Posted tagged ‘appreciation’

Longing for a Recovery in Housing

January 30, 2013

On only a few issues can I say that I would be happy to be wrong.  My views on likely home price appreciation and New Hampshire’s housing market  is one of them.     Housing is important to the state’s economic recovery and longer-term prospects for economic growth.  By way of shameless self-promotion, I will be on NH Public Radio’s “The Exchange” discussing some of my views on the topic.  I’m not a real estate economist so it will be interesting to hear how my views differ from someone who will also be a guest and who is a very good real estate economist,  (Russ Thibeault from Applied Economic Research).

The problem I have with most discussions of the  housing market is that housing is by far the economic metric that individuals have the most emotional, psychological and often direct financial attachment to.  Discussions of the housing market are the  most prone to hope, optimism, and wishful thinking, and the least amenable (and welcome) to dispassionate analysis.   If you want something to be true  it is as easy to find evidence to support your view as it is to dismiss evidence that contradicts it.  Every day we hear about the housing comeback nationally so we want to believe it is happening in NH, and we will look for any sign that it is.   I don’t see much evidence that the housing market is recovering as fast in NH as it is nationally and I don’t see factors in the near future that will contribute to it being so.   Long term, job and population growth are the best determinants of home price appreciation in a region and neither bodes well for a quick housing comeback in NH.  The chart below shows the relationship between year-over-year home price appreciation in each state and job growth during the same time period.  Each marker represents one state’s value on job growth (the horizontal or “x” axis) and its rate of home price appreciation over the same time period (the vertical or “y” axis).  Some states with large price declines are seeing out-sized rebounds but job and population growth largely determine price appreciation trends over the long-term (during bubble times that relationship breaks down but eventually it returns to trend),  NH is the red marker and reflects a state with both low job growth and appreciation rates over the past year.

job growth and home price appreciation

I know home sales have increased significantly in NH over the past year but I wonder how large a role  investor purchases for conversion to rental housing is playing in that trend.  For a number of reasons, that I will discuss in future posts, I think economic, demographic, financial, socioeconomic and social trends are likely to favor the performance of rental housing relative to homeownership in NH for several years.  Nationally and in almost all states, the homeownership rate fell during the housing market crash.  NH has a high homeownership rate and it barely dropped during the crash.  Many states are seeing homeownership rates begin to rebound and will see demand and price appreciation benefits from that.  Meanwhile, NH’s rate remains at historically high levels and given the demographic and other trends I don’t have time to discuss in this post, I think the rate will move lower and  closer to the state’s long-term rates.  That won’t help price appreciation.

Homeownership Rates

Gosh that sounds apocalyptic, its not, it just means that we shouldn’t soon expect the big price rebounds seen in many states.  Except I know we will expect exactly that, because residential real estate is about psychology and  about comparables and comparisons,  what has happened in the past.  Any industry strongly influenced by those factors is going to regularly disappoint.

The Home Price Rebound That Wasn’t

November 29, 2012

The Federal Housing Finance Agency released its latest home price appreciation index on Tuesday and while the data support the belief that housing is bouncing back across the country, and is now becoming a positive influence on economic activity rather than a drag,  the news is not good for New Hampshire.   The FHFA’ s repeat sales home price index shows that NH is one of only a few states that had price depreciation between the third quarter of 2011 and the third quarter of 2012 and only two states (Maine and Rhodes Island) had lower appreciation rates than did New Hampshire.

Repeat sales indices are the only accurate way to measure changes in home prices.  Simply examining median sales prices doesn’t account for the fact that the characteristics of the houses sold may be different (location, size, type, etc.) unless the repeat sales method is used.  I am by nature an optimist.   I am rooting for the housing market because its rebound is important for the prospects of the NH economy and its not so bad for my balance sheet either.   I am also not looking for yet another reason for realtors to take exception to some of my analyses.   I am, however,  a believer in the wisdom of markets (most of the time) but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories (the housing market is back, Mitt Romney has got the momentum in the swing states).  At least one of those stories is true , the housing market is coming back as a whole in the nation, just not everywhere.

As I have noted in prior posts, no amount of exhortation and cheer leading about housing can overcome the fact that values are determined by fundamental underlying demand for housing which includes population and job growth, the formation of new households, and the need to replace older housing units.   Both NH’s job and population growth have been weak relative to a majority of states over the past couple of years.  Regressing  job and population growth over the past year in each state on the FHFA’s home price index-based change in home prices in each state shows a highly significant relationship (R=.603) accounting for about 40 percent of the variation in home price appreciation across states.  There are variations in markets within each state, and this analysis is an oversimplification, but nevertheless it is important to remember that home price appreciation cannot, for long at least, outpace the fundamental determinants of the demand for housing – job, population and  household formation growth, and the need to replace obsolete structures.

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