- In January, the 20-city Case-Shiller housing price index was just negative year-over-year—the closest it's been to positive y/y since January 2007.
- Even as housing stabilizes, prices are still struggling off the bottom—a far cry from stocks and the larger economy.
- Despite a continued bull market and economic growth, housing worries will likely continue—but given the evidence, that's no reason to shun stocks.
In the Academy award-winning film Up, Carl Fredrickson attaches thousands of balloons to his house, lifting it off its foundation and soaring south in search of adventure. Instead of a soft landing, Carl's house falls hard, short of its destination and no longer a vehicle, but a burden. After the last decade, we'd bet some homeowners feel his pain—housing's similar rise and fall has been well documented.
But if you believe one common tale—instead of simply detaching from its foundation, that balloon-draped house pulled the country, even the whole world, up by the roots. Outside of Hollywood, it's hard to see how that works. And as it turns out, real world experience validates a little skepticism.
In January, the S&P/Case-Shiller 20-city home price index was slightly positive month-over-month (seasonally adjusted) and just negative year-over-year—the closest it's been to positive y/y since January 2007. City by city, the data is still patchy—the biggest seasonally adjusted monthly price gain coming in Los Angeles (+0.9% m/m) and the biggest drop in Chicago (-0.8%). Even as housing stabilizes, prices are still falling in some locales, stagnant in others, and at best struggling off the bottom overall—a far cry from stocks and the larger economy.
How could the bear market and recession end so categorically without a similar recovery in housing?
It could be stocks are looking ahead to a robust housing recovery—but don't bet on it. As we've said, housing alone didn't pull us skyward, nor did its crash wholly account for the bear market and recession. Similarly, other economic forces are driving the recovery and should continue to do so for the foreseeable future. Housing, stocks, and the economy are far less correlated than often thought.
Home prices began sliding in 2006, well before the stock market peaked. Both dropped in 2008—along with just about everything else—but global stocks staged an 80% recovery since March 2009, while housing barely budged. One would think that alone would be evidence enough to ditch housing indicators in decision-making.
Yet housing still worries stock investors. Just months ago it was fashionable to predict the next economic "shoe to drop" would be a slew of resetting Adjustable Rate Mortgages (ARMs). A veritable tidal wave of ARMs resetting at market rates would reignite foreclosures and the credit crisis, thus imperiling recovery. But the threat is fast diminishing as continued ultra-low interest rates, along with loan modifications, are quickly reducing the pool of these "ticking time bombs."
The fixation on housing will likely continue. And housing prices will rise and fall again in the future. But the rest of the economy needn't go floating off (or crashing down) whenever homebuyers attach a few balloons to the chimney.
* As measured by the MSCI World Index (net of dividends and taxes)