Morning Report – House Prices Overvalued? 7/18/14

Markets are higher this morning after yesterday’s bloodbath. Bonds are down, but still firmly below the 2.5% level. This has the feel of a summer Friday, where the senior traders are bolting for the beach around noon and the rest of the traders are watching the British Open and not their screens.

The catalyst for the sell off yesterday was the Malaysian jetliner that was shot down over Ukraine. Ukraine and Russia are blaming each other for the incident. We had a typical “risk off” trade, where investors sold stocks and bought Treasuries. Yesterday was the first – 1% down day in the market since April. The VIX spiked to 14.5, again the highest reading since April.

Merrill Lynch thinks home prices are overvalued and will go nowhere over the next few years. Home prices were undervalued about 6% relative to incomes at the end of 2011, and have now rebounded to levels that are 9.7% overvalued. Of course all real estate is local, and there is always the possibility that incomes begin to rise as the labor market tightens.

case-shiller fair value

For what its worth, I kind of come to the same conclusion, using the median income to median price ratio. The historical ratio of median house price to median income has been in the low 3s. Current median income is around $53,300. The median home price according to NAR is 213,400, so the ratio is 4x, a bit higher than its traditional 3.15 – 3.55x range.

Median House Price to Median Income Ratio

One note of caution with this analysis: the extremes of the housing market (distressed and luxury) have accounted for the majority of transactions. In other words, the median house price is distorted. That said, I do not think we will see meaningful home price appreciation until incomes start rising.

31 Responses

  1. Was in a Democratic office when the President gave his – uh — response to the shoot down. Was not well received.


  2. At least he didn’t give a “shout out” to anybody.


  3. Back to QBs recent assertion that Obama will be regarded the worst president in US history, he certainly seems to have had the worst 2nd term of any president I can think of. I thought Bush’s 2nd term was anemic, but Obama seems to be the lamest of lame ducks. The airliner response tends to cement this for me.


  4. I loved the Bob Schieffer’s confusion this morning on local radio. didn’t understand the administrations non response. couldn’t accept the simple answer “they are clueless and have always been so”


    • One of the silliest things said about Obama was that he is a mature, serious adult. Gravitas. Grown up in charge. Completely ridiculous. To him, this is all a junior high class election.


  5. Aren’t historians for the most part liberal? The worst presidents will always be Republicans…


    • Brent, I am betting on history’s finally overwhelming the historians in, say, 30-50 years. This is based on my belief that truth cannot forever be suppressed or denied, and that our society and government have gone past a tipping point where leftist nihilism must run its course and its bitter consequences felt.


  6. QB: I’m sure the truth can be suppressed forever, if it serves some overarching agenda, but a disconnect happens at a certain point, and political historians, generally, don’t see a flawed Democrat as being reflective on the present party. So, they may be more candid now about Truman than the media at the time. At some point, these issues will be past and it won’t be critical to recast a given president in a more positive light.


  7. Historians still think the New Deal “worked.” Talk about truth being suppressed.


  8. I think this happens faster with Republicans, if not with historians then with the media and pundits and Democrats generally. There are some diehards who still hate Reagan, but there are plenty of folks who lament the old days, where Reagan would talk out issues with Tip O’Neil. That was a Republican who knew how to compromise and work to get things done! Reagan, at least, was presidential, they say, compared to that cowboy Dubya. I heard numerous positive mentions of H.W. Bush, and lamenting that his son fell so far from the tree. And so on.

    There are Democrats who was poetic about Eisenhower, now. They did not like him then. Positive things to say about Gerald Ford. But during the Clinton Era, Reagan and H.W. Bush were still bad. Indeed, every trouble the Clinton admin suffered was due to 12 years of Reagan/Bush.

    So I think the Republican formula is something like this:

    Current Republican President: Bad.

    Previous Republican Presidents: Still bad. Compared to current Republican president in Previous Bad, Present Even Worse or Continuation of Bad.

    The Next Previous Republican President. Flawed, but at least presidential. At least he knew how to do X. Start with the comparison to the present Republican president (or in congress, if they control house or senate or both) where these current Republicans are so much worse that that previous-previous Republican president, who at least had some good points.

    The Republican President before the Next Previous President (3 or 4 spaces removed, depending on if you count the present Republican President in your number): Imperfect, but a great president in many important ways. Indeed, in every important way, this present Republican president is the opposite of that Republican president 3 spaces back.

