Housing: Been Down So Low, It Looks Like Up to Me
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The Fiscal Times
October 24, 2011
  • Excluding distressed properties, home price are rising in 26 states.
  • Census data show 600,000 fewer homeowners and 1.4 million new renters.
  • Another recession could push home prices down an additional 7 percent.

The U.S. economy may have escaped another Great Depression, but the U.S. housing market has not been so lucky. From peak levels five years ago, home prices are down more than 30 percent, combined sales of new and existing homes are nearly 40 percent lower, and new home construction has plunged more than 70 percent. The road to recovery contains plenty of obstacles, including sluggish labor markets, restrictions on mortgage lending, and potentially damaging unknowns about U.S. fiscal policy and the European debt crisis. However, several factors are falling into place that will support  gradual progress in the coming year as long as the economy doesn’t tip back into recession.

Most important, analysts increasingly believe that 2011 will mark the bottom in home prices. Most national price indexes adjusted for seasonal influences have stopped falling on a month-to-month basis. Reports this week, including the popular Standard & Poor’s Case Shiller home-price index on Tuesday, are expected to continue that trend. Breaking the deflationary psychology of recent years, which has kept some buyers on the sidelines waiting for further price declines, is a key to stronger demand, say economists at UBS.

News reports typically spotlight the year-to-year change, and most indexes show prices down about 3-to-4 percent from a year ago. However, those comparisons are somewhat misleading. Last year at this time prices were temporarily boosted by extra demand created by the homebuyer tax credit. After the credit expired last year, sales crashed and prices retreated, leaving this year’s year-over-year price changes looking weak compared to last year’s inflated levels. In coming months, UBS calculates, even if monthly changes remain at zero, year-over-year comparisons will stabilize by early 2012 and begin to turn modestly positive.


Downward pressures on home prices from both the demand and supply sides of the market are easing, but very slowly. On the supply side, the National Association of Realtors (NAR) in September counted 3.5 million unsold homes listed on the market. At the current sales rate, it would take 8.5 months to sell that inventory, down from a peak of nearly 11 months three years ago but about double the pre-recession supply. Plus, CoreLogic counts another 1.6 million unlisted units in the shadow inventory, which include properties that are 90 days or more delinquent on their mortgage, those in foreclosure, and real estate owned by the bank.

The good news is that the shadow is waning from a peak of two million units in January 2010, as distressed properties are being sold faster than new units are becoming delinquent. The bad news is that distressed sales account for about 30 percent of all home sales, and they occur at deep discounts, adding to the downward pressure on prices. CoreLogic chief economist Mark Flemming says that price weakness, negative equity, and weak job markets threaten to keep the shadow inventory elevated for a long time, a major headwind for prices.

However, regional differences show that the headwinds against overall prices are easing. Economists at Barclays Capital note that markets with fewer foreclosed properties have seen year-to-year increases in prices in 2011, while those with a higher concentration of foreclosures continue to post declines. CoreLogic, which looks at national prices with and without distressed sales, says overall prices in August were down 4.4 percent from a year ago, but excluding distressed properties, prices were down only 0.7 percent, reflecting yearly price increases in 26 states.

The demand side of the housing outlook is something of a paradox. Attractive home prices and super-low mortgage rates have made homes the most affordable in the postwar period. Yet, demand continues to languish. Sales of existing homes fell 3 percent in September and have mostly bounced around the current level this year. NAR chief economist Lawrence Yun says that despite historic affordability and more credit-worthy borrowers, the share of contract failures is double that in September 2010. Cancellations last month were reported by 18 percent of NAR members, says Yun, up from 9 percent last year.

James C. Cooper
was BusinessWeek's senior editor, senior economist and author of its influential Business Outlook column. Prior to that, he was an economist at the American Paper Institute, performing economic analysis and forecasting. He holds bachelors and masters degrees in economics.