Bottoming Out? Part 3

With an assist from Bizzy Blog comes this take on the future of the housing market, from J. Benson Durham at the Federal Reserve Board of Governors:

... this paper addresses the first three moments of investors' expectations for home prices in particular and the broader housing sector in general. In other words, first, what is the mean expectation for the path of home prices? Second, how uncertain are investors about that mean projection? And, third, do investors see the risks to the outlook for housing as considerably skewed to the downside as opposed to the upside, which might be consistent with the perception of a bubble?

The answers?

CME housing futures currently suggest that market participants expect home prices to decelerate sharply or actually decline a little within the next year, although the anticipated drop is mild compared to some estimates of the purported overvaluation of the housing market. In addition, market participants seem more uncertain about the trajectory of home prices, as implied volatilities on the few CME options that have traded thus far are generally greater than the realized historical volatilities on the underlying indexes. Finally, probability density functions (PDFs) implied by options on select homebuilders' shares are only marginally negatively skewed at the present time. Moreover, the current skew of these densities is broadly comparable to that of the equity market as a whole, and skewness has not noticeably increased over time for these firms. Caveats about this proxy notwithstanding, this suggests that market participants do not in fact view the risks to home prices or, perhaps more accurately, to the broader housing sector as especially tilted to the downside.

So, the housing market has probably not reached its trough yet, people are not sure what the trough will look like, but the consensus is not rushing to the view that a free fall is in the offing.

All of which seems perfectly consistent with today's report on September existing home sales.  From MarketWatch:

Sales of U.S. existing homes dropped for the sixth month in a row in September while median sales prices fell for the second straight month, the National Association of Realtors said Wednesday.

Inventories of unsold homes fell for the second straight month, a sign that the market is correcting, said Laurence Yun, a senior economist for the realtors group.

That last bit of news sounds like a positive ...

But economists said the decline in inventories was normal this time of year. The inventory figures are not adjusted for seasonal factors, as the sales figures are. "When adjusting for the seasonal factors, inventories actually continue to climb," said Celia Chen, an economist for Moody's Economy.com.

On the other hand:

"This is likely the trough in sales," said David Lereah, chief economist for the realtors group...

"Some indicators, such as pending home sales and mortgage applications, have suggested that sales may be starting to stabilize, but the latest figures continue to show a decline in activity," said Michael Moran, chief economist for Daiwa Securities America.

In other words, that uncertainty noted in the Durham analysis seems well justified, but the data is not yet sending clear enough signals to make either pessimists or optimists repent.

Calculated Risk has suggested that this focus on whether the housing market is balancing itself or not is misguided:

... the significant impact of the housing bust will come from housing related job losses, the loss of mortgage equity extraction (used fro consumption), and any financial stress associated with falling housing prices and tighter lending standards.

There is a significant lag between when a housing boom ends, to when housing related employment starts to decline precipitously.

Maybe, but the dominant view today -- here, here, and here, example -- seems to be that the dominant view at the Federal Reserve is that the answer to "Bottoming Out?" is "yes."