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Friday, January 05, 2007

Professor Case and Sticky House Prices

by Calculated Risk on 1/05/2007 04:35:00 PM

This research from Professor Case shows just how sticky prices are right now.

From the Boston Herald: Buyers vs. homesellers: Standoff could lead to recession

... Wellesley College housing guru Karl Case will release the results of a five-month groundbreaking survey of the housing market in Boston’s suburbs.

And it’s not happy reading.

After tracking 628 homes on the market from July through November, Case found that fewer than a third actually sold.

It paints a picture of a market nearing a standstill, in which would-be sellers are opting to take their homes off the market rather than accept big markdowns.

Over such a lengthy period, even in a slow market, one could expect 70 percent of these homes to have sold, Case estimates.

But Case’s study found only 30 percent moved.
Despite the big drop in sales activity, there was no price implosion.

Instead, average selling prices fell just 6.3 percent.

After seeing the value of their homes soar during days of the real estate bubble, home owners are reluctant to give ground on price. Or, as Case puts it, it’s a case of “sticky” prices common to past market downturns.

...the drop in home sales activity could be a more serious economic threat, Case believes.
I suspect a 6.3% price decline in Boston felt like a "price implosion" to some sellers!

This research shows the impact of sticky house prices. In a classic housing bust, real estate prices display strong persistence and are sticky downward. Therefore housing price "bubbles" typically do not implode, rather prices deflate slowly in real terms, over several years. As Dr. Case notes, this typically leads to a drop in transactions and can negatively impact the economy.

Let's consider Case's research, and the projections of NAR's Lereah and Fannie Mae's Berson:

NAR Economist David Lereah recently said:
“We’ve entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down.”
“Although some monthly declines are possible, when we look at the forecast for existing-home sales in 2007 on a quarterly basis, we see gradual improvement over the course of the year.”
However I believe it is much more likely that sales of existing homes will decline again in 2007. Fannie Mae economist David Berson is forecasting existing home sales to decline to 5.925 million units in '07 (from 6.425 million in '06), and new home sales to 0.975 million units (from 1.05 million).

Partially because of the impact of sticky prices, I think Berson's 2007 estimate will be closer than Lereah's projection. In fact, I think Berson might be a little too optimistic.