The investment performance of REITs

This graph shows the investment performance of real estate investment trusts over the past decade. As you can see, they plunged during the housing crash, but have since fully recovered and continue growing.

Robert Shiller wins Nobel Prize in Economics

Yale Professor Robert Shiller has won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel:

Three American professors — Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller — were awarded the Nobel Memorial Prize in Economic Science on Monday for showing that asset prices move unpredictably in the short term but with greater predictability over longer periods. . . .

Mr. Fama, 74, was honored for showing that asset prices are “extremely hard to predict over short horizons.” . . .

Mr. Shiller, 67, would later introduce an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods. Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of market participants.

Robert Shiller also co-developed the modern methods of tracking home prices used by this blog and my housing graphs website.

Why the prolonged economic slump? One word: Housing.

Economist Dean Baker writes about a recent research paper from the Federal Reserve Bank of Cleveland:

The study goes on to note the extraordinary weakness in housing in this recovery and point out that this weakness could explain much of the weakness of the recovery.

While the study notes that there are questions of causation (a weak recovery could lead to weakness in housing), there can be little doubt that if residential construction had returned to its pre-recession level, as had been the case by this point in all prior post-war recoveries, the economy would be back near full employment.

Of course it is not hard to understand why housing has not recovered. The massive over-building of housing during the bubble years lead to an enormous over-supply of housing, which shows up in the data as a record vacancy rate in the years 2006-10. In the last couple of years the vacancy rate has begun to decline which can explain the recent uptick in housing over the last few quarters.

This housing story explains why we should have expected a long and drawn out recovery. There is no easy way to replace the massive loss in demand associated with the collapse of the housing sector. And, it is hard to blame the collapse on President Obama, since the overbuilding took place in the years 2000-2006 and the collapse was already well underway at the point where he took office. ...

Ultimately we will need an increase in foreign demand, meaning a lower trade deficit, to fill the gap. This will require a lower valued dollar which will make U.S. goods more competitive internationally. Unfortunately, neither candidate seems willing to make the case for a lower valued dollar, which means that we can probably expect a weak economy for many years into the future, regardless of who gets elected.

S&P/Case-Shiller national home price index falls again

In the first quarter of 2012, the S&P/Case-Shiller national home price index fell 1.9% year-over-year:

Data through March 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended the first quarter of 2012 at new post-crisis lows. The national composite fell by 2.0% in the first quarter of 2012 and was down 1.9% versus the first quarter of 2011. The 10- and 20-City Composites posted respective annual returns of -2.8% and -2.6% in March 2012. Month-over-month, their changes were minimal; average home prices in the 10-City Composite fell by 0.1% compared to February and the 20-City remained basically unchanged in March over February. However, with these latest data, all three composites still posted their lowest levels since the housing crisis began in mid-2006. ...

The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, posted a 1.9% decline in the first quarter of 2012 over the first quarter of 2011.

Unfortunately, crappy journalists at several different news organizations keep emphasizing the 20-city numbers instead of the national numbers. Why? Why would anyone think that an index that measures a random selection of 20 cities deserves more emphasis than an index that covers the overall country? (Note: The S&P/Case-Shiller national home price index really only measures 70% of the country, but that's still way more than just 20 cities.)

Housing recovery a long way off

In a CNBC editorial, Michael Yoshikami argues that a housing market recovery is still a long way away:

Housing starts were surprisingly strong this week, while there was improving sentiment from home builders. So should we start to breathe a sigh of relief that the housing market is returning to health? The short answer is no. The headlines say that housing is stabilizing and there are signs of life in the real estate sector. This is true but is only part of the story. Signs of life is far different than a return to healthier times.

While KB Homes and Toll Brothers are reporting sales increases, this does not erase the fundamental problem with the real estate market today; there are too many people wanting to sell and not enough buyers. In some neighborhoods in the United States, every other house is for sale and sitting stagnant with no takers. But this is the obvious sign that the real estate market is troubled; there are deeper problems below the surface.

What is more troubling is in every block in neighborhoods across the United States, there are huge numbers of potential sellers that would sell their house if they could get the price they believe their house is worth. This huge reserve of sellers creates a supply waiting to flood the market when any sign of recovery in real estate capital values returns.

Additionally, banks continue to hold huge inventories of foreclosed properties waiting for a rebound in the market before placing these properties into the real estate market. ...

In addition to supply issues, the U.S. economy is far from healthy. While we are in the midst of an uneven recovery, unemployment remains stubbornly high and the prospects of a more normalized employment rate are far off in the distance.

Why did America's housing bubble decline more than in other countries?

Much of the developed world (especially America and Europe) had a housing bubble. The Economist asks why America's fell so much faster than the bubbles in Europe:

Perhaps the difference is institutional. American banks had poorer lending standards and have been quicker to foreclose on properties; borrowers have been readier to walk away from their homes. In European countries, owners have been able to sit tight in the hope that prices will recover. European markets are certainly a lot less liquid. Irish transaction volumes dropped by 83% from their peak and Spanish ones by 64%, but American deals fell by just 46%. Europe is going in the same direction as America. It is just getting there more slowly.

Updated housing graphs

I have updated my national housing bubble graphs to reflect the latest data available. It covers home prices from 1970-2011. It looks like U.S. home prices are fairly valued, although it varies by metro area. As I said in the past, I don't expect any significant overshooting nationally. I stick by that prediction.

Here, the red line represents inflation-adjusted housing prices, and the blue line reflects nominal housing prices:

The graph below compares the change in home prices to the change in owner-equivalent rents over time. Without any bubbles, they should increase at roughly the same rate over time:

S&P/Case-Shiller national HPI shows 4% fall in home prices

U.S. home prices fell 4.0% during 2011:

Data through December 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended 2011 at new index lows. The national composite fell by 3.8% during the fourth quarter of 2011 and was down 4.0% versus the fourth quarter of 2010. Both the 10- and 20-City Composites fell by 1.1% in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% respective annual rates both reported for November. With these latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006.

Note: Only the national composite index really matters when measuring the national housing market. Ignore the 10- and 20-city indexes.

In addition to both Composites, 18 of the 20 MSAs saw monthly declines in December over November. Miami and Phoenix were up 0.2% and 0.8%, respectively. At -12.8% Atlanta continued to post the lowest annual return. Detroit was the only city to post a positive annual return, +0.5% in December versus the same month in 2010. In addition to the three composites, Atlanta, Las Vegas, Seattle and Tampa each saw average home prices hit new lows. ...

Translation: Washington, DC metro area home prices fell, too.

As I pointed out yesterday, Phoenix, Detroit, and Miami are dirt cheap, so the prices should rise. Las Vegas and Tampa are also dirt cheap, but apparently prices are still falling there.

“In terms of prices, the housing market ended 2011 on a very disappointing note,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “With this month’s report we saw all three composite hit new record lows. While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.

“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”

To paraphrase Annie: The bottom, the bottom, I love you, the bottom. You're always a year away.

Warren Buffett is a housing bull

Billionaire investor Warren Buffett believes housing is a better investment than stocks right now:

Warren Buffett says along with equities, single-family homes are a very attractive investment right now.

Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "millions" of single family homes if it were practical to do so.

If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.

His housing recommendation is likely based on the fact that mortgage rates are incredibly low right now. Nationally, home prices are no cheaper than their pre-bubble norm, although it varies depending on where you live.

I believe that some housing markets are far better buys than others. Cities with very high unemployment rates have dirt-cheap home prices right now. Places like Las Vegas, Phoenix, Detroit, and most of Florida have prices below their historical norms.

Happy Valentine's Day, renters!

We get no respect, no respect at all:

In a survey of 1,000 single people, more than a third of women and 18% of men said they would much rather date a homeowner than a renter.

Ouch!

Only 2% of women said they preferred to date a man who rents, while only 3% of men said they would choose a woman who rents over one that owns her home, according to the survey, which was conducted by Harris Interactive for real estate site Trulia.

Both sexes also clearly prefer it when there's no roommate in the picture; 62% of survey respondents, men and women, prefer to date singles who live alone. ...

Trulia also asked which home features are the biggest turn-ons. Number one turned out to be a master bath. Men (64%) love that private sanctum almost as much as women (75%) do.

Walk-in closets were cited by 55% of men and 72% of women and gourmet kitchens got 51% of the male vote and 62% of the female. Hardwood floors, outdoor decks and home theaters also came in high on the list.