Case-Shiller Index Suggests Home Prices may Soon Bottom Out
Call it wishful thinking, but the most recent housing data has led some to suggest that the end of the crisis might be closer than originally expected. The Case-Shiller index, a “closely watched gauge of U.S. home prices,” registered a decline of “18.6% in February from a year earlier. That marked a slight improvement from January’s 19% annual decline.” In other words, even though home prices are still falling rapidly, the pace has begun to slow.” Meanwhile, “A separate measure of home prices by the Federal Housing Finance Agency has posted monthly increases for two straight months, though economists doubt that is a sustainable trend.”
The Case-Shiller report underscored important regional differences in the impact of the housing crisis: “While all cities posted monthly declines, 16 of the 20 declined at a slower pace than they did in January. The Cleveland, Charlotte, N.C., New York and Washington markets showed larger monthly declines in February than they did in the prior month.” In addition, “Seven of the 20 metro areas included in the index posted home-price declines of more than 40% since they peaked.” As the Mortgage Calculator reported last week, markets in Florida and the Sun Belt, have been hit especially hard, due to a preponderance of both speculation and sub-prime lending in those areas.
Housing analyst John Burns predicts that “Washington, D.C. and Sacramento, Calif…will recover first….Other markets at the top of Mr. Burns’ list include Denver and Raleigh, N.C., which were not that overheated during the boom, and San Antonio, which has a solid economic base and extremely inexpensive housing.”
“Fundamentals” in the housing industry are finally returning to sustainable levels. According to Warren Buffet’s analysis, “Roughly 1.3 million households are created each year in the U.S., while about two million homes were being built a year during the recent boom….Now housing starts are running at roughly 500,000 units a year, which means the excess inventory is being absorbed at a rate of about 700,000 to 800,000 units a year.” Finally, builders have caught on and are reducing supply proportionately.
Unfortunately, the economy may not return to long-term equilibrium as quickly, which could ultimately represent a bigger impediment to the stabilization of housing prices than oversupply. This is especially true in areas that have been devastated by the economic downturn, as unemployment and declining wages/disposable income is driving a decrease a demand. If people can’t even afford to buy houses, you can forget about the supply side of the equation.
As a result, one especially pessimistic economist predicts that, “It will take until 2020-21 for home prices to reach the levels seen in 2006, before the real estate bubble deflated.” Another offers that, “It is unlikely that we are anywhere near a bottom in nationwide home prices…After all, in the seven years leading up to the peak in July 2006, the national 20 city home price index jumped by 155% (126 index points). So far, this index has dropped by 31% (63 index points) in the 30 months since the peak.” The problem of course is that homebuyers who accept this forecast will put off buying under the expectation that the market has not yet stabilized, making further declines in prices self-fulfilling.