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Economist: Home-price funk has a silver lining

Home-price growth slowed for the third consecutive month in October, cooling off in several major cities, according to the latest read from the S&P CoreLogic Case-Shiller Indices released Wednesday. CoreLogic Deputy Chief Economist Ralph McLaughlin discussed the latest numbers and why he doesn't believe they are an indicator of an impending crash in the market. McLaughlin says home prices have a good chance of holding their value, or even rising, even when the next recession hits.   

Why have home prices been decelerating for some months now?

It is a combination of a couple of things. One is that the economy is getting mature in the cycle, and the pent-up demand for buying homes that came out of the housing market recovery is starting to moderate a bit. Two, we are starting to see both new and existing-home inventory rise. It has risen from historically low levels. And three, we think that recent upticks in the mortgage rate as well as the mid-term elections have put homebuyers into more of a cautious, hesitant mode.

mclaughlinIn addition to all of those broader explanations, there are some previously hot markets that are starting to cool. When big, fast price-growing markets start to slow, it can slow the overall national number. We have seen prices in Seattle and San Francisco, which were growing by double digits, year in and year out over the last eight years, really start to come back to earth.Those are big, expensive markets.

 If I were to add anything to that, it is that some buyers are starting to see some affordability fatigue. Prices can grow faster than incomes and faster than inflation for only so long before they become out of reach for the majority of potential homebuyers out there. We have seen that in some of the aforementioned expensive markets.

About the latest Case-Shiller price report released today, you noted that home prices were still rising in October by double the rate of incomes and inflation. Is that still too high?

They look more reasonable now, and that is good news for those who have wanted to get into the housing market, but haven’t. But, by no means, are homebuyers probably feeling any sense of relief right now. About the only way that homebuyers may tangibly [be feeling some relief] is with the increase in inventory this year. They certainly aren’t getting much price relief. Prices are still growing. The one consolation prize they have is with growing inventory. At least there is a little bit better selection on the market, and they may be less likely to face a multi-bid housing market than in the past. 

Las Vegas and Phoenix were No. 1 and No. 3 in terms of annual price gains. Why are prices rising so quickly there? 

We think it is a couple of things. Both Phoenix and Las Vegas were severely scarred by the financial crisis, and the housing market collapse back in 2007 and 2008. They never really went through a large initial recovery, when the housing market got off its feet in 2012. Places like Las Vegas and Phoenix, but also other markets, especially some of those in Florida that were also hit pretty severely by the recession, are going through a recovery at a later stage than other housing markets.

Second is that these places offer a relatively good quality of life. They are affordable. The weather tends to be Ok, albeit a little hot in the summer. As a result, maybe some of the households that have been priced out of the most expensive coastal markets are flocking to these areas. They can get a relatively good qualify of life without having to pay an arm and a leg for housing. And then third, these areas are still growing. There is lots of room for the population to grow. We are not coming up against significant geographic constraints when it comes to expanding the new supply of housing, and that is very much unlike some of the other more expensive coastal markets that I mentioned. So, really, it is a combination of those factors that are helping drive not just a prolonged recovery in those markets, but also their long-term growth when it comes to population, employment and housing growth.

How long can prices rise above what is already a record in nominal terms?

It can go on, technically speaking, for quite a while. In fact, the last housing-market boom, boomed for about 16 or 17 years. I am talking about the period from the early ‘90s through to the Great Recession. There was a recession in 2001, and home prices did not fall at all. In fact, prices still grew between about 4 and 6 percent, depending on where you were in the country. If you look back at the recessions in the early ‘80s, prices didn’t fall at all. With the last five recessions, the only two where prices fell were during the early ‘90s and the Great Recession. So, it is not out of the question that prices continue to rise indefinitely.

It is entirely likely that prices won’t necessarily fall during the next recession or, if they fall, they will fall only by a small margin. And when the economy picks back up again, prices will follow. Fundamental to this reasoning is that we are still in a very low inventory environment in the U.S. housing market. If you look at the number of new and existing homes that are for sale, it is just barely above historic lows that we saw last year. That sets a high floor for how far prices can potentially fall during an economic downturn. This is in stark contrast to what inventory looked like around 2006-2007. It was near historic highs in 2006 and 2007 just before the onset of the recession. That was certainly one catalyst as to why the housing market collapsed. There was just inventory galore when demand pulled back. When demand pulls back now for whatever reason, there is not an excess supply of homes on the market from a historical perspective. So, I am not too worried about the potential for the bottom to fall out of the market completely.

Does the recent turmoil in the stock market have any ramifications on the housing market?

I have two opposing thoughts on that.The rational person inside me says, well, it shouldn’t really. Most Americans are not compensated through annual stock grants. In fact, most people’s retirement, if it is in the stock market, isn’t really being used for downpayment purposes. Maybe it hurts a little bit because you can use your 401k as reserves, which you might need sometimes to qualify for a mortgage. But I would suspect that, at the end of the day, that isn’t going to make or break a households’ ability to buy a house. For that reason, I don’t think a falling stock market should have much of a long-term impact on the housing market.

There is a hit to a psyche. When the stock market falls, people’s net worth on paper falls. That may put them into a state of animal timidness, so to speak, to contrast with [Yale economist] Robert Shiller’s [concept of] animal spirit. Just as homebuyers can get caught up in animal spirit and that can potentially lead to a bubble, like it did 10 years ago, on the downside, there is a possibility for animal timidness. People feel less good about the future if they see that the stock market is falling, because of geopolitical events that may lead to uncertainty in the future. They may just start to be more conservative with their expenditures. Since a home is one of the biggest expenditures a household could have, it makes sense that there is some possible dampening of demand because of it. That is the reality between the link between the stock market and the housing market. 


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