Home-Price Bottom May Still Be a Year Away
Home Depot Inc. CEO Frank Blake told a Goldman Sachs retail conference that some recent housing trends indicate “we’re getting awfully close to the bottom” of the current correction, but economists at Credit Suisse say that one of the major metrics — home prices — aren’t going to reach lows for at least a year.
Blake pointed to trends showing private residential investment has fallen to about 3.5% of gross domestic product at the end of the second quarter from a peak of about 6.25% at the end of 2005. Other housing data, such as mortgage equity withdrawal rates, also indicate “a lot of the over-exuberance in our market is getting squeezed out,” Blake said. “We don’t think we’re at the bottom yet, but we think you can see it from here,” he said.
However, any bottom call in housing will hinge on the direction of prices, which have been on the decline for three years. Finding the low point for home prices is difficult, as there isn’t just one index to track, but at least three major gauges — the S&P/Case-Shiller index, the Ofheo home-price index and the National Association of Realtors median existing-home price data — that all have advantages and shortcomings. Economists at Credit Suisse looked at the different indexes compared to several metrics and see equilibrium being achieved in 12 to 18 months.
One of the key comparisons was the NAR median existing-home price (seasonally adjusted by Credit Suisse) to median family income. The ratio maintained a relatively narrow range from 1981 to 2000, when it started to explode. Assuming that trends in prices and incomes remain constant, Credit Suisse forecasts that home price will return to the historical range some time late next year.
“What’s evident is that a substantial down payment on the housing adjustment has already been made, although there still appears to be wood left to chop,” Credit Suisse said in it research report. –Phil Izzo
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