Housing Market

The quick answer to the headline of this article is yes.

At Kerrisdale Capital, we've written about the housing market before, but estimating the fair value of the US housing market is difficult. Two of the best ways to estimate fair housing prices are to compare housing costs to household income or rental rates. Obviously people can only spend so much on housing relative to their incomes, but secular trends in spending, tax rates, and cyclical trends in income make the data difficult to interpret. Likewise, comparable rental rates do a good job of showing the relative cost of ownership, but in an inflated market, rental rates are likely to be inflated as well. A third way to estimate the fair value of the housing market is to look at the replacement cost of existing homes. If the cost of building a home is equal to the cost of buying a home, then the price to cost multiple is 1x, implying a breakeven level of profitability for homebuilders. If homebuilders can build a house for $300k and sell it for $400k (a 30% return) they will continue to build homes until they can only sell them for around $330k (a 10% return).

Back in February, I wrote about a $2 bet I’ve had with a colleague since last spring on the state of the housing market. My side: residential housing had further to fall. His side: the worst was behind us. We spoke the other day and I told him to start saving: the housing market is about to take another tumble.

This, by far, is the biggest question troubling the administration, investors, and taxpayers. Here are some very detailed perspectives from Lehman Brothers a/k/a Barclays.

I've been telling readers and subscribers that the housing market has a considerable amount to fall before we reach income parity and equilibrium in supply and demand. With income currently falling along with rising underwriting standards, that point is actually being pushed even farther into the (event) horizon! We are now at a point where interested parties would be remiss in not pursuing blogs (both in addition to and instead of the mainstream media) to get the nitty gritty analysis on a wide variety of topics. With that being said, I have finally decided to bite the bullet and expand BoomBustBlog by accepting partners in a bid to grow the business. Lethargic media and financial concerns, look out, here comes the BLOGS!!!

Not too surprisingly, now that the old man is loose, he just refuses to keep his mouth shut about the true state of the economy. Also, unlike his interview with Maria Bartiromo, this time he doesn't just walk off the set. Some of the soundbites: "The mortgage market in the US is in trouble. It's totally dependent, heavily dependent on the government participation. It shouldn't be that way. That's going to have to be reconstructed." Another modest proposal from the former Fed chairman - raising the retirement age: "Social Security program should raise the retirement age by maybe a year or so." On the greatest blunder in the U.S. housing market: "Fannie Mae and Freddie Mac were not a good idea in the first place. This hybrid public/private thing sooner or later was going to get you in trouble and it sure got us in trouble big time! So I hope we don't go back to that model." And, lastly, on the most relevant issue at hand - the Volcker rule and defining commercial bank activities: ""The criteria in my mind is, are you meeting a customer demand or are you trading in your own interest? Or are you responding to your customer's demand to sell or buy?"

It appears that all the improvements in the housing market have not been due to market corrections, but are from government stimulus, and the numbers are fake. Such actions will only delay a recovery and housing prices will continue to fall.