I wrote two articles regarding the housing market (Housing Interpretations & Revisit) which highlights housing market condition for California. I've updated the current data as well as added new indicators to suite California better home price better. Let’s dive into it. I’ve gathered a series of data to study what drives our home prices. As my previous study and argument have shown, it is income. Here, I took a new set of data called House Price Index for California (found on St. Louis Fed under Series ID: CASTHPI) and Per Capita Income in California (Series ID: CAPCPI). Using this data I created an index which begins in 1975 at 100 and extends to 2008. My finding shows that home prices are highly correlated to income. The obvious was a rise beginning from 2000, after the well known tech-bubble. I would note that this set of data contains all California homes including those in the distress area such as Stockton, Merced, or Antioch.
It is obvious from this chart that home prices need to correct more to equilibrium level. You ask, “This is crazy, how can prices fall much futher?” Let’s take a look at specific area such as one that I live in, San Francisco.
To find this, I’ve taken the data from the Case-Schiller Index which tracks areas, such as Los Angeles, Phoenix, and Las Vegas. More detail can be found here. Taken only San Francisco data, I plotted the home prices index from 1987 (when Case-Schiller Index was introduced) against Per Capita Personal Income in California. The chart shows sign of "bottoming out". The data is incomplete as the Fed hasn’t released the income data for 2008 yet, but as an educated guess, that figure is likely to be slightly higher than 2007. We should see that figure dip or remain unchanged in 2009, but I’m not one to forecast.
The Federal Reserve and the government are doing their best to bring cost of borrowing down to stem home purchasing. One may say they’ve succeeded but I argued that cost of borrowing is the remedy. Given the house was priced at the peak, would 0% financing help those who did not have the income to support their purchase? A simple number crunching revealed that since 1975, income has been more closely correlated to home price, not cost of borrowing or mortgage rate.
Another new indicator I discovered is the Coppock Indicator. I won’t go into detail about it but long-term investors have used this indicator in purchasing stock for the long-term. How you read this chart is simple. You first ignore what is in the positive range and focus when chart dip into the negative range and turn upward. Thus this chart had given us a buying signal back in October 1991, May 1993, and April 1996. Note, this chart isn’t perfect, but what it does best is reduce the risk one takes in making a long-term purchase. Based on what I see here, I don’t see a reason to rush into the real estate just yet.
I’ve heard people are rushing into make that purchase before price “sky-rocket”. I highly doubt that price would “sky-rocket” as price tend to overshoot on the upside. The same goes on the downside.
Summary and Prediction:
Home price in San Francisco is bottoming. Home price in distress area such as Stockton or Merced has some more to fall. With historical rate at 4-5%, it will be a great time to buy if you can afford it. Even if rate was at 10%, it will still be a great buy if you can afford it.
Income drives home price and not cost of purchase which many bankers will tell you.
My prediction for the mortgage rate is that it will remain at historical low rate until at least the end of 2009 because the Federal Reserve is targeting 4.5% to stem home purchase as well as make bank become more profitable. Once the bank shows sign of life, the Fed will slowly hike the rate when inflationary fear creeps in. I suspect the first rate hike will come sometime in the second half of next year if not later. When that happens, you will want to be in real estate or commodities as inflation will surely eat away any cash you have.
So do buy real estate, but buy for the right reason. We all got into this situation because bankers said rates are at historically low.
Art
To find this, I’ve taken the data from the Case-Schiller Index which tracks areas, such as Los Angeles, Phoenix, and Las Vegas. More detail can be found here. Taken only San Francisco data, I plotted the home prices index from 1987 (when Case-Schiller Index was introduced) against Per Capita Personal Income in California. The chart shows sign of "bottoming out". The data is incomplete as the Fed hasn’t released the income data for 2008 yet, but as an educated guess, that figure is likely to be slightly higher than 2007. We should see that figure dip or remain unchanged in 2009, but I’m not one to forecast.
The Federal Reserve and the government are doing their best to bring cost of borrowing down to stem home purchasing. One may say they’ve succeeded but I argued that cost of borrowing is the remedy. Given the house was priced at the peak, would 0% financing help those who did not have the income to support their purchase? A simple number crunching revealed that since 1975, income has been more closely correlated to home price, not cost of borrowing or mortgage rate.
Another new indicator I discovered is the Coppock Indicator. I won’t go into detail about it but long-term investors have used this indicator in purchasing stock for the long-term. How you read this chart is simple. You first ignore what is in the positive range and focus when chart dip into the negative range and turn upward. Thus this chart had given us a buying signal back in October 1991, May 1993, and April 1996. Note, this chart isn’t perfect, but what it does best is reduce the risk one takes in making a long-term purchase. Based on what I see here, I don’t see a reason to rush into the real estate just yet.
I’ve heard people are rushing into make that purchase before price “sky-rocket”. I highly doubt that price would “sky-rocket” as price tend to overshoot on the upside. The same goes on the downside.
Summary and Prediction:
Home price in San Francisco is bottoming. Home price in distress area such as Stockton or Merced has some more to fall. With historical rate at 4-5%, it will be a great time to buy if you can afford it. Even if rate was at 10%, it will still be a great buy if you can afford it.
Income drives home price and not cost of purchase which many bankers will tell you.
My prediction for the mortgage rate is that it will remain at historical low rate until at least the end of 2009 because the Federal Reserve is targeting 4.5% to stem home purchase as well as make bank become more profitable. Once the bank shows sign of life, the Fed will slowly hike the rate when inflationary fear creeps in. I suspect the first rate hike will come sometime in the second half of next year if not later. When that happens, you will want to be in real estate or commodities as inflation will surely eat away any cash you have.
So do buy real estate, but buy for the right reason. We all got into this situation because bankers said rates are at historically low.
Art
Print this post
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.