U.S. House Prices Could Fall Another 10%

This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.

Guest Post by Oxford Analytica

Over the past few months, there have been suggestions that the US housing market might finally be bottoming out. Since July, the decline in sales of both new and existing homes has moderated. Moreover, over the past three months, there has been a very modest increase in home prices at the national level as measured by the 20-city S&P/Case-Shiller home price index. However, the high inventory of unsold homes, continuing foreclosures, and double-digit unemployment could mean that housing prices have further to fall.

Reasons for cheer. A number of ‘green shoots’ suggest cause for some optimism:

• Inventory reduction. Whereas housing starts are presently estimated to be running at a 600,000 annual rate, underlying US household formation is presently running at an annual rate of approximately 1.5 million units. Lower residential construction relative to household formation is allowing excessive home inventories to be gradually worked off.
• Cheap mortgages. As a result of the Federal Reserve’s highly accommodative monetary policy, and the activity of the government sponsored home lending enterprises, mortgage rates have declined to more affordable levels. For example, 30-year fixed rate mortgages have fallen below 5% for the first time in many years.
• Increased affordability. The slide in home values has brought prices more into line with their long-run fundamentals. Since September 2006, US home prices have fallen 27%, bringing prices back to the level prevailing in mid-2003. As a result, the ratios of home prices to rents and of home prices to incomes are now much more in line with historic levels. The index of housing affordability now stands at its most favourable level in the past 20 years.

Reasons for doubt. Despite these ‘green shoots’ there remain a number of factors that suggest that US home prices have not quite hit bottom:

• Inventories historically high. Despite small declines in recent months, the inventory of unsold homes at the national level remains at close to its historic high. A key indication of the degree of excess home inventory is that the number of vacant homes, in which neither an owner nor a renter presently dwells, exceeds its normal level by nearly 1 million units.

• Foreclosure crisis. The United States is presently suffering from a foreclosure crisis that is further adding more homes to a market already characterised by excess inventories. Forward looking indicators, such as the number of mortgages that are more than 90 days delinquent (ie behind payment) suggest that the pace of foreclosures could increase in the months ahead.

• High unemployment. A very weak labor market situation inhibits households from making the long-term financial commitments, such as buying a home. The Labor Department estimates that approximately 16.5% percent of the labour force is either unemployed or in involuntary part-time employment. At the same time, the huge slack presently affecting the labour market is exerting downward pressure on wage income growth. Most economists — including White House Council of Economic Advisers Chair Christina Romer — do not foresee much improvement in the labour market in 2010.

• Mortgage resets. Next year, approximately 200 billion dollars in ‘Option ARM’ mortgages (adjustable rate mortgages) are due to reset to higher rates. This is likely to add to the foreclosure problem, since these resets will produce a sharp jump in debt service payments.

• Default incentive. Finally, another factor adding to the foreclosure problem is that a growing number of US households now have ‘negative equity’ in their homes (ie their mortgage debt exceeds the value of their homes). Since mortgages in most US states are ‘non-recourse loans’ (the lender cannot pursue the borrowers’ other assets, beyond the home), negative equity gives homeowners a strong incentive to default on their mortgage loans.

Outlook. The present high level of unsold housing inventories, the poor state of the labour market and the current wave of foreclosures suggest that home prices may have a further 10% to fall (in real terms). This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.

Comments

[optionsgirl:]

Great article: www.ritholtz.com/blog/.../

Oct 26 11:38 AM

[dpnstl:]

Good article...I did a post back in September with a video interview of Karen Weaver, the Global Head of Securitization Research for Deutsche Bank, who also predicted at that time home prices could fall another 10%...the post and video are at:

realestateconsumernews.../

Also, there was an interesting post this morning by Charles Hugh Smith in which he is calling for another "leg down" in housing due to lending standards that are still too loose....this post is at:

realestateconsumernews.../

Oct 26 01:34 PM

[BillyK:]

"Since mortgages in most US states are ‘non-recourse loans’..."

Is this true? I thought that recourse states outnumbered non-recourse states

Oct 26 01:45 PM

[Graham and ...:]

"U.S. House Prices Could Fall Another 10%"...

or 20%,

or 30%.

Oct 26 03:53 PM

[Roger Knights:]

And don't forget the shadow inventory.

Oct 26 07:48 PM

[User 504692:]

housing will drop....some more.

no doubt about it.

Oct 27 02:41 AM

[Smalltownba...:]

Essentially 18 States restrict deficiency judgments within their non-judicial foreclosure process. Others are non-judicial foreclosure but deficiency judgments can be obtained, some with limiting circumstances.

Oct 27 09:45 AM

[clreed1252:]

Add to the above that rental vacancy rates are rising, putting more downward pressure on home prices.

All things considered, I think it is a given that home prices will fall; whether by 10, 20 or 30 percent, I don't know. The real question is when will the housing market stabilize and how quickly will prices begin to rise again, once they begin to do so. In my frank opinion the government's current monetary and attempts at supporting the housing industry will only prolong the agony.

Oct 27 10:28 AM

[User 219941:]

IN Phoenix Az we have already seen 50% off 05-07 prices. BUT we have already sold to date as many houses as we did in 08.
The underlying unknown is how mant Alt-A

Oct 27 12:23 PM

[Bigman16:]

Prices will drop, and drop, and drop until END USERS buy homes again - and I am not talking about sepculators or investors who are showing up at Trustee sales and purchasing homes out of auction, because these homes will go back into the market a few months post sale.

So then I guess we should consider who will be buying homes, right? Chances are its not 1) the aging baby boomers who just helped move their children back into their house after graduating college or lossing a job and also having to support thier parents who did not think they would live this long (wow, technology has changed!). 2) not the recent college grad who is paying off college debt and living off credit cards. 3) Definitely not the middle class where one spouse may have been laid off recently. 4) Definitely no one who bought over the last 4 years and walked away from their home becuase of inflated payment structures and 100% financing. Banks are having a tough enough time extending credit to good borrowers. 5) Not Renters who actually have a job and are some what intelligent and know the market will go down, so they wait for the right time (or when their lease is up) to purchase, many motivated by the tax credits - which may be too expensive for the US. Numbers 1 & 3 do not have a net effect on supply becuase if they are buying a new home, chances are they are selling their current home. So who will buy these homes?

Only way this thing turns around is an onslaught of "quality demand" entering the housing market that has stellar credit, employed, down payment ready, currently renting or living at home, hopefully married (more income), and ready to step up to home ownership. Now this sounds like a college educated, recently graduated, steady job, slight savings, parents paid college - so no debt, still living at home, eager-to-get-going kinda person, right?

Oct 27 01:36 PM

[mkttrdr:]

Agree 10-20% more down.
The truth hurts!
I was not happy to tell many of these facts to my local business network, Realtors and NAR members in a meeting back in 2004 before this mess started. The majority said Im nuts and dont call/talk to me now. Yes, I saw it coming early. I'm educated and a business owner who understands basic economics. It's common in most economic cycles to have peaks and valleys. Gravity is real; and so is greed.
Our Leaders, Realtors and the NAR don't want to realize facts, figures or hear the negative tilt I know. Our housing will improve, but not until 2015. Hang on. 2010 is going to make 2007 and 2008 look good.
Our IRS requires no-NO documentation for the 1st time tax credit.
Are we on fantasy island?

Oct 28 11:59 AM