Tuesday, April 24, 2007

Your Bottom May Vary?

by Ken Houghton

The generally-astute Calculated Risk posts "When Will the Housing Market Bottom," which is one of those parlor games like predicting nine of the past five recessions.

The proximate goat is Hank "All the signs I look at" show "the housing market is at or near the bottom," Paulson, who one presumes is driving with his seatbelt these days.

The most curious part, though, is this counterintuitive graphic, which indicates that the last bottom of new home Starts and Sales was in 1991.

I fully realise that the plural of anecdote is not data, but I know a lot of people who bought on Lon Gisland in 1988-9 who spent until two or three years ago, at best, before they could get their purchase price back. And a former professor's father bought his San Diego area home ca. 1979-80 (two years before the previous bottom) and watched a precipitous drop after that.

Now, as CR notes, he's not analysing existing home sales, so that may have something to do with it. But, judging by the graphic, The Way to Bet appears to be that building hits bottom several years after it would in a fully-rational world.

Or am I missing something Really Obvious (as usual)?

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One needs to distinguish between a bottom for the industry and a bottom in prices. Prices have barely moved but volumes have dropped precipitously. Prices will fall initially in real and nominal terms and eventually only in real terms but volumes will pickup much sooner (or we will really be in a recession and rates will plunge soon enough to cause them to pickup anyway).
Prices have been falling in real terms in many areas for a while, and the latest sales data are showing nominal declines as well.

I won't speculate as to the turning point or near term direction, but there is a possibility of a vicious cycle whereby the anticipation of further price declines kills off sales. (See, e.g., the post-property bubble Japanese economy.)
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