Overly Optimistic Housing Metrics?
It’s been a few years now since the first signs of trouble began emerging in the U.S. housing and real estate market. Standard & Poor’s just released the latest Case-Shiller Home Price data so where do we stand now? Market pundits have been cheering the percentage price gains in the Case-Shiller Home Price Index for several months and telling bearish investors to forget the past and go right back to the same assumptions that caused the real estate crises in the first place. To support their theory, they simply point to data like the Case-Shiller Percentage Year over Year Price Change Index.
Unfortunately, this data gives a very skewed picture of what is actually happening to U.S. home prices because we are coming off of such a low base. Investors need to be examining markets for afford ability, thus we feel income to price ratio is a safer guide as a consistent metric.
The U.S. Government began inflating the housing bubble all the way back in the 1980’s with aggressive home-ownership policies spearheaded by Fannie and Ginnie Mae. Wall St. helped the bubble along with financial “engineering” and then the Federal Reserve even stepped in to do its’ part after the dot-com crash by lowering rates dramatically for an unprecedentedly long period of time.
All these factors make it very hard to get a real idea of what housing prices should be because the markets have been manipulated so completely. For a guess of what is happening today, we should look at metrics such as income to home price ratios. In fact savvy investors use this data to guide which markets they are investing in as it is often a predictor of markets that support positive cash flow.
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