The Case-Shiller index yesterday was up 5% for the month and prices are getting close to the 2006 peak. Naturally, this has brought forth the usual round of dire predictions of an imminent housing collapse. We have been hearing similar pronouncements about commercial real estate for several months.
Since I own a few single-family housing REITs and a whole bunch of little banks that have single-family homes as the collateral for most of their loan book, I pay pretty close attention to housing prices and I honestly do not see any signs of a 2008-style collapse. I have said for some time that I see the housing recovery as a long, slow grind higher with lots of little spikes and drops along the way. It is still early in the game.
Homes may be a little ahead of themselves right now. We are seeing sales dip a little as prices rise and buyers hesitate. Fears of higher interest rates are keeping some buyers on the sidelines, although I think that's a mistake. A 25-basis-point bump in the fed funds rate is not going to change a mortgage payment by very much at all. We may see some dips in sales and prices may move sideways for a bit, but there is no collapse coming.
Robert Shiller commented on the housing market yesterday in a video on Yahoo. "There's always reason to worry. We're in a holding pattern right now. People are less excited about buying because they themselves don't believe prices will be going up a lot," he said. We probably do need prices to slow down a little bit to bring demand back into the marketplace, but we will not see a significant collapse any time soon.
There is still a supply problem in many markets around the country. While that is not the case here in Orlando, as builders seem determined to build on every spot of land that doesn't have an alligator on it, other regions' activity is not as robust, and there is more than enough demand for the housing markets to avoid any big implosion.
It looks to me like, for now, housing prices are right about where I think most commercial real estate markets have reached. The total return from residential real estate is probably not going to be as great for a buyer at today's price as it will be for those who bought a couple of years ago, but I do not think you will lose money over the next few years either. I will add that if the potential short-term total returns are driving your decision about purchasing a residence, you just may be approaching the situation from the wrong perspective.
I am not running to sell any of my single-family home REITS just yet. I have done pretty well so far with REITs like Colony Starwood (SFR) and Silver Bay Realty (SBY) , but I think there is still a lot of long-term upside in single-family homes. I might wait for a pullback to be a buyer, but I am not rushing to sell them at these prices either. Institutional single-family operators have finally figured out the operations side, and once most of the larger repairs that are often a big part of the cost of buying distressed properties are behind them, we should see improved cash flows. That, combined with rent increases, should make these pretty healthy dividend growth stocks with mid-double-digit annual total returns over the next decade.
There is also not enough debt and nowhere near enough stupid debt in the system for prices to collapse. I have seen a few significant pullbacks in real estate markets in my lifetime and each and every time before things went bust, stupid loans were made to unqualified and inadequately vetted borrowers, and that's just not happening right now. The bankers I talk with are still pretty conservative with credit standards, and even if they had the urge to stray, the regulators are still pretty aggressive at overseeing credit standards and loan-to-value numbers. We will get to the point where the regulators relax and bankers get stupid in their search for profits, but we are nowhere close now.
I own a lot of banks with high single-family real estate exposure in addition to my single-family REIT positions. While I may garner more clicks with predictions of peak pricing and imminent collapse of the housing market, I am not losing any sleep over the housing market right now nor am I anywhere near the point I would consider selling.