Yes, inventory is rising off the crazy lows of the past 2 years, but supply is still, well, low.
The above chart is a generic trend line for the seasonally and non-seasonally adjusted 20-City Case Shiller Index released today using the data from the release.
And here’s the same index that I time-shifted backwards by 6 months to reflect the “meeting of the minds” of buyers and sellers. More specific methodology is embedded in the following charts. By moving the index back 6 months, the changes in the direction of the index are in sync with economic events (reality). In my view this index has a 6 month (5-7) month lag rendering it basically worthless to consumers but perhaps a useful tool for academic research where timing may not be as critical. I’m just grasping here.
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And here’s a time-shifted trend line for the year-over-year change in the 20 city index. You can see that the pace of year-over-year price growth began to cool at the end of last year. Talk about the weather is still premature since the polar vortex occurred after the new year.
And here is the ranking by year-over-year changes for each city as well as the 10 and 20 city index. Dallas and Denver are no longer under water and Las Vegas, despite recent good news has a long way to go to get to the artificial credit induced high it reached in 2006.
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I always like to parse out press release of the NAR Existing Home Sales Report using their data but presented it with proper emphasis. I believe these charts are better ways to interpret the report results.
My two big rules: ignore seasonal adjustments and focus on year-over-year results. The consumer doesn’t know that the EHS report results are heavily adjusted rather than providing the actual results.
Since the annual sales figure is a multiplier of a monthly figure, why do we need to alter the actual numbers any more by adjusting for seasonality? Through recent periods like the possible expiration of the Bush tax cuts (end of 2010), the federal homeowners tax credit for new buyers and existing home buyers as well as the expiration of the fiscal cliff at the end of 2012, seasonal adjustments are subject to maddening skew.
For much of 2013, median sales price was rising at an annual rate of more than 10%…
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I really like the way this chart illustrates the 20 year decline in the homeownership rate. A few thoughts on what it shows:
Under 35 – Lowest in 20 years – record student debt and tepid economy plays a significant role in falling rate.
35-44 – most volatile, has overcorrected – large gain during credit boom and fell well below 1994 levels.
45-54 – fell below 1994 levels but didn’t rise as much during credit housing boom.
55-60 – higher than 45-54 group but followed a similar arc – fell below 1994 levels but didn’t rise as much during credit housing boom.
65 and above – only category to finish higher than 1994 levels – not heavily influenced by credit bubble.
Overall – is currently higher than 1994 levels. Coming down from artificial credit bubble high – probably won’t stop declining until credit begins to normalize.
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I took a look at the change in new development inventory versus re-sale inventory both by year-over-year change (quite dramatic) and number of units. Both categories bottomed out at the end of 2013.
These trends are based on Manhattan co-ops and condos which represent more than 98% of the “non-rental” market. Much of the new inventory coming online is located within the “luxury” market which is the top 10% based on price.
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I like to say that we never had a housing bubble in the US. It was a credit bubble with a housing as a symptom. The same credit bubble logic applies to college costs which have run unchecked well past the housing bubble “pop” in 2006 and the great recession. Lately there has been discussion on the student debt crisis by economists and financial journalists that the phenomenon is overhyped – which prompted this post as a college tuition paying parent.
College costs for a 4 year degree are growing at a rate of about 5%, well above inflation. Access to credit has remained easy for students and parents to obtain so there are no real checks and balances (no pun intended) on college costs. Demand is high as students and their parents often fight to gain admission and can worry about paying off the debt later.
It’s been widely discussed that anemic household formation is holding back the housing market and the economy from fully recovering, that student debt has been the key culprit in holding back young people from striking out on their own, resigned to live at home until their finances get better. Speaking as a parent who just finished sending a son through college with more on the way, it’s a hard reality for parents too.
I was standing on the platform the other day waiting for a delayed commuter train (hey, it’s Metro North, who else) and struck up a conversation with a woman who was lamenting about all the debt she and her husband incurred sending their 4 kids to Ivy League schools – only for them to be unable to find a job in their chosen profession or find one that pays a living wage – these factors are often mutually exclusive.
Parents that borrow heavily to finance their children’s education is the sort of thing that is missed in economic data because that debt is in some other form of a home equity loan or other debt.
“Parents are facing an economic crisis because they are borrowing too much for college,” says Rick Darvis, executive director of the National Institute of Certified College Planners. “They’re sacrificing their current lifestyle and robbing their future retirement.” The rising levels of parental debt could ripple through the rest of the economy. By the time parents are in their 50s and 60s, they should be saving for retirement instead of taking on new liabilities, says Joseph S. Messinger, a certified college planner and president of Capstone Wealth Partners in Columbus, Ohio.
We are seeing financial coping strategies emerge like going to a community college for 2 years to save money and transferring to a better school for the remainder – or questioning the value of college all together. The cost/benefit of a college degree is being called into question because of the combination of spiraling costs and tepid job opportunities for many in the current economy.
