Wednesday, July 22, 2009

Lawler on Sticky House Prices

by Bill McBride on 7/22/2009 11:59:00 PM

Note: Thomas Lawler is a former Fannie Mae and Wall Street economist who now writes a newsletter. He did an excellent job calling the housing bubble and bust, and I've quoted him a few times over the years.

From James Hagerty at the WSJ: As Housing Loses its Stickiness, Prices Reach Bottom Quicker

Tom Lawler has a new concept. He calls it the “de-stickification” of house prices.

Though Mr. Lawler was among the more bearish of housing economists when the market was still bubbling, he recently has been arguing that prices for low- and mid-range homes are stabilizing in many parts of the country ...

Part of the bear case involves the historical observation that it takes many years for house prices to bottom out because they are “sticky,” or slow to adjust downward even when supply surges and demand evaporates. In the past, home prices adjusted slowly in such circumstances because homeowners are stubborn and often don’t need to sell immediately. When Los Angeles had a housing slump in the early 1990s, caused in part by a plunge in aerospace-related employment, the Case-Shiller price index for the city started falling gradually in early 1990 and didn’t hit bottom until 1996.

This time around, Mr. Lawler argues, things are happening a lot faster. That’s partly because banks are dealing with a foreclosure rate not seen at least since the Great Depression. ...

That has forced prices down much more quickly than would have been expected in some of the milder down cycles of the past, Mr. Lawler says. ...

Not that Mr. Lawler sees another housing boom around the corner.
Once again house prices were sticky. Even in the low priced areas with significant foreclosure activity, prices have fallen for several years. The question is how sticky?

What Lawler is apparently suggesting is that significant foreclosure activity makes prices less sticky in for "low- and mid-range" priced homes - I agree - and I've argued before that some low priced areas could be near the price bottom.

The dynamics will probably be different in the mid-to-high priced areas. With few move-up buyers, I expect prices to fall for some time in the mid-to-high priced range bubble areas (especially in real terms). Of course foreclosure activity is picking up in the high priced areas - see DataQuick's report today - but I think it will still take some time for prices to fall to the market clearing price.