Two days ago I posted and article “Home Price Drop of 30% Possible in 2010”. Shortly after the article went up I posted a comment saying the article contained a significant error and I would be writing a corrected article. With more work, it has become evident that the only change needed for that article would be to insert in the title the words “But Not Probable” after “Possible”. Thus, it seems the best course of action is to write a second article rather than revise the first.
This article will review the analysis that distinguishes between the possible and probable and shows how the probable can shift with changes in the economy and the housing market.
This analysis starts with the First American CoreLogic (FACL) residential real estate analysis here, which was the basis for the previous article. Using the data from FACL, combined with existing home sales data from the NAR (National Association Realtors), the following graph has been constructed.
click to enlarge images
Vertical reference lines could also have been drawn for other possible numbers of distressed sales. The additional lines have been omitted to keep the graph more readable. In addition to 2.4 million, which is this analyst’s previous estimate, prices have been calculated for 1.6, 2.0 and 2.8 million distressed sales for 2010. The four numbers represent distressed sales at levels 117%, 147%, 176% and 206% of the number for 2009, which was 1.36 million (NAR data).
(Note: 1.36 million distressed sales for 2009 is less than the numbers 1.6, 1.7 and 1.8 million I have estimated previously from other sources. I consider the NAR number to be a better number than my earlier estimates. The NAR number is calculated from two survey measurements, and is not an estimate.)
The five numbers chosen for total existing home sales possibilities (6, 6.9, 8, 9.6 and 12 million) are 15%, 33%, 54%, 85% and 130% higher than the 2009 total of 5.22 million (NAR data). These projections are anticipating that the economy (and existing home sales) will be improved in 2010. We will discuss later what happens if that anticipation is wrong.
The four levels of distressed home sales each have a distinct curve when price is plotted against total existing home sales. This is seen in the following graph.
The most probable box is actually fixed on the top by the February average existing home sales price of $210,500. The left and right boundaries are for 2010 existing home sales 17% and 38% greater than 2009 totals. The bottom boundary has been selected to be 10% less than the 2009 minimum average price. It is 12% below the lowest average price so far in 2010, cited above.
This analysis is projecting that existing home average price is most likely to hit a low in 2010 between 4% and 16% below the December 2009 value. This would be between 2% above and 11% below the 2009 low average price of $206,700 (January).
What could break the pattern established over the past four years? What could put prices outside the probable price box? Here are two possibilities:
- The economy strengthens sufficiently that higher priced homes start to sell in greater numbers (and as a larger percentage of total sales) than seen in 2008 and 2009. In that event the average home price could come in above my designated probable zone, even if distressed sales remain high.
- A much weaker recovery than expected, and especially a double dip into recession, could shrink demand for housing even below the 2009 level. In such a scenario, the left hand side of my most probable box shifts to less than 6 million and takes the box “off the chart”. This would drive the lower boundary lower closer to $160,000 and, again, possibly “off the chart”.
For example, a repeat of 5.22 million existing home sales in 2010 with 1.6 million distressed sales would put the estimated average price at $199,000; with 2.0 million distressed sales the average would be $184,000; with 2.4 million distressed sales the average would be $163,000; and with 2.8 million distressed sales the average would be $151,000.
These four estimates would be 9%, 16%, 25% and 31% below the December existing home average price of $218,700.
We can see that it is possible for housing to decline by 30% in 2010, but it would take a particularly weak economy to get there. The center of the most probable outcome box would see existing home sales come in about 6.6 million units (up 26% from 2009), with an average price low for the year around $195,000 (down 11% from December 2009), with about 2.2 million distressed sales (up 60% from 2009).
To add more distress to this scenario, by the end of 2010 we will have disposed of only about half of the foreclosures that are likely to result from the collapsed housing bubble. The 2010 lows in prices may not be the cyclical lows.
Disclosure: No stocks mentioned.
