Thoughts on the latest Case-Shiller Print
After a really strong summer for residential demand, as well extremely low supply over the summer months, prices have moved substantially. They now appear to be approaching fair value. While the Case-Shiller has significant lag and therefore shows the results of two months past, it provides a benefit of a long timeline for a nice frame of reference.
A naive trendline is shown in the exhibit to the right. Other fundamental measures we are employing include price-to-rent ratios and price-to-income measures in order to estimate what we call "fair value." While some commentators have focused exclusively on year-over-year increases and using that as evidence of a bubble, we view these price changes along several dimensions. Markets often overreact to information. On the downside, home prices in Las Vegas reacted very strongly on the downside, falling below the long-run trend. Investors and owner-occupants recognized this and started buying. This is one reason why prices should have naturally had support. Secondly, on the supply side, legal restrictions to foreclosure and negative equity caused some inventory to be held off of the market. A third, rarely discussed component has been the lack of bank owned homes hitting the market. Our prior research conducted during the depths of the foreclosure crisis indicated that bank owned homes typically trade at 10% or more discount to similar homes. The fact that we remove most of this distress implies an increase. Based on our October and November analysis of median price per square foot trends, future readings of the Case-Shiller should reflect a slowing growth rate. It would not be surprising to find some negative prints as we go into 2014.
Market IQ notes
As a proxy for market expectations of the Fed policy rate, the Eurodollar yield curve appears to show that market participants are not afraid that normalization away from QE could mess with growth.
CB Patterson's San Angelo market report is complete. Prices continue to rise, the level of closings fell. Many Texas markets continue to be interesting. Check out the report here: http://www.cbpatterson.com/
Happy new year. Our impactful Residential Real Estate Investment Report is updated and available. Just send us a request to get your copy.
A lot of big deals happened in Las Vegas this year. We recently built a report showing the major sales as well as current developments. Send us a message if you want a copy.
So the Fed finally decided to "taper." Although not all the way, shaving $10 Billion in bond purchases split between government securities and MBS. Apparently the job market came in okay enough to pull back a little bit. The equity market rallied and homebuilders jumped too. We are still digesting a lot of the homebuilder earnings that have come out this week.
Just finished reading a transcript of a Silver Bay discussion at the JPM Securities Financial Services and Real Estate Conference.
Here is one interesting quote
"But again, the institutional ownership that you read about in the papers is still very small, perhaps a 100,000, maybe 150,000 homes have been purchased over the past three, four years, and that's just tiny in comparison to the overall markets. So, we see a great deal of growth opportunity and consolidation going forward."
The media has largely been hammering on the institutional buyer as a principal cause of the home price run-ups we have seen in a lot of areas. This is only partially the case. Similar in the markets we follow.
A second quote is also interesting. "The cost of housing is all interrelated. If ultimately the housing costs in those areas goes up 50%, mortgage rates go up, the cost of attending to the home goes up, all of that will contribute in a world in which supply/demand tightens into higher rents."
That is why we like this model better than a lot forms of real estate ownership. If the owner-user market gets punished by rates, that still leaves renters in the mix.
Well Bernanke's comments certainly helped pop the equity markets with the lack of taper talk. This might help slow mortgage interest rate increases but part of the underlying message is largely glossed over. That is, the Fed believes the U.S economy is not strong enough yet to take the chance of removing stimulus. Makes us wonder if risks are being priced adequately.
Taking a look at home prices in the Baltic States. Prices in Lithuania have apparently increased, coinciding with quite a few apartment building deliveries. I still haven't figured out where this demand is coming from. Certainly local business is doing better with strong exports, automotive sales and good retail sales. Vilnius has become a hub of IT with Barclay's and Western Union operating major centers here. Nerveless, with 85% LTV on a typical mortgage, its still a bit hard to see how people afford some of this nicer new product, as well as some extremely nice cars.