The baby boomers have taken on significant debt to finance their children’s education. Sure the average student debt is $25k to $29K, the cost of a new or used car, but I contend a large portion of college debt is in the shadows born by the parents.
The average cost for a 4-year degree is about $23K (blended cost of private and public) which suggests that the debt would only cover about 80% of the cost of first year. This would imply that more than 3/4 of the cost of a 4-year degree was paid in cash through savings and working during the four year period. That doesn’t seem plausible to me – actually it seems ludicrous. Parents have to be paying cash or taking on an inordinate amount of debt to pay for the other 75% of the cost that doesn’t show up in the school related debt numbers. How common is it to see parents in our helicopter nanny state shoulder little to no financial burden for their children’s college educations? No matter the demographics, I contend it’s quite rare.
And how does this impact the US housing market recovery?
The tepid economy has exposed the problem – and the heavy debt loads could provide a drag on housing for an extended period of time.
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The report we author for Douglas Elliman covering the Manhattan/Brooklyn rental markets was published today.
Back in February many observers of the Manhattan and Brooklyn rental markets were saying: “The Spread is Dead, Long Live the Spread!” Ok not really.
But there was a lot made of the fact that the difference in median rental price between the two markets narrowed to $210 from as much as $1,125 in 2008. Manhattan rental prices had stabilized at the end of last year as Brooklyn continued to see sharp gains.
But that was as close as it got. Since the beginning of the year, month-over-month Manhattan rental prices began to rise as Brooklyn started to level off.
Manhattan rents cooled last year as the sales market poached demand from record volume. I saw the decline was temporary. The excess purchase activity from several years of pent-up demand has largely been absorbed allowing rents to begin climbing again.
Brooklyn rents are beginning to level off as a result of all the new rental development entering the market soaking up demand.
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The New York Post ran an article on Sunday “Chinese buyers snapping up NYC skyscrapers” that was chock full of Manhattan skyscraper renderings – I found myself clicking through all of them. While I already am familiar with each of these residential and commercial towers, I never get tired of looking at them.
While I’m no architectural critic and some of these designs are controversial, even cited as dangerous, I must admit I really like the genre. I was fatigued from enduring the boring, utilitarian and ultimately generic designs throughout the 1980s and 1990s. We got a sampling of this new genre in the last new development boom a decade ago, but with the shift towards the higher end of the market, there seems to be more money available for creating iconic designs.
As far as the China hyperbole cited in the piece, it is an assumption based almost exclusively on anecdote as well as 2013 research by National Association of Realtors (cited as “US National Real Estate Association” but had no luck finding it with Google so I assumed they meant NAR). And how do we rely on an NAR survey of it’s members when so few Manhattan real estate agents are members of that trade group?
I’ve inserted all the renderings below: I’m not going to bother labeling them since that’s not the point – you can get that detail in NY Post piece. These are placed here for your oogling pleasure.
With big swings in housing related trends over the past decade, long term patterns are called into question. When a long term trend seemingly changes direction, it is reasonable to point it out. As I opined previously, the housing industry often defaults to linear thinking. It’s not enough to point out a trend, it is better to proclaim that the trend will run indefinitely because consumer tastes have changed.
Here are a few examples of trends in the US housing market that are not trends:
Average New Home Sale Size
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When the housing bubble popped in 2006, shortly after it was pronounced that the multi-decades long trend would reverse it self. Yet the change was a purely short term economic shift as the entry level surged with the sharp decline in mortgage rates. After a few years, the trend of expanding sizes resumed. I’m not saying that the trend will run indefinitely larger, but it is important to look at why the average square foot began to fall in the first place. A harsh economic condition with a rapid rise in affordability prompted in a shift in the mix. And remember, this highly referenced metric reflects new homes which is only about 15% of normalized housing sales.
Here is the housing conversation on home sizes from 2007-2011.
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Perhaps one of the largest misinterpretations of consumer trends has been on the subject of homeownership. As is evident in the chart, the heavily documented push to higher homeownership played was a sudden burst rather than a long term gradual change. The surge in the trend was artificial, based on fraud and unsustainably loose credit conditions that where based on NOTHING. With the multiyear decline, we are beating ourselves up over the decline in the homeownership rate yet we are reverting to the mean since credit is unusually tight. In fact the median homeownership rate of 64.8 over the past 49 years is exactly where we are right now in 1Q14. Will the market overcorrect towards rental? Yes I believe it will until tight credit conditions resume to more historic norms.
Here’s terrific takedown of the homeownership metric by Jed Kolko, Chief Economist at Trulia.
Will the US become a nation of renters and micro-houses? If one makes those arguments out over the long term, I don’t know what compelling information those trends would be based on.