I caution fellow CIGAs not to focus on home prices as a proxy of health not only for the real estate market but also the economy in general. Traditional economics suggests that price represents the equilibrium, the clearing mechanism so to speak, that matches supply and demand.
Price, however, is also a function of confidence in the currency that denominates the transaction. Price can be heavily influenced, yet seldom recognized, by waning confidence during periods of aggressive currency devaluation.
The median home price is often presented as a representation of the health within the real estate sector and by extension health of the economy has been rising steadily since 1963. The chart even suggests, despite headlines suggesting lower prices, the 2007 downtrend could be breached in late 2010 or 2011.
U.S. Median Home Price (MHP):
Price, however, can be heavily influence by waning confidence during periods of aggressive currency devaluation. Rising home prices cannot be misinterpreted as an all clear sign as long as the policies of currency devaluation, better known as quantitative easing, are used to support the failing dollar.
Capital is not stupid. The inverse correlation of gold relative to major fiat currencies has tightened considerably since 2000. As confidence in paper wanes, demand for gold has increased.
Gold and US Dollar: Major Currency Index Change (YOY)
When home prices are adjusted or priced in a stable currency such as gold, the US dollar trends are radically changed. The “real” secular trends, down, are clear as day.
U.S. Median Home Price (MHP) to Gold:
Why are they down? The lending machine of securitization that brought home ownership to record levels in the United States was completely dismantled in 2008-2009. Residential and commercial real estate growth rates and contribution to total credit creation has been contracting steadily since then.
Breakdown of Commercial Bank Credit
Restricted access to credit, job loss, and income stagnation are not supportive to rising home prices. Home prices, nevertheless, remain stubbornly sticky because of the overwhelming influence of currency devaluation or quantitative easing.
The robo-signing controversy is just another issue that the already sluggish housing market didn't need -- but most analysts do not think it will have far-reaching impact.
Nevertheless, the housing market still faces many problems: a weak economy, sluggish hiring, tight mortgage underwriting, falling home prices, and slowing sales.
Fiserv, a market analytics company, has scaled back its home price projections considerably. In February, it forecast national price gains of about 4% through the end of 2011. The company's latest prediction is for a 7.1% drop in prices between June 30, 2010 and June 30, 2011.
Source: finance.yahoo.com
0 comments:
Post a Comment