Tuesday, December 29, 2015

Housing Prices Ding the Rich. Are you next?

There were some interesting charts published that I highlighted over on our Facebook page, but the blog lets me get into a little more detail.

Below is a chart(source:Redfin) depicting the Y-o-Y change in price for homes in the luxury segment versus the rest of market. During Q3 the luxury segment of the market saw price declines for the first time in years. Whether it is temporary remains to be seen until Q4 data is released. Yet there is a clear trend of declining percentage gains since Q1 2014. Regardless the way it works in real estate is that the high end is more sensitive to global economic changes as it's used for big money to move itself around and park for safety. But this is just one data point.

I'm reminded of a trip to Australia that I took a few years ago.  On a boat tour along the Gold Coast the tour guide mentioned he'd been giving tours for awhile. Passing by the same coastal houses for years day after day. He could recall which houses had not been occupied in years based on the storm shutters never being opened once. At the time I thought it was interesting, but failed to realize the significance. Hey cut me a break I was on vacation and more interested in getting a sun tan and cocktail. I remember people saying "Oh its because they are too busy working". Which is probably true for some but not all the houses. In reality many of the houses were simply meant to be an investment with no real intention of ever being used. The owners probably had plenty of houses and could vacation to wherever they pleased on a private jet if preferred. An alternative intention was to own the home as part of their overall investment portfolio. For example if you have $100 million in assets and all of it currently resides in equities you would look to diversify into bonds and real estate. Your real estate portion could come to 5% which could allow you to buy five $1 million homes, or any combination thereof. We've all heard the stories of the mega rich with multiple homes. Yet I'd bet most of them spend the majority of their time at just one or two places. Remember they are just people like you and me with families and other responsibilities. Also remember that my thoughts in the above paragraph are my opinion and not necessarily reflective of the overall situation.

Here is our second chart(source: Housingviews).

This chart above depicts the changes in housing prices compared to CPI, real, and nominal changes in price. There are a few things I want to mention. First of all if you have any experience in stock market technical analysis this chart is making a series of lower highs, and lower lows over time. If you see this pattern in an index or individual stock it usually is a bearish(heading lower) signal. Eventually the price breaks to the downside until it finds or creates another support area. That is cause for concern on its own considering how tepid the real estate recovery has been. I know the figures represent the percentage change in prices and not the actual prices. Yet the pattern isn't encouraging. So lets take a look at the price of a home in real terms.

Odd that the prices in real terms haven't even reached their pre-recession peaks. Most economists and real estate groups have been exclaiming prices have passed their recessionary peaks. That is true only in nominal terms. That is a very distinct difference. The two charts correlate the declines in real terms are becoming more pronounced in each recession. When I look at this chart it seems to me that there was a bubble top that formed in 2006/2007. Take a look at charts with similar patterns in equities or bonds. You will find the same pattern across many asset classes not always ending well. Also I find it interesting that in 4 of the last 5 recession housing prices began to dip before the official recession started. So a keen eye should be kept on the trend to see if it signals another economic recession. Since real estate was a big factor in the last recession we should watch to make sure the issues have cleared up.

Secondly there is an issue with comparing housing prices against inflation. For one the CPI does not use home prices in its calculations. It uses rents which was changed back in 1983 since owning your home is considered an "investment" even if you have no plans to ever sell. In reality your home is a cost center when viewed from a business angle since you do not derive any actual income from living in it yet you are responsible for all maintenance costs and taxes.

I'm not bullish on real estate for the near future. Of course I could probably find a bunch of stats highlighting prices are destined to keep rising infinitely. Which would make us all feel real good. Since housing comprises a great deal of individuals wealth in this country we should all pay it some attention. But real estate is a much different ball game than owning stocks or bonds. Real estate is the house we live in where families are raised. It's where holidays are celebrated, and friends come over for dinner. When the world goes awry you don't just transfer your house to a bank account in another country. You're stuck with it no matter what. So I'd rather be wrong ringing the alarm bell for a disaster that doesn't strike, than be right. I guess only time will tell.

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