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Higher home prices are not a recovery, skeptics say

In a Jan. 26 column in The New York Times, Yale economics professor Robert Shiller, co-creator of the S&P/Case-Shiller index, maintained that many price improvements in 2012 were merely seasonal, and other increases — which continued this week with another gain reported Jan. 29 — appear disconnected from a middling underlying economy.

An improvement is an improvement, many observers would say. But, Shiller concluded, “the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down.”

Pending home sales numbers released Jan. 28 by the National Association of Realtors were similarly opaque, showing a 6.9% year-over-year improvement in December 2012 but a decline of 4.3% from the previous month.

Jonathan Miller, CEO of the New York-based appraisal and consulting firm Miller Samuel Inc., said he does not deny the recent price increases, but is uncomfortable using the word “recovery” to describe the present environment.

“Nothing that’s happening right now is substantiated by fundamentals like reasonable levels of employment and improving personal income levels,” Miller told SNL. “The whole thing is just sort of a twist, because tight credit is keeping inventory off the market, and that’s essentially goosing up housing prices to a certain degree, or stabilizing them, and we have this situation where there’s nothing driving the demand.”

Expanding on a blog post he wrote for his firm’s site, he added, “We’re in this period where things are a little bit better, numbers-wise, but it’s not based on anything. It’s just better because of the low interest rate stimulus and tight credit keeping everything off the market. You look at that and go, ‘Well, that’s not a recovery, that’s just better numbers.’”

There is an element of semantics to the argument, since better numbers are an important part of a recovery. And Miller is being a bit wry when he suggests that the term “pre-covery” would be more accurate.

But his underlying point, worth considering, is that whatever you call the recent rise in housing prices, it has brought only meager benefits for most homeowners. To the contrary, Miller said, many are stuck where they are, either because they’re underwater on mortgages and can’t afford to sell without a loss, or because credit is so tight that they can’t get financing to move into a new place.

Rising price numbers alone do not reflect that stagnation, Miller argued.

“My thing is, in my lifetime I never thought I’d be saying that irrationally tight credit may be the catalyst for a housing recovery,” he said. “It makes my brain crack just thinking about it, because it’s a game about supply.”

There are, of course, some clear beneficiaries if Miller’s analysis is accurate. Homebuilders, for example, are in a position to benefit from high demand and low inventory since, after all, they can increase inventory as it suits them. Indeed, executives at builder D.R. Horton Inc. said in a Jan. 29 earnings conference call that low supply, and the relatively low quality of the existing houses that are for sale, have combined to give the company stronger pricing power.

A question, though, is what the housing market will do next. In the best case, Miller said, things could essentially take care of themselves. Prices could rise to the point that fewer people are underwater, more homeowners have greater equity and credit loosens up — freeing people to sell and buy, which in turn would increase supply and temper the rising prices.

Short of that, he is less optimistic.

“I think the hope is that you’ll see a more normal flow of inventory onto the market, but for the life of me I can’t think of how that would be, because credit is unlikely to ease significantly this year,” he said, citing the Fed’s continued public wariness about the economy. “So what you have is, I think you’re going to see rising prices. Because the supply is not going to meet demand, they’re not going to see any real change in it, and so it’s going to be sort of a smaller subset of people that are active in the housing market.”

Writer and analyst Barry Ritholtz, who outlined a similar argument on his own blog, maintains that the solution is, basically, for the fundamentals that aren’t driving the recovery to start driving it.

“More household formation, increased employment — and increased wages,” Ritholtz wrote. “As those three go, so goes housing.”