This graph – again from Bill McBride – shows us how in general terms housing is close to a criticality.
You can see that price-to-rent is approaching multi-decade lows. However, 30 year real interest rates are also near mulit-decade lows.
If housing were homogenous and there weren’t significant and idiosyncratic transactions costs involved in renting out single family units, you would see a genuine criticality. One month there would be lots of “excess supply” then it would cross a line and boom within-in days it would all be sold to investors.
The gritty nature of housing, renting and the loan market means that this can’t happen. But, you can none-the-less have a very rapid acceleration where it seems like nothing is happening and then all of a sudden everything is happening at once.
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Tuesday ~ February 28th, 2012 at 5:52 pm
FT Alphaville » Further further reading
[...] – Are we nearing US housing criticality? [...]
Tuesday ~ February 28th, 2012 at 8:00 pm
rjs
you still have 70% of the poor who cant afford both food & rent & a quarter of homeowners paying half their income on their mortgages…so how do you get criticality? pixie dust?
Wednesday ~ February 29th, 2012 at 9:20 am
Chiaroscuro
Smith’s use of “Criticality” is vague and confusing.What is it that we should be worried about – i.e.that investors will purchase all the empty, abandoned houses? Is that bad? Won’t that increase by a lot the amount of rental housing available? Is the criticality that housing prices seems to have a little bit more to fall to reach “1.0″ so that home prices are almost at bottom based on past history? Isn’t being at equilibrium, finally, after a huge bubble, a good thing?
On the other comment, why is anyone paying 50% of their income on their mortgage. Sounds like an unsustainable decision.
Wednesday ~ February 29th, 2012 at 11:02 am
Exasperated
I think that by “criticality” is simply meant a situation where there is a very large change in a process caused by an incremental and reasonably small stimulus. Think of a fission pile, which is basically just a big pile (yes, that’s where the term comes from) of fissile radioactive materials. You can add a bit at a time for quite some time, until the pile is quite large, and you will not get a particularly big change. But the instant you add the last bit needed for the pile to “go critical,” the reaction will suddenly become way more energetic, completely out of line with the size of the final increase.
It’s really a little more complicated than that and it has more to do with the density than the absolute size, but it’s still a reasonable metaphor. Another example is crystallization of a supersaturated solution. It’s possible to dissolve way more of something in a solvent than would normally be possible if you control the conditions properly and provide no nucleation sites. So much as touch the inside of the container with a stirring rod to make a scratch too small to even SEE, creating a nucleation site for the first crystal to form, and suddenly you have a solid chunk of crystal in the shape of the container.
Wednesday ~ February 29th, 2012 at 12:56 pm
MR
criticality? I am lost. Can you dive a little deeper?
Friday ~ March 2nd, 2012 at 10:06 am
Lord
While housing is a momentum industry and feeds on itself, it takes years to develop to a sizable magnitude, that is, it has a lot of inertia as well. While we probably are near the turning point, we shouldn’t expect large changes for some time.