The Bullish Scenario for Housing

Sell (Stocks) High, Buy (Housing) Low . . . Again?

Stock market investors who'd gotten in at much lower levels and were worried that a correction was overdue decided to take profits.

The sector they turned to?

The housing market, where wary Buyers burned by the last downturn were still keeping their distance -- or clamoring to get out at the bottom.

The foregoing pretty much describes what savvy investors were doing . . . in the late '90's.

Back then, of course, the Nasdaq was well on its way to its 5,000-plus moonshot, and stocks like Pets.com were fetching -- temporarily -- billions despite having no sales or earnings.

And the real estate downturn that was still fresh in people's minds?

The early '90's bear market, which was especially severe in places like Manhattan and Southern California.

Then and Now

Fast forward to today.

After rallying some 75% now from the lows set in March, 2009, here's what Gluskin Sheff analyst David Rosenberg says about stocks today:

The April data was just updated and showed the inflation-adjusted normalized P/E, premised on "bird-in-the-hand" (as opposed to consensus earnings forecasts, which is historically more than 20% higher than we get actually get — one reason why Wall Street banks are dubbed "the sell side") 10-year trailing profits, expanded to over 22x from 21x in March.This is not nosebleed territory, but it is expensive; the historical average is 16.4x. So, this implies that the market is currently 34.7% overvalued benchmarked against the historical norm. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.

--David Rosenberg, Gluskin Sheff (4/21/2010)

Translation for non-economists: 'stocks ain't cheap anymore.'

As Yogi Berra would say, is it "deja vu all over again?"

Really Cheap Housing

Boobie Prize Winner -- Winter, 2010 Edition

[Editor's Note: sort of like the blog equivalent of a broken clock, this post is timely twice a year in Minnesota. The last time I ran it was mid-December]

Walking around Lake Calhoun just before dusk last night, I spotted what appeared to be not one but two ice fishing houses (no, this isn't a picture of one of them -- it's a stock photo).

I doubt it's been cold long enough to even stand on the ice, let alone put a structure on it.

Just trying to be first, I guess (as in plucked from the water -- if they're lucky).

"Pride of Renter-ship"??

Renting vs. Buying: How Interchangeable?

Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo.

Nick Timiraos, "Renters Lose Edge on Homeowners"; The Wall Street Journal (2/25/09)

Besides figuring out how to save the financial system, the other Holy Grail at the moment seems to be calling the bottom in the housing market.

In turn, that has unleashed a search for various "metric's" -- or valuation yardsticks -- that will accurately identify when housing is truly cheap, and therefore likely to stop falling.

So once again the cost of owning vs. renting is back in the limelight -- this time, with commentators noting that the pendulum has swung back towards owning. (In fact, owning has traditionally been more expensive than renting, but in a growing number of markets, the premium is now much smaller.)

It's certainly good news -- to prospective Buyers, if not prospective Sellers -- that housing is more affordable. However, underlying the owning-renting comparison is the flawed assumption that renting is a close, if not perfect substitute, for owning.

In economic-speak, rice and potatoes are close substitutes; apples and oranges are, well . . . apples and oranges.

I'd argue that renting a two bedroom apartment vs. owning a two bedroom home -- the example cited in the Journal article quoted above -- is more like comparing apples and oranges, for two reasons. (Note: for purposes of this post, "condo" means "owned, "apartment" means "rented" -- both are multi-family housing.)

Pride of Renter-ship??

One. Different housing stock.

I work with clients looking for small, single family homes, as well as clients looking for condo's. However, I seldom work with clients looking for both at the same time.

Single family homes have more privacy, no shared walls, and -- if they're located in the Midwest -- a yard and a garage. Because of zoning laws (everywhere except Houston), the single family house is located in a lower density neighborhood surrounded by other single family homes.

By contrast, the condo is likely on a busier street, clustered with other higher-density housing.

Cutting the other way are such factors as convenience and upkeep; condo's offer more of the former, and require less of the latter. It's also true that higher density locations offer better proximity to public transportation, stores, and restaurants.

Two. Different profiles.

Of course, the difference between owning and renting extends to more than just choice of housing stock.

Renters tend to be more short-term oriented, financially less well-established, and, especially today, more risk-averse.

It can also be the case, particularly in the Midwest, that owners -- at least until recently -- enjoy subtly higher social status than renters (they're certainly treated better by the tax code!). Just as it's said that no one ever washed a rental car, few renters invest the kind of TLC in their rental space that owners lavish on their homes.

For all these reasons, the decision to own vs. rent is a more qualitative one that goes beyond simple economics.

Which is not to say that economics are irrelevant.

In my (Realtor's) experience, whether renters decide to become Buyers likely depends much more on their individual economic prospects -- and their expectations of future housing prices -- than housing's cost relative to renting.