Roach: Housing still in the weeds

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In the interview below, Morgan Stanley’s Stephen Roach breaks down why low homebuyer demand is keeping him bearish on its recovery.

Source: Fox Business, October 26, 2010.

In the meantime, Peter Schiff of Euro Pacific Capital yesterday published an op-ed article in The Wall Street Journal, saying: “If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the chart below), a sobering picture emerges. In his book “Irrational Exuberance,” Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and ’60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late ’90s.”

Source: Peter Schiff, The Wall Street Journal, December 30, 2010.

Schiff concluded: “With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.”

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