Fisher Investments Editorial Staff
US Economy

Location, Location, Location

By, 08/31/2009

Story Highlights:

  • Residential real estate finally received some good news recently as home prices nationally ticked up in May and June.
  • Some housing markets have fared better than others during the downturn, revealing the regional nature of real estate.
  • Stabilizing home prices can have positive implications for the economy and stock market, but a real estate recovery isn't necessary for the stock market rally to continue.


The massive stock market rally since March has investors breathing a little easier, yet residential real estate continued to be a problem area. But at long last, some signs of life in the residential real estate market have recently emerged. The S&P/Case-Shiller U.S. National Home Price Index rose 1.4% in June from the previous month after rising 0.5% in May. Small gains considering that, from top to the bottom so far, the index fell a whopping 32%. But before these increases, national home prices fell for 33 consecutive months, so even a small rise is a big deal to many.

Of course, "national home prices" is a bit of a misnomer—there are no national homes. Real estate is inherently regional. As they say, the three most important factors in real estate are location, location, location. The performance of different markets shows just how true this mantra is. In recent years, overbuilding in some areas has caused real estate there to fare far worse than others. Home prices in Las Vegas, Los Angeles, Phoenix, and Miami are down 40-50% from their peaks—much worse than average and largely the result of a glut of newly-built homes. Regional economic conditions also play a role. For instance, home prices in Detroit are off by a similar amount, but the problem there has been a sluggish local economy thanks to the faltering US auto industry. By contrast, cities like Dallas (-11% from peak to trough) and Charlotte (-13%) have held up much better.

Not only are prices possibly stabilizing, but other positive signs are emerging as well. Existing home sales were up 7.2% on the month in July versus expectations for a 2.1% increase. July new home sales jumped 9.6% from the prior month —much better than the expected 1.6% rise. And the number of new homes for sale in July was 271,000, the lowest reading since 1993.

A bottom forming in real estate can be a positive for the economy, possibly causing the pace of mortgage defaults to slow and generally improving consumers' sense of financial stability. It could have positive implications for some stocks too, but it's a mistake to think stocks can't mount a sustained recovery until real estate stabilizes There has been a connection between stock prices and real estate during this downturn as financial instruments tied to real estate impacted financial firms, contributed to credit markets seizing, and ultimately contaminated the stock market. But stocks and homes are influenced by different forces and have distinct cycles. Recent differences in the performance of real estate and stocks provide evidence. National home prices peaked in early 2006, but stocks continued rallying well into 2007. This year, stocks were up substantially from their lows before home prices showed any improvement.

So while a floor in home prices is a welcome sign to stock investors, it isn't necessary for the stock market rally to continue.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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