Despite continued gains in home prices doubts are heard about the housing recovery. As the Wall Street Journal noted on Monday both the bulls and the bears cite the same evidence in support of their arguments. One disconnect is that different cities show different results. The northeast is seeing modest gains in prices combined with reports of increased activity while the southwest Sunbelt is booming with double digit price increases and the rest of the country is between these two extremes. One way to judge what is going on is to begin with a sense what “normal” means for home prices. Two things stand out — on average home prices don’t move much. Corrected for inflation the long run change in prices is probably zero to two percent. The events of 2000-2006 were extreme, not normal. Second, looking past the averages one should expect to see some markets leaping upward while other slip down. The range of reports across the 20 cities covered by the S&P/Case-Shiller Home Price Indices is reasonably close to normal. What stands out is in no city are prices lower than a year ago. On average there is a modest recovery in housing.
But there is the story of the person who drowned while wadding across a river with an average depth of two feet — and a 50 foot deep whirlpool in the center. How does Phoenix with prices up over 20% in the last 12 months measure up to moderate recovery? It doesn’t. From press reports, Phoenix, Las Vegas and some other spots are seeing large numbers of homes being bought by corporate investors with plans to rent them. The large scale demand not only pushed prices up, but is not something seen before in a normal housing market. The bears argue this is half of a one time event and the other half will come when the same corporate owners sell blocks of houses and send prices down. The bulls point to the same events and argue that home ownership has declined so the rental conversions are to be expected while low inventories and the last few years of little construction point to increasing demand for more homes. Time will tell where the story will end.