Housing Market Reaches Recession Level Lows

by: Benzinga

By Luci Morland

Someone call it the party police, as home prices across America decreased another 4.9% last quarter and 5% year-over-year — dragging the housing market down to recession-level.

National home prices have fallen 11.5% in the past nine months, bringing the housing market down to lows not seen since the 2008 recession. Now that prices are below their 2009 low-point, it is safe to declare the unfortunate: the housing market just double-dipped.

Housing prices are dropping primarily because of another surge in foreclosures and bank-owned properties. Sales of these bank-owned properties are almost 35% of the total market right now, dragging down prices even further than before.

"With more than one-third of national home sales being REO (bank owned), market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales," Clear Capital's Alex Villacorta said.

This time around, it is the Midwest region that is lagging behind the rest of the nation in home prices, with prices down 6.3% year over year. Analysts say this reflects the recession's toll on the region, as opposed to the previous dip which was largely blamed on the banking crisis.

One expert says that, despite the downturn in prices, now is not a good time to buy a house. Patrick Killelea argues that prices will continue to fall for many areas for some time, especially in areas where the market is over-saturated with properties and rental options are available.

“Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that affluent neighborhoods are still in a huge housing bubble. Anyone who bought a "bargain" in those areas last year is already sitting on a very painful loss. On the other hand, in some poor neighborhoods, prices are now so low that gross rents exceed 10% of price. Housing is a bargain for buyers there. Prices there could still fall yet more if unemployment rises or interest rates go up, but those neighborhoods have no bubble anymore,” Killelea said.

He even offers an easy formula for prospective buyers/renters to utilize when considering moving to a new home. Take the annual rent and divide it by the purchase price of the home. If the number is around 3%, do not buy. If the number is around 6%, that is borderline, and if it is 9%, the price is reasonable to buy the home.

Interest rates are also a concern for buyers. While the thought of buying a home at low interest rates seems wise, consider the alternative. When interest rates rise, home prices decline even more, as buyers can afford less houses on their salary. With enough cash on hand, you can save money even with a higher interest rate by negotiating down the price of the home.

In all, the housing market has taken a significant downturn. While it was once propped up with tax credits, those credits are gone. Whether or not the government will issue new credits or simply allow the market to float downstream a bit further remains to be seen.

Disclosure: Author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.