February, 2011 Archives

26
Feb

Are Housing Prices At A Bottom?

by Riaan Nel in News

[27LEDE]There are those predicting the housing market will be reaching a bottom this year even though we’ve learned last week that the S&P/Case-Shiller home-price index fell 1% in December, 2010.  The optimists point out that housing is the most affordable it has been in decades, with interest rates at record lows.  In 2005 the cost of a home in Los Angeles was equivalent to 4 and a half years worth of pay for the average family.  Currently the average price has fallen to just over two years’ income.  Nationally, the cost of a house is equivalent to 19 months of total pay for the average family.  This is the lowest level in 35 years according to The Wall Street Journal.

The optimists also point to the significant increase in all cash deals.  In Miami more than half the deals last year were made in cash.  In the last quarter of 2006 only 13% of purchases in the city were made with cash.  Last year 42% of purchases in Phoenix were cash deals.  Cash deals are indicative of investors stepping into the market.

Scott Simon, a managing director at PIMCO, recently stated his belief that housing prices will probably bottom in 2011, although he thinks they might dip another 5%.  Scott’s prediction should be taken seriously when we consider he foresaw the housing crash and helped his PIMCO avoid substantial losses when housing prices came crumbling down.

I am not an optimist.  I think housing prices can and will decline further.  I base my analysis on demographic trends with retiring baby boomers downsizing, decreasing demand for the McMansions.  Moreover, future interest rates will move higher, inhibiting demand and making housing more expensive.  The jobless growth we’re experiencing is another factor.  Lastly, I think current housing prices are artificially boosted by direct intervention from the Fed earlier during the financial crisis through their purchase of  Mortgage Backed Securities, and now indirectly through Quantitative Easing.

There are those predicting the housing market will be reaching a bottom this year even though we’ve learned last week that the S&P/Case-Shiller home-price index fell 1% in December, 2010.  The optimists point out that housing is the most affordable it has been in decades, with interest rates at record lows.  In 2005 the cost of a home in Los Angeles was equivalent to 4 and a half years worth of pay for the average family.  Currently the average price has fallen to just over two years’ income.  Nationally, the cost of a house is equivalent to 19 months of total pay for the average family.  This is the lowest level in 35 years according to The Wall Street Journal.

The optimists also point to the significant increase in all cash deals.  In Miami more than half the deals last year were made in cash.  In the last quarter of 2006 only 13% of purchases in the city were made with cash.  Last year 42% of purchases in Phoenix were cash deals.  Cash deals are indicative of investors stepping into the market.

Scott Simon, a managing director at PIMCO, recently stated his belief that housing prices will probably bottom in 2011, although he thinks they might dip another 5%.  Scott’s prediction should be taken seriously when we consider he foresaw the housing crash and helped his PIMCO avoid substantial losses when housing prices came crumbling down.

I am not an optimist.  I think housing prices can and will decline further.  I base my analysis on demographic trends with retiring baby boomers downsizing, decreasing demand for the McMansions.  Moreover, future interest rates will move higher, inhibiting demand and making housing more expensive.  The jobless growth we’re experiencing is another factor.  Lastly, I think current housing prices are artificially boosted by direct intervention from the Fed earlier during the financial crisis through their purchase of  Mortgage Backed Securities, and now indirectly through Quantitative Easing.