The Standard & Poor's Case Shiller Home Price Index was reported improved in June by most measures of comparison. Yet, the index's founders Professors Case and Shiller, expressed concern about the outlook for housing in a Bloomberg Radio interview this morning. The two wise men might add a mouthy blogger to their troop, as I've been doing much of the same over the course of the last year, often to an unreceptive audience.
The report's three main composite indices, the National Index, 20-City Composite and the 10-City Composite all marked year-over-year growth. It was the first time for it since the summer of 2010. On a monthly basis, all 20 Metropolitan Statistical Areas (MSA) reported higher home prices in June versus May. Only Charlotte and Dallas reported decelerated annual rates, and just 6 MSAs were still seeing negative annual comparisons.
Annual Change Q2
+6.9% Vs. Q1
The news certainly appears good enough and a view of the trend lines likewise offers an attractive picture. So why were Professors Case and Shiller concerned then? Their comments on Bloomberg Radio sounded very similar to my macroeconomic musings of the past year. Case and Shiller took note of the slowdown in China, it seems, because that would be the new factor at play these past few months versus older history. Their warnings were vague though, indicating that these slowing and contracting economies must carry some weight and weigh against the U.S. economy in some way, and housing by default. Sound familiar?
Over recent months, I've been swimming against the tide in my warnings about the European economy, how it would impact the world, and its unavoidable impact to the real estate market and housing industry. However, my views are complex, because while warning against housing stocks generally, I've also noted the existence of corporate specific benefits from market share gain, multi-family construction (for rentals) and the tight supply of new homes available for sale. Companies like Toll Brothers (TOL), PulteGroup (PHM) and D.R. Horton (DHI) have benefited from these factors. Still, I warn about the strong tide that might washout all players.
Also, while you might expect economic recession to coincide with home price deflation, I do not see that scenario as most likely here. As the dollar comes under increasing pressure, hard assets will rise. Also, mortgage rates at record low levels, could quickly shoot higher as factors I see at play change the lending environment in the U.S. and globally. I'm reportedly out on a limb with my inflation fire setting, but when it happens, mainstream pundits and economists will say, "Nobody could have foreseen this." It wouldn't be the first time or the last, but until I'm more widely followed, I will garner little credit for forecasting events like the downfall of the real estate market and the financial sector. The cost of home ownership, including home prices and the cost of borrowing, will increase and price many out of the home market for a long time, in my view. This is the reason I authored my report, "It's Time to Buy Real Estate". Such change would also do harm to investors in high yielding mortgage REITs like Annaly Capital (NLY) and American Capital Agency (AGNC).
The reaction of the SPDR S&P Homebuilders (XHB) today to the home price index is telling of the confusion and concern currently about housing. The XHB was up to start the day, sank into the report and rose on it. However, it has since retraced ground into the red. It's a sign that the market is beginning to understand the interrelations of the issues I've discussed over the last few months. Finally, Case, Shiller and I agree that while recovery should be underway, new factors are undermining it.