Friday, June 16, 2006

U.S. housing boom is biggest since 1890

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- The recent housing boom is the biggest the United States has ever seen, but its underlying reasons may have been psychological, economist Robert J. Shiller said on Friday. New data also suggest the market might be at the end of a cycle, he added.
The only time since 1890 that compares to the recent residential real estate market is just after World War II, the Yale University professor said during a presentation on U.S. home prices, held at Standard & Poor's in New York and broadcast to journalists on the Web.

"After World War II, the soldiers came back and they wanted houses and started the baby boom. And when you had babies, you wanted houses with at least two bedrooms -- and that wasn't so common back then. They went on a buying spree and it pushed home prices up," he said.

The recent boom, however, doesn't have the same fundamental variables causing prices to soar, he said, adding that variation in such things as building costs, population and interest rates doesn't adequately explain the reason for the housing boom.

"I don't see why home prices should be shooting up that strongly," Shiller said, adding that speculation may have played a role. "It's a sign of concern."

Shiller was co-author of "Irrational Exuberance," a book that chronicled the stock-market bubble of the late 1990s. He also co-developed the S&P/Case Shiller Home Price Indices, designed to measure the average change in U.S. home prices. The indexes are based on 10 cities -- Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Denver, Las Vegas and Los Angeles -- and are now the basis of new futures and options trading at the Chicago Mercantile Exchange.

Within that index, Shiller has noticed a short-term trend of cooling home prices that could signal an end to the cycle of steep appreciation increases. Investing in the index could help homeowners hedge against price fluctuations in their homes, he said.

Shiller said he is not allowed to invest in home price index futures.

During a question-and-answer session, he said that the stabilization of home prices could also have some effect on consumers' means of gaining equity. Low interest rates inspired people to refinance their homes, and the increasing value of their houses allowed them to pad their pockets with spending money; consumers will now have to turn to other means for financing, including credit, he said.

Wednesday, June 07, 2006

Wall Street finally goes bearish on housing (about time!)

The stock market is now almost flat for the year with housing being one of the worst performers because of the selloff in the last few weeks.

What has surprised me is that all of the information has been mounting for a long while now. Anyone who googled 'housing bubble' over the last few years should have come up with Ben's Housing bubble blog, arguably the most convenient way to track daily housing bubble news. Ben pulls together relevant bubble commentary from respected news outlets throughout the country. I have been reading his blog daily, for over a year, and watched as the mainstream press slowly turned from (NAR spoon-fed) Bulls, to recent Bears.

Consensus is rising that the 'soft landing' scenario emitted by Bulls is in my opinion, er well Bull.. And finally some of the analysts are starting to agree. I expect more homebuilders to cut forecasts (or those who have cut, to cut them further) leading to further downgrades. Speculation in ending and the cold hard facts of fundamental affordability are beginning to return, as always.

The problem is, as goes housing, so goes the economy.

Mark Kessel of PIMCO has this very timely piece out on housing and the economy:

"Housing is a leading indicator of the overall direction of the economy. As housing slows, economic growth will surely follow. As such, we should expect to see tighter terms on credit extension, less liquid markets and a pick-up in the overall corporate default rate over time with a slowdown in the pace of economic growth. An eventual rise in the default rate, combined with higher near-term volatility, should lead to a more challenging market environment for credit. Watch the 'for sale signs' in both the housing and corporate bond market my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion."
Mark does an excellent job of explaining why we are heading for a downturn. I came to a similar conclusion last year and as of January 06 moved to cash, gold, and housing shorts.

As the housing market grinds to a halt, I believe the economy will drift into recession, possibly as soon as the end of 2006. It's been one hell of a party, but there is a hangover coming. If you are long in homebuilders, you may want to rethink things.