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Tuesday, August 25, 2009

A comment on House Prices

by Calculated Risk on 8/25/2009 09:39:00 PM

I've seen story after story today suggesting the bottom is in for house prices.

This isn't like 2005 when it was almost certain that prices would fall, and fall sharply. Now we are much closer to the bottom than to the top in prices (for some metrics, see House Prices: Real Prices, Price-to-Rent, and Price-to-Income)

In some areas prices have probably already hit bottom - like some non-bubble areas, and some bubble areas with significant foreclosure activity.

But I think many areas, especially the mid-to-high priced bubble areas, there will be further price declines. I'm not as certain as I was in 2005, but I think these price declines will drag down the Case-Shiller indexes - and I don't think the price bottom is in.

I do not have a crystal ball, but ...

It seems there are many more foreclosures coming. Some of this depends on the success of the modification programs, but the Q2 MBA delinquency report shows a growing number of homeowners in the problem pipeline.

And the Fitch report yesterday suggests few of these delinquent homeowners will cure.

That seems to mean rising foreclosures, and more distressed inventory. The MBA Chief Economist Jay Brinkmann thinks foreclosures will peak at the end of 2010.

Historically prices bottom about the same time as foreclosure activity peaks. Maybe it will be different this time - maybe the modification programs will significantly reduce foreclosures - maybe prices will bottom before foreclosures peak ... but I'll go with the normal pattern.

And on the demand side, there has been a surge in first-time homebuyer activity. There was significant pent up demand from potential first-time buyers who were priced out of the market in 2004-2006, and then were afraid to buy as prices fell. But demand from these buyers will probably wane later this year, even if another tax credit is enacted.

Just like the "cash-for-clunkers" demand declined after the initial burst.

For mid-to-high priced homes, there are few move-up buyers (or so it would seem since so many low end homes were distress sales). Right now the months-of-supply in many of these areas is well into double figures, suggesting further price declines.

And on unemployment: most forecasts are for unemployment to rise into next year some time. Historically house prices do not bottom until after unemployment peaks. That seems especially likely now since so many homeowners are underwater. Once again I'll go with the normal pattern.

Also looking back at previous housing busts (like I did earlier today looking at the early '90s) there are usually some months during the bust with increasing prices. So no one should expect every month to be negative during the bust ... especially are prices get closer to the bottom.

I could be wrong - this isn't as certain as in 2005 - but I don't think house prices have bottomed. If I'm proven wrong, I'll be the first to admit it.

Best to all.