No Way Has Housing Bottomed, Says David Levy
By Barry Ritholtz - September 30th, 2009, 4:23PM
Bulls are beside themselves about the recent performance of the Case Shiller house-price index: Prices have risen for three straight months!
This happy (if short) string of data has given rise to the widespread belief that the housing bust is over, that buyers can safely return, that folks who want to sell their houses are smart to “rent for a year until the market has come back.”
Keep dreaming, says David Levy, of the Jerome Levy Forecasting Center. House prices have plenty further to fall.
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September 30th, 2009 at 7:50 pm
I think one of the thing all of these analysts miss over and over again is that there has been a bit of a paradigm shift in the homeowner market, especially over the last decade. I see far more second houses bought for the purpose of renting. And this isn’t limited to renting only to strangers; for example, there seems to be many more families who have bought or co-signed for houses and condos for their college aged and 20-something kids to live in (sometimes with the kids paying rent, often including roommates who are de facto paying loan interest). This used to be a luxury only afforded by the upper class, but with more dual income empty nesters and sustained low interest rates, this has allowed families to do what was a generation ago was impractical. The housing machine has also become more efficient and cheap labor from the south became more available pushing construction costs down – at least until land prices pushed back. Add other social changes, like middle class people having fewer kids and having them later in life, and you see that the multi-home owner is a more common beast than it used to be. I don’t see any particular reason why this trend is destined to reverse itself in the short to medium term.
Every analyst likes to quote this “natural rate” of home ownership based on conventional wisdom about the number of “responsible enough” adults to do so, and there’s a lot of truth to that. But the problem is that this misses the portion of the population who live in someone else’s home (and I don’t mean with the owners). These homes are owned as a “second home” by one of those “responsible enough” people. These get easily lost in the statistics, since they are treated as second homes, even though they aren’t used for that purpose. This gray area between ownership and renting that results from expansion of the multi-homeowner class gets lost in this mix. If you look at the ratios of commercially owned residential rental units to the number of privately owned ones, you’ll see that in the neighborhoods that have sprouted up in the last 10 years, this ratio is way lower than in the country as a whole. Developers have developed what has been demanded, which is more private ownership properties, whether they be single family, multifamily or condos. This started well before the sub-prime mess exploded onto the scene.
Even in re-development areas, the demand was for ownership properties, not rentals (I like to refer to this as “condofication”). The judgment when it came to the price was way off for a lot of these products, but the demand really was there at the right price. Banks now won’t lend for under-occupied condos, effectively taking a large number of units off the market for private ownership except to the few who can (and want to) pay cash. So even though they’re technically for sale, they’re not competing for market share with single family homes and established condos – another often ignored point.
Analysts all seem to assume that all these extra homes beyond the “natural rate” are owned by “not responsible enough” people and sooner or later will be foreclosed upon. And while there’s plenty of anecdotal evidence showing this happening, it’s really only part of the picture.
Even with all of these errors, I don’t think his analysis is too far off, though I’m not expecting another big drop, just some natural fade in prices as we move away from peak buying season. Home prices have probably reached the point where they will be flat (ex. inflation) within a range for a while to come. He, like most, thinks there is going to be another dump of foreclosures. With many banks in less desperate need of cash, I don’t see why they would do this; it doesn’t benefit them (I expanded upon this in a post a few days ago). I just find it odd that rather than looking at what’s really happening, everyone wants to go to that “natural rate of homeownership” safe spot to justify their reasoning.