Not About the Swine Flu!

Whew! You can really tell when a story hits the media at a time when nothing else important is going on. With words like “pandemic” and “crisis” being thrown around like cowboys at a rodeo, it’s hard not to panic a little bit. If there is any good news in all of this, it seems that this flu strain is responsive to treatment by existing medicine, which seems to be available in ample supply. We hope for the best for all involved.
What I really wanted to talk about today is the housing market. Remember that problem? Every once and a while, we will hear something about how many homeowners are “upside down” (have mortgages bigger than the value of their house), how many homeowners or behind on their payments or how many foreclosures there were last month, but generally the news flow about the housing market has been rather light lately. When swine flu, automaker bankruptcies and/or banking industries do not dominate the airwaves, we might reasonably expect the media to recycle the apparent bad news about the housing market.

Recall that the baseline problems which led to the current recession and bear market were housing related. Recall that many experts consider the bursting of the housing bubble a key factor in all the economy’s current struggles. Recall that the US government is trying to lower mortgage rates in an attempt to help homeowners keep their houses. Amid of all this, it’s easy to ask “When Will Housing Recover?”
Well, in the latest issue of the Financial Analysts Journal, two finance professors, Eli Beracha and Mark Hirschey, attempt to answer that very question. They point out that in the 25-year period from 1982 to 2007 the annual rate of house price appreciation in the U.S. was 1.65% per year, and that over this period nominal house price never fell. This makes the experience in 2008, where nominal prices fell, so unusual – something not seen since the Great Depression. Yet, they emphasize, that despite stunning declines in several states (California, Nevada, Arizona, Florida and Virginia), the housing market remains moderately strong (or at least not horribly weak) through most of the country. The real trouble exists in those markets which had been the strongest.

This may sound pretty obvious to many of us, but it was a bit of good news to me – that the real estate problem was not the wide-spread “pandemic” we might think it is, just listening to the nightly news. After many pages of data and commentary, the authors were able to offer this conclusion – “…if typical per capita income growth continues for only 1.49 years [note the academic penchant for precision without accuracy! – ed.] with flat housing prices and continued low interest rates… the nationwide housing ‘crisis’ will be on the road to recovery by the second quarter of 2010.” In other words, they can see the housing market recover by the middle of next year, IF incomes rise and housing prices stabilize. Perhaps those two assumptions are overly optimistic, but they are based on reasonably assumptions spelled out in detail in the essay. IF this were true, we could expect the stock market to begin discounting this good news sometime later this year.

I am sometimes accused of being too optimistic. Well, if this is a fault, then label me “guilty.” My optimism is not congenital; is has been acquired through many years of analyzing great companies and seeing how much motivated, creative and hard work goes on behind the scenes. The economy is not one thing. It is not a monolith controlled by some all-knowing entity. Rather, it is the amalgamation of millions of actions by millions of people all trying to make products, provide services and make some money along the way. The fact that this is the driver of our economy makes me optimistic. Better news about the housing market will make me even more so.