Friday, August 28, 2009

Why Fundamentals Of The Housing Market Are Ridiculously Strong

Dr. Steve Sjuggerud from Daily Wealth points out some keen insights about the fundamentals of the current housing market. He suggests that supply hasn't been this low is a long time, and yet housing is very affordable. These are some of the reasons that real estate could be one of the best places to put your money right now. Continue reading to learn more.


That's about what the median home in San Francisco sold for at the height of the boom three years ago. Then the bust came, and prices fell 45%, according to the Case-Shiller home price index.

But a funny thing has been happening lately... something people haven't really noticed...

Home prices in San Francisco actually bottomed in March. According to the Case-Shiller Index, they've been up every month since... up nearly 4% in the latest month.

On my side of the country in Florida, the same thing is happening. Again, people are almost refusing to notice... But for 11 consecutive months, home sales in Florida have INCREASED over the same period last year.

Meanwhile, homes in Florida are now ridiculously affordable.

The median home price in Florida is now $147,600. That's a mortgage payment of about $650 a month (at current mortgage rates with 20% down). The median household income in Florida is about $50,000, roughly $4,000 a month before tax. That's about 16% of your household income – way below any rules of thumb about how much to put toward a house.

From coast to coast, housing affordability is better than it's ever been, getting a big boost from two things: the housing bust and super-low mortgage interest rates. The pile of government incentives has helped, too.

As an investor, I'm seeing what I love... It's an ideal situation that's rare, but incredibly important if you can recognize it. It's when people's emotional opinions are clearly at odds with the reality of the numbers.

The numbers for housing are really great right now. But after three years of losses, people are sour on housing. Perfect!

Three years ago, we had the opposite situation... The numbers for housing were terrible. Housing was completely unaffordable, and builders were building at a frantic rate. But people were incredibly enthusiastic.

Today, the value is there. What will cause prices to climb again? When the supply of homes available for sale shrinks. It's Economics 101. And guess what? We're there...

Right now, fewer homes are available for sale than at any time in the last 40 years (adjusting the supply for the growth in the U.S. population). If I hadn't crunched the numbers myself, I wouldn't believe it. Take a look:

Economics 101: When the Supply Is Low, Prices Go Up

Even better, when you do the simplest, dumbest comparison – the price of homes versus the supply of homes – you get exactly what you'd expect: When the supply of homes gets low, home prices rise.

David Dreman agrees... In 1980, he literally wrote the book. It's called Contrarian Investment Strategies. In it, he recommended going heavily into stocks. In the current issue of Forbes magazine, Dreman recommends U.S. residential real estate:

If inflation hits hard, the chief culprit of the bear market – real estate – is likely to be one of the best investments in the years ahead. Buy a home if you don't already have one or a second home if you can afford one.

Time to buy a house. (Or two!)

This post has been republished from Daily Wealth, a contrarian investment analysis and advice site.


Anonymous said...

the problem is your analysis is purely technical. you're not looking beyond the immediate data that all points to things continuing to get worse for many, many years. here are a few signs:

1. there is MUCH more inventory than you think. there are 100's of thousands of "shadow inventory" across the country - properties that should be on the market but are not on the MLS. the bank is holding these back to not flood the market and so the "supply" is artificial. completely artifical.

2. job losses will continue. that will lead to more foreclosures and shrink the buyer pool (shrinking the demand).

3. homes are not really selling. when you remove foreclosures and short sales from the stats...even when it is proclaimed in your local paper that "home sales are up!", that's a distortion of the data. Most homes are not selling. take a look at a few major cities on the web and look at how long property is sitting.

4. auctions, foreclosures and other factors continue to drive property values down. i live in seattle. we are having 2 auctions in one day on the 27th. one of the condos is 3 blocks down the road from me and prices are SIXTY PERCENT reduced.

hmm...what impact will that half on the other half of the condo buyers in that building that paid way more? do you think they will stay there...or walk away? and what impact do these have on teh price per square footage in teh surrounding areas?

yes, it will force property values down, down, down.

5. high end property is not most states.

6. it took MANY years for this housing bubble to go up. it's not going to go down that quickly for above and additional factors. this is a historic bubble that will change the expectations people had that pricing would always go up and at a high rate.

Anonymous said...

National association of Realtors released July inventory (on August 21) of 4.09M units which was a 7.6% increase from June's 3.8M. I wonder where is your data coming from?

kemet said...

Ah, No, this is not the time to buy real estate unless you want to take a big loss! I expect prices to drop another 30-50% in the next 2 years.

Ever hear of Alt-A mortgages? They had teaser rates as low as 1% for the first 3 to 5 years. There is about a Trillion dollars worth of them that will be resetting over the next 2-3 years. It is estimated that 70% will default as monthly payments skyrocket 40-50%.

Then there are the Jumbo mortgages. Those that are above the conventional loan limits, about $400,000. They are defaulting at a higher rate than any other mortgage class.

And of course we have not seen the obligatory market capitualtion. There are still owners who are waiting for Godot. When they finaly realize he aint comin, they will finally sell at any price!

Want to make money? Buy silver!

CraigFlorida said...

Inventory supply is mostly a question of the middle class walking away from homes valued 50,000 or less than their outstanding liens. With $100,000's of loses in a home, they simply will all be walking eventually UNLESS...banks + insurance companies paying them off + government programs can stall the artifically low inventory long enough for investors and buyers to create demand with the artificailly tight inventory AND start raising prices so owners will hold on. WE HAVE HIT THE LOW Orlando that was in May 2009. The banks then stopped releasing inventory. They began to control it. Of course, if it does not rise, the pressure on releasing inventory will continue to increase and it coudl undergo another round of dropping..but honestly, it is low enoughnow for investors. At least, it ought to be given returns available.