Architecture Billings Index Falls Again

After recovering from record lows earlier in the year, the Achitecture Billings Index fell significantly in June. That's another indication that economic recovery may still be a ways off.

Source: American Institute of Architects (AIA), via Calculated Risk.

No Sign of Economic Recovery

In a recent posting, I said that the financial panic has subsided, but that the housing market is unlikely to recover soon. Paul Krugman made a similar point last week, about the broader economy. I won't reproduce his comments here, but I will borrow his chart (which he borrowed from Goldman Sachs, in any case).

Together, the four series included in the chart represent a sizable portion of overall economic activity. They all fell significantly during 2008, and they've all been flat since the beginning of 2009. Economic activity remains at depressed levels, with few signs of improvement.

San Francisco Housing Market Recovering Strongly - For How Long?

The San Francisco housing market has strengthened significantly since the beginning of the year. Prices are still 10% to 15% lower than they were last summer, but that represents a marked improvement from January, when they were down by roughly 25%. Take a look at the chart, below, which shows the recent history of home prices in the City.

The solid blue line shows median sale prices for 2-4 bedroom single family homes in San Francisco. The dashed purple line shows median sale prices for 1-3 bedroom condos. I smoothed both series slightly, using a trailing two-month average.

In January, San Francisco home prices were roughly 25% lower than they had been just six months earlier. And they were on a trajectory that seemed to imply disaster. Since then, the economy appears to have stabilized. The recession isn't over yet, but the panic has subsided. Not surprisingly, home prices have bounced back somewhat, rising by about 10% since January.

Is the recent price trajectory sustainable? I'll save that for a future blog entry. Meanwhile, the chart below seems worth considering.

The solid blue line shows median sale prices for 2-4 bedroom single family homes in San Francisco. The dashed purple line shows the S&P 500 stock price index.

It seems clear that over the last couple of years, the housing market and the stock market both have been driven by the same underlying factors. That's hardly surprising, given the dramatic events of the last 18 months. The recent close correlation is unusual, however. Over longer time horizons, houses and stocks generally don't track each other very closely. Stock prices respond rapidly to economic news, limited only by investors' imaginations. In contrast, home prices are sharply constrained by the ability of consumers to pay for them. So while expectations of improvement in corporate profits may drive stock prices higher, continuing deterioration in the job market is likely to put a ceiling on home prices.

Note: You can find additional price charts for San Francisco and the Bay Area in the Market Stats section of my website.