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U.S. Housing Market, Neither Boom Nor Bust, Just Rumbling Along Nicely

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by: Tim Worstall
Tim Worstall
Tech, banks, gold & precious metals, natural resources
Summary

The one thing we don't want in the housing market is a fabulous boom as we did have in 2004-6.

For we know what would then follow, the crash that breaks Wall Street.

Fortunately, the U.S. housing market seems a model of sobriety, rising gently in line with population and earnings growth.

Speculative frenzies are all very well

As long as we know we're in such a speculative frenzy, they're great fun and easy to make money in. Invest in whatever that speculation is and make sure, certain, that we're out before the bubble pops. The problem of course is that pop and cleaning up the mess afterwards.

We're especially keen that such doesn't happen to the housing market - again. Thus the nervousness with which we might watch the usual measures of the health of the housing market.

As we've noted just recently that market looks pretty sensible. We've now another set of statistics to underpin that view.

Case-Shiller Homes Prices

More formally, the S&P CoreLogic Case-Shiller house price indices. These are showing a useful and steady appreciation in housing values.

Case Shiller(Case Shiller Indices from Moody's Analytics)

That's a nominal price movement, not a real one, so house prices are going up only a little over inflation. Add in real earnings growth (or, if you prefer, forget to adjust for inflation and compare nominal to nominal) and we can see that housing prices aren't roaring away.

Good, so a useful sign that we're not in some form of housing frenzy or speculative bubble.

Homeownership rate

One possible limitation to the market is that there's no one left who doesn't already own a house. The home vacancy rate is bouncing around a little, but it's not by any means outside historical norms:

(Housing vacancy rates from Census Bureau)

We don't appear to have some mass stock of housing not being used - a useful sign of our being in a speculative boom being that people aren't actually using the thing being speculated.

Homeownership rates look reasonable too:

Home ownership(Home ownership rates from Census Bureau)

We're down from those possibly excessive rates of the boom. And an historical view would indicate that there might be a percentage point or two of the population that could or perhaps should become home owners.

Pending home sales

Similarly, we can look at pending home sales to tell us whether there's some uptick in the number of transactions. Perhaps if prices aren't moving then activity is?

Homesales(Pending homes sales from Moody's Analytics)

Again, no, we're not seeing anything out of the ordinary. Matters seem to be rolling along entirely within normal historical limits.

Consumer confidence

Of course, what is going to happen to something as important as the housing market depends upon consumer confidence. People don't make the largest purchase of their lives unless they're at least reasonably confident:

Conmfidence(Consumer confidence, from Moody's Analytics)

To round it up

Given past experience what we're looking for is any evidence of a speculative bubble in housing. We're all rather aware that given the damage of that last bubble bursting, significant effort would be put into dampening down one that started now. Thus we find ourselves in a slightly odd situation; evidence of strongly rising prices would be a signal to get out of this market, not one to pile in.

So, we want to see that we've not got such a bubble either happening or forming. We also, obviously enough, want to know that this market isn't falling apart. Over the past few days - including the earlier piece linked above - we've had a number of housing market indicators. There are no anomalies here, nothing that doesn't add up. We seem to have an orderly market rising gradually in price at about nominal income growth. Which is great; that's something that can, in theory at least, carry on forever.

My view

The upside to the US housing market is limited by those memories of what happened last time around. The downside is of course the usual point that prices can decline. As far as we can see, from all the information we've got, we're in neither boom nor bust. A calm and orderly market where the national picture is benign in every sense.

The investor view

Given this calmness in the national sense - and thus in terms of credit standards and rationing, monetary policy, interest rates and so on - any look at real estate as an investment becomes a micro decision. Is this specific unit worthwhile? Does it fit into my plans? Do I have, can I gain, a tenant for it? Do I want to live in it myself?

We don't appear to have any monsters lurking in the real estate market, meaning it becomes an issue of those personal and local factors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.