    Even Nixon get some credit by pundits on the left familiar with his record. Garrison Keillor, who is as rabid a partisan Democrat as any out there, characterized Nixon (during the Dubya admin) as the last Republican president who cared about people. Republicans previous to Nixon? All fine except Hoover, because, you know, he caused the Great Depression with his Laissez-Faire attitudes. But otherwise, it’s only contemporary Republicans who are truly evil.


  9. @Brent: “Historians still think the New Deal “worked.” Talk about truth being suppressed.”

    Well, that depends on your definition of “worked”. If we defining working as successfully launching the nanny state in America, then it worked.

    The common habit on the left and even the middle of giving it credit for ending the Depression is so clearly wrong that the mind boggles.


    • KW and Brent, there is some truth in those points, but I think they also fall into the belief that what has not yet happened cannot happen, or that the current pattern of history inevitably will continue. I look at it more as what can’t continue forever won’t. Progressivism is a destructive disease. It is presently running its course. Eventually it must kill its host and itself.


  10. “I thought Bush’s 2nd term was anemic, but Obama seems to be the lamest of lame ducks. The airliner response tends to cement this for me.”

    I think Bush’s was a bigger fall from his first term with Katrina and Iraq. For Obama, his first term effectively ended in the 2010 mid-term election. That seems to be the real division in terms of his ability to get legislation enacted.


  11. “quarterback, on July 18, 2014 at 10:03 am said:

    One of the silliest things said about Obama was that he is a mature, serious adult. Gravitas. Grown up in charge. Completely ridiculous. To him, this is all a junior high class election.”

    I’d change this to:

    “To him, it’s all about him.”


    • Jnc, wouldn’t dispute that. I was only getting at the childishness and immaturity he so habitually displays.


  12. Clinton didn’t seem hamstrung by losing both chambers in 94. Reagan only had an R Senate for what, 2 years?

    Obama is like Carter in that he’s not a particularly warm guy and tends to regard himself above others while making the fatal mistake of letting them know he’s above them.

    I can’t imagine Obama serving coffee to someone he’s trying to woo, for example. When was the last time anybody characterized a conversation with Obama that was not, essentially, a lecture to them by him.

    To paraphrase Glenn Reynolds, it looks like the Carter years are going to be a best case scenario.


  13. Clinton was from the South, so he was used to conservatives and at least understood how they thought. Reagan was a Democrat once, so he at least understood where the left was coming from.

    obama had no such experiences with people from differing opinions. His background in urban politics, community organizing and academia pretty much guaranteed it. He is like Greg Sargent – he thinks he understands what the Republican side is all about, but he doesn’t.

    Anyway, the well is poisoned for the rest of his administration. He should be on his knees every night praying that Janet Yellen can raise rates without someone blowing up, because if he ends his presidency with another financial crisis or even a recession, his legacy will be sealed.


  14. Mark, certain liberal/progressives are starting to come to your realization that Ted Cruz may well be their most dangerous opponent.


  15. Kevin Williamson continues to kill it. “Back when he was a good economist rather than a fixed-gear rant-monkey, Paul Krugman ….”

    I don’t even care what the rest of the column says.


  16. From the New Yorker article about Cruz,

    Capitol as a cesspool of corruption, and they see compromise as betrayal.

    That there are those that don’t think that Washington is systemically corrupt is very depressing.


  17. progressives are pure, bagger. you should know that


    • That kos item is amusing, as the hair-pulling and eye-poking among the kooks always is. Such a sense of self-importance.

      A reader might wonder, well, what if some of the Kos staff wanted to attend Nutroots? Isn’t the left all about personal autonomy and stuff? Is the little hater-in-chief forbidding his hate apprentices to attend? But I suspect it means only that DailyKos means the little hater himself and little more.


  18. You should read the comments. Very illuminating once you get through all the tribal signaling.

    That’s my favorite part of DailyKos.


  19. I agree with his premise – that we won’t see a meaningful recovery until there is wage inflation. Think we are getting closer. FWIW, I have had more headhunters etc contact me over the past couple months than I have since 2007. And I’m not actively looking for a job. Of course, sample size of 1.


  20. Lord, Net Nanny at work won’t let me read Zero Hedge. Bah!


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