Residential Investment

Thursday, January 04, 2007 | 11:30 AM

In the comments of a prior post, a reader (Sailorman) asks: if housing is having heartburn while the general economy is still relatively strong, what will happen to housing if the general economy has a hard landing?

That's a fair question worth further exploring:

Housing activity is a function of several factors: Rates, the overall economy, supply, population growth, rental prices. These are the primary drivers of sales and pricing. Like all asset classes, other elements will impact end demand: sentiment, speculation, liquidity (easy financing terms, I/O loans, no doc mortages), etc. 

Over the past 5 years, rates dropped, supply expanded, population expanded, prices rose. That's fairly normal. Then something a bit unusual happened: rates plummeted even further, prices rose more quickly as former stock market investors discovered Real Estate Speculation.

This group is notorious for being late to the party. Just as they bought right into the top in 2000, I suspect many did the same in the Summer of 2005.

Fast forward a year or so: Equity price shave dropped -- and not just the 2% you may have heard in the official data.

Most of the time, Real Estate is a function of the overall economy: Job creation, GDP, Rates. As we discussed extensively, this go round has seen the roles reversed: its the prime mover of the economy. 

Which leads us to this chart:   

Historical chart of Residential Investment Cycles, 60 Years



Does this look like the downturn in Residential Investment is over? Except for 1995, most private RE investment contractions are much longer lived . . .


The "Carry" Trade in U.S. Housing Looks to be Over
December 01, 2006

Thursday, January 04, 2007 | 11:30 AM | Permalink | Comments (28) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Barry, I see you listed rates 1st tho on a relative basis I don't know what your thoughts were. Albert Einstein found the power of compound interest mind boggling. If you couple debt with leverage up to the sky, it can alter the course of history. It's greater than the power of wages. And adjustments and secular trends can change the economic landscape drastically. But I'm with Warren Buffet, changes in debt changes the terms of endearment.

Posted by: Teddy | Jan 4, 2007 11:52:20 AM

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