some 86 million who will eventually live separately.

U.S. home prices won’t recover until the economy improves enough to boost the number of households and clear an oversupply of properties, said economist Karl Case, co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had more household formation,” Case, a retired Wellesley College professor, said in an interview today with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster economic growth has encouraged people to move in with friends or family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home sales, grew by 600,000 this year, less than half the 1.5 million pace of 2006, when prices reached a record, according to IHS Global Insight Inc. This year’s pace isn’t enough to absorb the so-called shadow inventory of distressed properties poised to come on the market, said Patrick Newport, an economist with the Lexington, Massachusetts-based research firm.

Whereas something like 750,000 and 1 million new households were predicted in 2011, predicts UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport, according to a recent Bloomberg article. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes also edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, just released. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Foreclosures and short-sales now make up some 30 percent of existing-home sales, according to CNBC’s Diana Olick. But that number might change with the new revisions of existing-home sales since 2007 by NAR. As it is, existing sales jumped 4 percent in November. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

So who is right, Karl Case or Patrick Newport? Even 600,000 new households is a doubling of last year’s new households. And that is why we are seeing more housing construction. Much of it has to be rentals, but the pressure to build will continue as more of the echo boomers find jobs and leave their parents’ homes.

Harlan Green © 2011