Housing: The New Store of Value

It's been a rough August for stocks. Investors have had to endure a 10% drop in the major stock-market barometers: the Dow 30, the S&P 500, and the NASDAQ Composite Index. We wouldn't be surprised to see further declines in weeks to come, given the precarious state of the Chinese stock market and China's economy.

But as they say, when your house burns down mine looks a lot better. Housing as an asset class looks good compared to stocks. At the least, housing has momentum on its side.

Housing demand continues to trend higher. Existing-home sales posted a solid 2% gain in July, with sales hitting 5.59 million units on an annualized rate. Sales were strong despite a dearth of inventory, which stands at 4.8-month’s supply at current sales.  Year over year, supply is down nearly a full month. When supply is down and demand is up, prices are usually up as well. The median price for an existing home rose 5.6% to $234,000 in July. 

New-home sales were also up last month, which is no surprised, considering the strong uptrend in housing starts in recent months.  Sales of new homes posted at 507,000 units, a 5.4% increase over June.  Here, too, inventory remains tight, with supply dropping to 5.2 months at the current sales rate.  Again, we see the same dynamic: tight supply plus rising demand equals rising prices.  The median price of a new home rose 3% to $285,900. 

Interestingly, there appears to be a price dichotomy at work. The S&P/Case-Shiller 20-city index dropped 0.1% in June. Eleven of the 20 cities Case-Shiller follows posted declines. Year over year, the Case-Shiller index is up 5%, but price-appreciation has eased in recent months, with the index now up 5% year over year. This isn't a bad thing. After all, low-to-mid-single-digit appreciation is the historical norm.

Of course, coverage is the reason for the difference in existing-home and new-home prices reported by Realtor.com and the Commerce Department and prices reported by Case-Shiller.  The former two cover most of the country; the latter covers only a few choice metropolitan areas.  As we all know, all real estate markets are local markets. Any aggregate number can be meaningless to any local market. That said, overall, things look healthy, and that means many local markets are healthy as well.  

Given the current state of the stock market, we expect most local markets to remain healthy.  Housing is looking good as both an investment (flipping or rental) and as an appreciating long-term asset (an owner-occupied home).  A sub-4% rate on the 30-year fixed-rate mortgage will further inspire demand. Given housing's comparative advantage to stocks, we see no reason the good times shouldn't last quite a bit longer.    

Information provided by Jessica Regan.

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