The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice.
-- Mark Twain
Newly released statistics last week from Standard & Poor’s Case-Shiller index show continued decline in national home prices, prompting the media to question once again if the housing market is headed into a double dip. Though we can validly view any downward trend as a dip, Standard & Poor’s would define a double dip in housing values as prices falling to previous lows hit during the recession. The newest report from the 20-city index shows current lows are a mere 1.1% above the previous bottom of April 2009.
“The double-dip should happen by June,” Patrick Newport, U.S. economist with IHS Global Insight, wrote in a note Tuesday. “Going forward, weak demand, foreclosures and a glut of homes for sale should translate into at least another 5% drop in the Case-Shiller composite indices.”
Five percent seems like a very conservative estimate. Historically, economic bubbles overshoot on the downside. While much of the media has been debating whether or not a double dip will manifest despite continued declines in prices, sales numbers and building starts since the end of the tax credits last summer, The Paper Boat has been calling for a resumed decline in home prices since the market first began showing signs of recovery. In our view, the downward trajectory of the housing market was deterred only temporarily by expensive unsustainable government intervention and it has always been just a matter of time until housing continues along its merry way to finding a true bottom. In fact, we imagine we will see prices fall to pre-bubble levels before the market begins to appreciate again in any sort of sustainable way.
The Case-Shiller housing index is widely viewed as the most reliable graph of housing price trends, but keep in mind its data is derived from a limited number of larger cities that don’t reflect the devastation of value occurring in outlying areas. Here in southern California, as in much of the country, the hardest hit real estate values are located outside of major cities in outer ring suburban areas like Riverside and Lancaster. In this respect the Case-Shiller index may fall short in its ability to capture the severity of the market’s decline.
It is also important to remember the Case-Shiller index is a lagging indicator. The newest data reflects market trends only through January. If we look at an alternative data source, like Clear Capital’s Home Data Index, we can get a sense of where trend lines have headed all the way through mid-March. Their latest report shows prices have continued to decline over the past two months, showing a quarter-over-quarter national price change of -1.6 percent in February and -1.4 percent in March. It is interesting to note that Clear Capital’s research shows prices are uneven nationwide, with declines in the West dramatically steeper than in the rest of the nation. This has a dampening effect on the overall national price trend. Eight of the fifteen worst fairing markets are located in the western region of the US.
“As prices continue to slide, new record price lows for the West are only 0.7 percent away and could be realized as early as next month. This is notable, since two years have passed since the prior record price lows were seen in early 2009. While local variations persist, this leaves some recently vested investors in the West with little potential gain while broadly amplifying the risk of losses,” the new report from Clear Capital notes.
Watching from the ground in Los Angeles, I would correct that to say “guaranteeing losses” for newly vested investors. In terms of foreclosures alone we are seeing pending defaults outnumber houses for sale many times over. Most sales transactions are transpiring entirely in cash, which indicates investors are a driving force in moving inventory. I keep wondering who these investors are. They don’t seem very experienced or aware of even the most basic economic principles. The evidence is overwhelming that this is a terrible time to invest in property, yet they are jumping into the market as though we’re seeing deep discounts. On the West Coast the bubble mentality persists that housing will soon be shooting back up in value to the highs we saw six years ago. Meanwhile, many mid to high end areas have yet to see the real damage of the downturn.
A major concern regarding a double dip in the housing market is that it will trigger a double dip in the larger national economy. Yale professor Robert Shiller, co-founder of the Case-Shiller index, warned months ago he sees a looming risk of this happening. Now former Secretary of Labor under Clinton, Robert Reich of UC Berkeley, is echoing those concerns. He makes the point that the economy is reliant upon consumer spending, and that losses in housing value put a damper on people’s willingness to spend.
“Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes are the biggest asset most Americans own, as home prices drop most Americans feel even poorer,” Reich explains.
“Why aren’t Americans being told the truth about the economy?,” he asks. “We’re heading in the direction of a double dip — but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.”
Reich surmises the answer is political. Democrats and the White House want to maintain the illusion that the economy is on an upswing and the recovery is going strong. Republicans, on the other hand, are focused on deficit cuts and are afraid if the alarm is sounded people may want the government to do more rather than less. In any case, it is probably not the best time to buy property, so don’t believe the hype. With the prospect of a double dip in the economy ahead you’d be better off stashing that money under the mattress.
Huffington Post The Economic Truth That Nobody Will Admit: We’re Heading Back Toward a Double-Dip
March 31, 2011 http://www.huffingtonpost.com