Without a Widespread Economic Crash, a Housing Crash Is Unlikely

Includes: ICF, IYR
by: IndexUniverse

Planet Doomed: that's where Matt Hougan is living. It's the same planet that Chicken Little lives on, in fact. The problem, my friends, is that Chicken Little is a fairy tale.

The real estate bust scenario is not like the tech bust scenario. I repeat, the wider housing market is not like the stock market. And why is that? Because people don't live in stocks. Matt — you come out of that (excellent) Bob Shiller interview with this doom and gloom conclusion. Let me give you the key quote in the Shiller interview:

In the Great Depression in the 1930s, home prices in nominal terms fell 25% and there was a huge rash of mortgage defaults.

So when did that housing drop happen? In the Great Depression. So yeah, if the economy drops by 25%, the overall housing market could drop by 25%. That makes sense. But what does NOT make sense is to see that kind of widespread drop amidst a situation where MOST people have their same job. This is even MORE so in a banking system that depends on fixed-income rates. Basically, people will pay what they can. We're real good about wanting to continue to live in houses.

This is something that is even more clear and more logical to me than, say, they idea that international equity correlation is NOT dead. And usually Matt is logical. But on this, he's having none of it. He's in there with Briar Rose and Little Miss Muffet.

Shake it off Hougan. It's embarrassing.

OK, let's take a look at the major housing market measured by the Case-Shiller indexes. I've got two points here. 1) What do the major city housing markets have in common? Answer: Speculation; and 2) What do futures markets tend to do? Answer: Just like markets and cash flow, they can get overly enthusiastic on one side.

Now I know on point 2 that Hougan is going to say I'm giving short shrift to efficient markets theory. But anyone who's looked at futures markets knows they can run as wild as the rest of the market. But I WILL countenance that this sort of pricing amidst ANY liquidity (and do we have that?) DOES open the possibility of housing prices moving in that range. Which brings me back to point one. It is impossible to imagine REAL housing prices moving in that way against the wider economy. Any such movement is phantom movement in an environment of constrained liquidity.

So a drop in the overall value of U.S. housing stock can absolutely NOT be inferred by some bubbly movement around the fringes. Here's my theory: the value of housing is roughly what the purchaser population can afford per month (a figure that will move up and down to some degree with interest rates of course) multiplied across the economy, PLUS whatever speculative and second-house market there is. And that's it.

So a widespread housing BUST in an environment of anything short of an ECONOMIC bust just does not make sense to me. And that's the way it is.

Written by Jim Wiandt

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