August Housing Numbers Across Various Indices Don't Yet Show Genuine Recovery

The OFHEO index showed a decline from July to August, which may be notable given that construction costs went up. Yet, over the same time frame, the Case-Shiller index increased even more than construction costs, with the ratio of home price index to residential construction PPI reaching its highest level of the year.

Sean MacLeod also informed me that the RPX index was up a bit in August, although the RPX increase was not enough to offset the increase in construction costs.

A genuine housing recovery will NOT have real housing prices increasing perpetually (or have the huge amount of construction we had 2004-6), but the level of housing prices may need to be a bit higher than it is now in order to sustain normal construction activity. Recall that construction activity depends on the ratio of home prices to construction costs.

Comments

[Malkiel:]

Construction costs are not a fixed target--like everything else in a recession we would expect materials to be discounted and labor to be willing to take lower wages, all resulting in lower construction costs. Given how high prices got during the bubble saying that "the level of housing prices may need to be a bit higher than it is now in order to sustain normal construction activity" is simply a guess without facts behind it...

Oct 27 02:58 PM

[megatrend:]

hard to see why anyone in their right minds would think that a housing recovery was in the offing. Not even close. House prices are still falling because people are still losing jobs and there are far more houses on the market than people who want them. Secondly, theonly reason why it "seems" to have stabilized is because the FHA is doing what the sleezy mortgage companies did. i.e underwrite mortgages to anyone who walks by. NOTHING goes up or down in a STRAIGHT LINE. There are always bumps up and down along the way. SOme bumps up are so huge that they are essentially "head fakes". Dont get caught. Just my 2 cents. megatrend2010.webs.com. Safe investing.

Oct 27 08:55 PM

[ebworthen:]

Home sales and some construction may be occuring in certain markets or micro-pockets, however, the whole picture is not better.

Did you see the report this weekend of tracts of homes in Michigan that they couldn't give away?

I suppose the government will simply pass the bill on to the taxpayers after letting the banks "write off" (default) on their loans to Fannie/Freddie and FHA.

That, however, will eventually catch up with the economy, just like the bailouts and the TARP, TALF, purchasing of treasuries and backstopping of GM, AIG, Citi, etc., etc.

The wand waving, incantations, and shell shuffling can continue for a long time before reality catches up - but it will.

Oct 28 12:24 AM