When it comes to Housing, people often mistake bottom calls like they pick a wrong partner. Somebody out there will complete me, if only I can find them. Well love ain’t a noun… it’s a verb. And so is picking a bottom. In other words, buying right is not something you obtain. It is something you do.
We might be at a bottom, depending upon your perspective, and upon your ability to capitalize on advantages relative to your strengths. For example, for the right reasons, people might take advantage of opportunities to buy below replacement cost. Some are borrowing other people’s money at a significant discount to the future cost of borrowed money. Some are positioning themselves against inflation happening as I type this sentence. Some are making investments to lock in ROI higher than the 10yr bond yield, and locking in an arguably safer investment.
But these folks are still the minority, and for good reason. Because, unless you are sure you are buying “right”, and that you have what it takes to DO what is needed to ensure this buying decision stays sound, and can DO so for roughly 10 years, then well… you are about to meet your future ex.
As it relates to housing bottom calls, the whole “revert-to-mean” crowd, I think, should really shift their attention away from price as an indicator to more of a result. Look more toward rates, than prices, because this, more than any other variable has been artificially suppressed. To be sure, lots of other factors have been manipulated, but rates are the only variable that also serves as a latent ceiling for growth, at least until we finish deleveraging anyway. (Oil too maybe, but this is a housing article).
As for prices, they will keep going down until either rates force them to back in line with market forces unfettered by intervention... or until the tide of inflation completely offsets the inevitable correction. Housing is affordable right now relative to monthly payments… but not necessarily if you factor (un)employment outlook, or diminished income from a strained economy.
Regardless of the continuous stream of nearly three month-old statistics being published incessantly, the previous two quarters have been stellar as far as transactional volume is concerned, in San Diego anyway, and this current quarter seems to be outperforming the last two. We are seeing more volume in this single quarter than we did in all of 2008.
However, let’s not get ahead of ourselves. The economy still absolutely sucks. Productivity within most small businesses seems off about 30%.
My thesis: people who are strapped for cash see the barber less frequently… but eventually need to get their hair cut. It is the same thing for housing. Rates have been relatively static for long enough now, that life changes are forcing folks to get on with things. So volume picks up. Rosy stats get published (albeit three months after the fact).
Meantime, rates succumb to international pressure, and lurch one point within a single month, for example, as they did in January before quickly dropping when events in Libya took front and center… and your standard-issue $500k SoCal home drops another 9%.
There is a constant refrain heard from the whole bottom is now… no now... crowd, which goes like this: “Barring another catastrophic economic event it seems home prices will be looking around in this area trying to find a bottom”. I suppose it seems logical that only just so much pain can be inflicted by any given sector at a time. But it is critical to remember how the last catastrophic economic event was triggered. It was a housing free-fall that started this mess. It was not a reaction to it, but the cause. And it was not allowed to play out to its natural conclusion.
By all accounts, the pent up energy stored within the still highly dysfunctional ‘Prime’ mortgage market, is three times the magnitude of the mere ‘Subprime’ blip we saw last go ‘round. This was as easy to see three years ago as it is today. And it boggles the mind how super smart folks just don’t want to acknowledge we have to keep earning what we enjoy, like we need to work at our relationships, like we need to paddle out to catch more waves, like we need to resist immediate gratification to be healthy, like we need to save more than we spend, like we can’t just have an unearned run up of 25% year over year over year over year over year without consequences.
When rates revert to their long-term mean, and when buyers can afford the payments, after putting 20% down, on a suitable residence, that costs only a reasonable amount more than it does to rent a similar replacement, and that costs only a reasonable amount less than it does to build a similar replacement… then we will approach a bottom. This capacity varies by person, by market, and by the amount of work folks are willing to put into it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.