To The Stars and Beyond!

Exponential growth is unsustainable. a fools errand at best...... Our fearless leaders really believe that they can continue the current manner of growth for any significant period of time????

Home Ownership Rates

I recently came across some home ownership data that was interesting in context of how it fits into the current bubble and what its potential long term consequences are. It appears that most of the US has historically been within +/- 1 standard deviation of the median home ownership rates for 30+ years, before the current housing bubble began.Click on any of the following charts to enlarge them

Northeast: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New Jersey, New York, Pennsylvania.

Midwest: Illinois, Indiana, Michigan, Ohio, Wisconsin, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota.

South: Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia, Alabama, Kentucky, Mississippi, Tennessee, Arkansas, Louisiana, Oklahoma, Texas.

West: Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming, Alaska, California, Hawaii, Oregon, Washington.

Homeownership Rates. The proportion of households that are owners

Per 2006 census data (Source) there are 77,402,000 households in the US. The median US home ownership rate is 64.7% and the current rate is ( 1Q08) is 67.8%. A reversion to historic home ownership rates would require that 1.1 million to 3.7 million homeowners become renters, with the long term median requiring about 2.4 million homeowners to revert to renting.

For reference, there is an average of 3.9 people per household per the 06 census data.

A second bit of data I found from the same source was historical data of Asking Sale Price and Rental Prices, both nationally and regionally. The following chart shows the ratio of Asking Sales price Vs Rental Price for the Northeast and the nation.


This small set of data alone should be enough to illustrate that we will not see a recovery of the housing market anywhere in the near future. It also suggests that the northeast is still in line for a substantial correction. We have seen an approximate increase of 62% in the Northeast Asking Sales prices VS Rental price ratio in just the last 4 years when for the previous decade that ratio was staying in the neighborhood of 200.


This is also bad news for the recent buyers who bought with a plan of turning a profit on rental properties or who hope to rent their home out to cover the expense that they may not be able to afford. This last chart shows that both rents and home prices are set for a drop. While there will be some segment of the landlord population that is still positioned to profit, this will become a very tough market in the near future as their are

bergen county + Case-Shiller data

Notice that during the early 90’s housing bubble, that there was not a rapid expansion of credit as can be seen by the case-Shiller index staying relatively flat.

Also Notice the precursor to the current bubble; the Case Shiller Index starting a rapid rise in 1998.

My question is what was the trigger? the Gramm-Leach-Bliley Financial Services Modernization Act ( this act removed The portion of the Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services) wasnt passed until 1999 when a rapid rise in the case-Shiller index had already occurred. perhaps a secondary effect of the Dot.com bubble?

Another question is: Is the case-Shiller (CS) data adjusted for inflation in some manner? if the CS data is adjusted for inflation then we have a very long way to fall to get back to historical norms.

IF it is not adjusted, i treated the value of the CS data as a dollar value and used the online BLS calculator to adjust the the 1998 CS value (approx 8000) for 2008. That adjustment comes to approx 10,500.

While this method is certainly not rigorous, i figured that it would give me a rough estimate since the CS value is ultimately based on the dollar value of home sale transactions.

The NY CS index is currently at 19,000. A reversion to mean , using the rough inflation adjustment i described above would give us a target of 10,500. However a reversion to mean usually overshoots.

I extended the trend lines for the CS data on one of the charts at the link above, As a VERY rough estimate, if current trends continue, then the CS Composite-10 could see a bottom in 2012. But if the area covered by the CS NY data continues on its current trend then it wouldn’t bottom until sometime around 2017.

One argument we have on this blog is how well (or not0 the NY area will hold up during the RE deflation. I argue that we will see a big drop in the next 2 years and that the NY area will come into line with the CS composite 10 and CS composite 20. Data for the last 20 years show that the NY area has NOT been substantially different from the other 2 indexs. The difference has only arisen lately, since about 2004.

i argue that this divergence is due in large part to the inflation of the financial services industry in the Ny area and the huge amounts of cash that were pumped into regional housing as a side effect.

i think that the Ny region will see a bottom before 2017 but after 2012. My guess is the NY region will bottom sometime around 2014 and then stay stagnant for a long period.

The driving factor that allowed the price divergence in 2004, the huge amounts of money loaned out by the banks with little to no regard for the quality of the loan, and the sky high salaries seen around the region will not exist to support the divergence anymore

my 1.25 cents

have fun tearing it apart!

treauries

2yr Indirect Treasuries

Dow V Gold

Dow v Gold

Updated bergen county data