Impossible marks

Daily Data: More tall tales from the world of valuation

In today’s dispatch:

• homes are, in fact, affordable

• the remarkable case of the secondary market for private capital

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Impossible marks

Random Walk likes to tease home-price-index-enjoyers, and other ‘rate lock-in enthusiasts’ that obviously home prices aren’t going up, despite what case-schiller or zillow wants you to believe.

There is no imminent housing collapse either, but reality is still important. Not only is there no reason to think that home-asset-values are uniquely immune to the impact of interest rates, all the other evidence says that they’re not.

Homes are affordable

Existing homes aren’t selling, and despite all that “appreciation,” no one seems interested in monetizing any of that value with an home equity loan. The homes that do sell, by contrast, are new builds, and they’re all getting smaller and cheaper. Weird that only the homes that no one is buying are appreciating.

But sure, sure, the aging homes are just going up, up, up . . . none of that value can be realized, of course, and most people can’t actually afford the homes they live in for the prices they think they’re worth, but the index is going up and the right, so home values must be going up.

You see, what we have is an “affordability” problem where houses are just magically more valuable than anyone—including existing owners—could possibly afford:

Goldman Sachs via Lance Lambert

Houses become affordable again, at current rates, if:

• home values drop ~41%; and/or

• incomes rise 69%

We all know option #2 isn’t happening anytime soon, so . . .

Look, home values have obviously come down. The only reason it doesn’t show in the indexes is because people don’t have to sell, and so they don’t, and the result is that there is nothing for the index to measure.¹ The enormous Bid-Ask spread is telling you that the index is a weak signal.

This isn’t a catastrophe (except for the banks, locked-in to those 30 year mortgages)—assuming there’s no sudden bout of unemployment—but it is reality.²

When discounts don’t show in prices, even a little

Anyways, home prices weren’t actually the point.

The point was that while ‘appreciating home values’ (despite having no sales to prove it) is a cute gimmick, the real estate industry has got nothing on what the private capital markets are up to.