In my previous life, when I was a professional musician playing in the rock and roll band Legal Reins, we felt confident we were good, but it was always nice to hear it from people from the recording industry because they were the supposed experts. Nothing wrong with a little positive reinforcement; it didn’t necessarily change our reality, but it was nice to hear. That’s kind of how I view today’s Case-Shiller report which splashed the headlines, “Home Values Up”; it’s nice to hear but it doesn’t change our reality. That reality is that the housing market and prices have been climbing for several months; inventory is at 2003-04 levels and demand is far outpacing supply, especially in the low to mid prices ranges. That’s reality, whether Case-Shiller admits it or not. After all, Shiller is a backwards looking index basing numbers on closed sales which indicates contracts entered as many as 90 days ago. In fact I would say it’s safe to say, we should expect the prices to continue to rise in Shiller’s report, while the number of sales declines. This will be due, not to a lack of demand but to the shortage of supply, restricting sales activity. By the way this explains why the National Association of Home Builder’s reported yesterday that sales were up the highest level in years and the number of permits applied for skyrocketed. Home builders create inventory.
There was something I found compelling in Case-Shiller’s report: their graph of Home Price % Change year over year for their 20 City Metropolitan Statistical Area (MSA) which dates back two bubbles ago to 1988. Their graph demonstrates a trend line that is now repeating almost identically to the 1988-1995 timeline. I think it’s noteworthy that from 1988-1995 the Price % Change trend line was as high as 12% above the zero line in 1988, dipped to below -7% in 1991 (a 19% swing), rose over the zero line in 1992, dipped again through 1993 and finally went over the zero line to stay in early 1995. That up-down-up-down-up pattern is exactly what the trend line looks like today, only the swing was far greater in this last bubble. According to Shiller we were at +20% price activity year over year in 2005 dipped to -20% in 2009 (a 40% swing), up to +4% in 2010 (tax credits), down again to -4% in 2011 and now trending upward towards the zero line in 2012; up-down-up-down-up, an identical pattern. In fact not only is the pattern the same but so is the time line that the pattern takes place: 2005-12 is the same number of years as 1988-1995, 7.
So what’s that mean? Well if past performance is any indication of future activity, it means the housing market is set for another historic rise. In fact from 1995- 2002, before the boom of the artificial bubble due to loose lending standards, Case-Shiller shows that home prices rose 15% in that 7 year stretch (about 2% per year). That’s some pretty big gains in what we might consider “normal” times. Thus it looks like the next 7 years are going to be great for home buyers, great for home sellers and great times for our economy, and to this I say, “Bring it on!”