Tuesday, May 08, 2012

The economic impact of stabilizing house prices?

by Bill McBride on 5/08/2012 12:54:00 PM

First a bit of an apology: Back in February, when I wrote “The Housing Bottom is Here”, I received a number of positive emails (even from people who disagreed with me), and many more negative emails. One person wrote: “No credible informed analyst would call the housing bottom now. You are doing a disservice to your readers.” I’d like to think I’m impervious to criticism, but I admit that comment bothered me.

That is why I posted the list yesterday of “informed” analysts who now believe we are at or near the bottom for house prices. Of course we could all be wrong – these are just forecasts – and house prices don’t care who calls the bottom. But I’d only be doing a disservice to my readers if I didn’t write what I believe – and I do think there is a good chance nominal house prices have bottomed on a national basis.

Just to be clear: there are also informed and credible analysts who think house prices will fall further.

But if I’m correct about house prices – and the CoreLogic report released this morning is another indicator that prices may be stabilizing - I think we should start asking what the economic impact of stabilizing house prices will be.

Prices don’t have to start increasing to have a positive impact on the economy; just stop falling. As an example, Freddie Mac just noted that “stabilizing home prices in certain geographical areas with significant REO activity” led to lower REO expenses in Q1.

We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand (here is an example).

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

These are just some preliminary thoughts ...

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