Do Housing Fundamentals Really Matter?

If you're like me, you spend countless hours pouring through data trying to make sense of the underlying economic fundamentals to understand what's happening today and what the data means for tomorrow.  In short, we're always looking for the trend to clue us into what we hope to be sound investment decisions.

Needless to say, rolling out of bed and waiving your finger in the air to determine which way the wind is blowing is not going to be a consistently successful approach.  However, at a certain point, we can outsmart ourselves by basing our decisions solely on what the underlying fundamentals are telling us.

How many home buyers are basing their decisions on the latest S&P/Case-Shiller housing price index?  Gee, let's hold off on making this purchase since the S&P/Case-Shiller index is a lagging housing indicator.  Looks like Diesel consumption picked up for the month of .....  More QE2 is coming in Q4?  Temporary Census Bureau jobs are beginning to clear the system and will have less of an impact on the employment picture moving forward.  You get the point.

Spending time to get a grasp on the fundamentals definitely helps to give clarity to our decisions, but what good are our decisions if the overwhelming majority isn't using the same data and is making decisions based on a completely different perspective?  Isn't this different perspective just as important (if not more important) to understand and to take into consideration?

Courtesy of Jim the Realtor, check out the video below regarding an auction of a lot in Southern California.  Jim notes that the data points to a certain number regarding the sale of the lot, but the actual final sales price defies the data.  In fact, pushing forward, the sale (if it goes through) will greatly skew the data / comps for the next potential buyer in the same neighborhood.

Human nature and the countless intangibles drove this sale while the data floated out the window ... If you think this is an isolated incident or this only happens in high-end micro housing markets, think again!

Buy Now!

Based on being a "natural contrarian", Brett Arends is giving the buy sign for housing.  He's not suggesting that homes have bottomed in every market, but does believe it's a good time to look in many, especially since mortgage rates remain extremely low.

Needless to say each purchase / deal has to be evaluated on its own merits, but I do agree with many of the points that Arends makes.  Even if homes haven't quite bottomed in your market, most likely they have already tanked from boom highs.  Furthermore, the glut of inventory is your friend as a buyer.  Even if homes in your market stand to fall another 10%, what value does this create for you if interest rates move a point higher and tightening supplies force you to submit a strong offer to compete against other competition?

In our own experience in the Phoenix, AZ housing market, it has been tougher to find our opportunities this year due to the huge increase in investor activity.  Even though values have trended lower in some segments of the market, the increased competition has led to higher purchase prices, a decrease in negotiation leverage, and smaller operating margins.

As always, run the scenarios before you make a blanket assertion on whether or not it's the time to buy, since value is not always what it appears to be!
 

Rethinking Homeownership?

A Business Insider article labeled this recent Time Magazine cover story as, "great news for housing market".  Needless to say, you're out of your mind to use a media cover story to guide your home-buying decisions.  There's no doubt that we can outsmart ourselves by complicating matters, but we can certainly do a similar disservice by taking too simplistic of an approach.

Media and sensationalism go hand in hand these days.  These dramatic statements sell product and help the bottom line.  In reality though, if you have the ability to purchase a home (especially if you're a first-time home buyer), should we really believe that buying a property discounted 50% plus at 3.5% - 4.5% interest rates doesn't make sense?  I'm obviously painting with a broad brush and can't speak to the validity of every opportunity in every market, since all deals aren't created equal and there are plenty of homes out there that still shouldn't be purchased despite how far they have already fallen.  However, there are definitely some great housing opportunities out there carrying extremely affordable price tags.  In fact, some price points make it much cheaper to own rather than to rent even when factoring in insurance, property taxes, and maintenance.

So ... no, I'm not rethinking homeownership and neither should you.  The housing picture remains grim, but don't check your brain at the door and get absorbed in this nonsense.  What's next, "Rethinking Investing?".  We all know that financial independence comes from a working wage, right?  Just ask Bill Gates, Warren Buffet, and nearly every other financially well-off individual.

CoreLogic: Home Price Index for July 2010

CoreLogic reported their home price index to be flat for July, 2010 and noted underlying weakness in housing as a growing number of markets are declining since the expiration of the federal tax credit:

SANTA ANA, Calif., September 15, 2010 – CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009. June 2010 HPI showed a 2.4 percent* year-over-year gain compared to June 2009.

CoreLogic made it a point to reiterate that the weakness in housing is spreading and the weakness is continuing to grow relative to market conditions a handful of months back:

"Although home prices were flat nationally, the majority of states experienced price declines and price declines are spreading across more geographies relative to a few months ago. Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining," said Mark Fleming, chief economist for CoreLogic.

12 Month House Price Index Change: Single-family combined series

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12 Month House Price Index Change: Single-family combined excluding distressed series.

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This report continues to highlight the difficulties that remain in place for the U.S. housing market.  The lack of jobs and disappearing stimulus show how fragile the overall housing market is.  Even the absurdly low interest rates aren't enough to offset the poor underlying fundamentals.

Click the following link to view the actual CoreLogic report: CoreLogic Home Price Index Remained Flat in July [Actual PDF Report].

Jamie Dimon Singing the Real Estate Blues

The Los Angeles Times blog recently posted an article titled, "Jamie Dimon's real estate woes" noting that Dimon hasn't been immune to the housing downturn either as he has had to drop the asking price of his Chicago mansion:

"The mansion, where Dimon lived back when he headed up Bank One, originally went on the market for $13.5 million in 2007. The bad real estate market has forced a series of reductions that have brought the listing price down by nearly half, to $6.95 million."

As a result of Dimon's misfortune, the author (Daniel Popper) states:

"As homeowners have struggled to modify their mortgages with JPMorgan Chase & Co., more than a few have probably felt flashes of anger toward the company's chief executive, Jamie Dimon ...... It may be some comfort to these folks, then, to know that Dimon has not been immune from the problems of falling home prices."

I'm the last person to sympathize with the likes and ranks of people like Jamie Dimon, but I don't wish him ill will or find comfort in his circumstances despite not liking to deal with CHASE bank on any level.

Unfortunately, the greed and irrational exuberance at the highest levels (Jamie Dimon's world) of these uber and / or multinational corporations has created turmoil for the vast majority of people in this country. Furthermore, countless hardworking Americans have encountered these incredibly tough times to no fault of their own as a result of this unregulated mess and the slick maneuvering these uber banks use to assess account and various transaction fees.

For Jamie Dimon, the economic mess that he was complicit in developing (or stood by allowing it to happen) has now landed like a big pile of crap squarely in his mansion's backyard. Welcome to the sober party! Unlike many Americans, I'm guessing he'll fare a little better even if he does have to get more aggressive with price drops on his modest abode.