Everybody wants to know if we have hit bottom. There are three indicators suggesting we have—and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.It's funny how rising asset prices are always "good" and falling prices are always "bad". More people need to study Warren Buffett's investment philosophy, because he considers low prices to be "good" and high prices to be "bad". As Warren would say, "The price you pay determines your rate of return."
On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.
I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see.
Friday, August 28, 2009
Has housing hit bottom?
The arguments for and against a bottom, by USC professor Richard Green: