The original formulators of the S&P/Case-Shiller Housing Price Indices held a press conference on Tuesday to discuss the state of the housing market. The two, Robert Shiller, Professor of Economics, Yale University and Karl Case, Professor of Economics Emeritus, Wellesley College, were generally up-beat about the industry in the conference which coincided with the release of the monthly and quarterly national and city-based indices.
Shiller said that a survey he has conducted for years asks homeowners a question about the amount of change they expect in house values over the next 12 months and the recent responses are positive. He pointed to Orange County California as illustrative. When homeowners there were asked that question in 2005 the average expectation was for a 10.7 percent increase, but then it plummeted into negative numbers. In the most recent survey the expectation was for a 0.4 percent price increase. A second question is whether or not it is a good time to buy. In 2005 90 percent of Orange County respondents said yes and even in 2009 that number remained at 79 percent. It is now back to 92 percent.
Expectations are a major driver and in housing they can become self-fulfilling prophecies but right now people's long term thinking it that it is time to buy, but short term thinking keeps them in a holding pattern. Things are looking positive, but not that positive.
Shiller pointed to two leading indicators - the National Association of Home Builders survey on builder confidence and the Census Bureau figures on housing permits. Both of these peaked in 2005 and then plunged. Now they are both up, the NAHB figures of buyer traffic is rising rapidly, but remain well below their peaks. Other indicators such as home prices are still heading down and there is great uncertainty about how close they are to bottom.
Case said he is constantly asked when and how the market is going to clear. But there are hundreds of markets across the country and each has dozens of submarkets. Every MSA has a low income sector, a high income sector, waterfront property, distressed property and MSA and each of its submarkets are subject to a different level of clearing.
Case said that household formation and housing starts drive the market and presented some statistics about their recent performance. Housing starts peaked at 2.37 million in 2006 which, he said, sounds like a big number. But looking back over the last 60 years, starts peaked at about that same number in every housing cycle only to then fall below 1 million. But only once in the last 60 years did they ever fall below 800,000. That time it was only for a single month. This time starts came off the peak and fell below 700,000 and kept going down into the 400,000 range, an 80 percent decline. They have remained below 700,000 for 40 straight months
This has been devastating to the construction industry but should have provided some stability on the supply side as not only are we not building but there is evidence we are removing homes through large scale bulldozing going on in some cities. However, household formation has let down the demand side. Anytime formation has fallen below 1 million it has meant trouble but between March 2010 and March 2011 household formation actually fell into negative numbers. Then it came roaring back, and has been above 1 million since last march.
Case said we are still at the middle of the cycle. Inventories are tightening, demand is coming back while production is not, so we should be working through the problems but there are still bombshells out there. People can't get mortgages because of tightened requirements and they can't get mortgage insurance except through FHA, Freddie Mac and Fannie Mae. The government is taking all of the risk and this is a problem that probably won't be tackled until after the election.
Shiller said he was more positive about housing this year than he was a year ago. Many of the indicators are up and unemployment is down. But none of the changes have been dramatic, so he is more optimistic than one year ago, but not a lot more optimistic.
A questioner asked each of the professors what they saw as the biggest problem holding back the market. Shiller pointed to the difficulty in getting a mortgage. Case said it was the 8.3 percent unemployment and a vague fear about a lot of things; gas prices, the problems in Europe. But most of all it might be a marked change in the way people think about homeownership. If you look back historically, he said, people did not believe that prices would ever fall. That was the American dream and it has become a nightmare. As a result people are becoming more realistic about their housing choices.