Blood in the Streets

Baron Rothschild, the quintessential banking opportunist, is said to have advised that the best time to buy is when there is "blood in the streets."  This is the best time in the last century to purchase real estate.   Over the past 120 years there has been a trend of increase in home values.  In the the past 20 years, we have seen that trend make the jump to lightspeed. 

Populations around the globe are increasing at exponential rates and the world isn’t getting any larger to accommodate the growing need for housing.  Basic laws of supply and demand predict that there will be a long term strain on various products, services, and resources.  Inevitably, prices will be driven higher. 

Here in the U.S. we saw a tremendous boom in home prices that is now experiencing the effects of some natural price corrections.  Although there are many individuals in the past few years that have suffered from a combination of credit crisis and falling home values, there are some wise investors that are still working profitably in the housing sector.  At a macro level, there is no place for property value to go but up.

 

A little history…

Yale economist Robert J. Shiller created an index of American housing prices going back to 1890. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.  The 1890 benchmark is 100 on the chart.  If a standard house sold in 1890 for $100,000 (inflation adjusted to today’s dollar’s), an equivalent standar house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890).

If we examine the year over year change in the Case/Shiller index ­­since 1988, we see a steady rise in values until it peaked in July 2006.  The sharp decline since that point has reset prices to below the dip in 1991, in fact, prices are down to 1980 levels.  As this recession slows and turns a corner, the natural progression will be upward.  Whether the recovery and growth will be a rapid or whether is will pace slowly is what many analysts today are discussing.

The S&P/Case-Shiller index for home prices in 20 major cities in the three months ending June 30, 2009 was up 1.4% from its level in the three months ending May 31, 2009. It was the first time the index rose two months in a row since mid-2006. Prices gained in 18 of 20 markets, but were still down 31% from their July 2006 peak. 

These numbers mark a definitive slowing in the downward spiral.  "Momentum matters," said Robert Shiller, the Yale University economist who helped create the index. "This is a sudden break in momentum."

We are now hearing almost daily reports of “good news” in the real estate sector.  This good news compounds upon itself and begins to move the market in a more definite direction of growth.  One component of the Case-Shiller index, consumer expectations of where the economy will be in six months, rose to 75.8, its highest since the recession began in December 2007. Consumers' assessment of present conditions also improved, along with stepped-up plans for buying homes, autos and several major appliances.

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