US Housing Will See Two Bottoms

by 08 Feb 2012

The true second bottom of the housing crisis will be seen in retrospect in the next few months

  The real estate bubble and housing crisis that has been wreaking havoc on the economies of the United States and Europe since about 2007 may have hit a bottom and is likely to see another one, according to some economists and real estate analysts. When looking at the available data representing sales of new homes, new construction, and investments made on residential housing, a bottom can be seen retroactively to the last couple of months. The drop has been dramatic since all three indicators hit all-time highs back in 2005 and 2006. Those three indicators together comprise one bottom of the American housing market, and it is estimated to have transpired from 2009 until recently. The other bottom is related to real estate prices, and could be seen later this year. [caption id="attachment_6223" align="alignleft" width="609" caption="New Homes verse Existing Homes"]New Homes verse Existing Homes[/caption]                                   In late May of 2011, a “double-dip” in home prices was observed in the S&P/Case-Shiller National Home Price Index. This double-dip is not to be confused with the two bottoms that take place once a housing bubble is burst. A slight increase in home prices is expected after a double-dip, something that has been observed in some United States markets. The true second bottom of the housing crisis will be seen in retrospect in the next few months, once the first bottom has been overcome and a meaningful recovery is evident. The bottom that consists of new home sales, new construction and residential investments has just begun to emerge from a flat line period. The bottom in home prices will not exhibit the same uniformity, and so it is more realistic to look at nominal data like the price-to-rent ratio. This ratio is calculated by dividing the proceeds from an annual lease contract divided by comparable homes in the area. Low price-to-rent ratios motivated investors to look into real estate acquisitions to add to their portfolios, thereby stimulating the housing market and moving away from the bottom. [caption id="attachment_6224" align="alignleft" width="650" caption="US housing, new homes, existing homes, housing, prices, price, bottom, new lows, low, lows, bottoms, mortgage, rates"]US housing, new homes, existing homes, housing, prices, price, bottom, new lows, low, lows, bottoms, mortgage, rates[/caption] A bottom in home prices is likely taking place now, but just like with other economic indicators that are subject to speculation, like stock market rallies or bear markets, it is difficult to corroborate such a claim with precision. The proverbial “green shoots” of the economy haven't quite grown enough to be considered stalks. Cautious investors usually say that the bottom of home prices tends to lag behind new home sales and housing starts.

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