Home prices dropping nationwide, economists don't foresee recovery until 2011 or 2012

Friday, November 05, 2010

by Penny McLaughlin

In the midst of numerous reports released this month that indicate that housing prices have been dropping nation-wide, Clear Capital (as reported by DSNews.com) issued a report last week with a “market alert”, identifying an abrupt 5.9% drop in U.S. home prices over the two month period of September to October.

Clear Capital's analysis differs from that of many other price indices in that it gathers and analyses data in “real time”; most of the other indices work to analyze data from previous months.

The Clear Capital analysis confirms trends noted in the other indices, but it suggests that the speed at which home prices are dropping may be increasing. For example, a Morgan Stanley report published at the beginning of this month noted that home sales are slowing, and that both the number of home sales in 2010 and the average number of home sales for 2009 and 2010 are expected to be lower than they were in 2008.

An analysis by CoreLogic, using data from this past August and reported by DSNews.com this week, revealed that average home prices have dropped by 1.5% from the previous August - the first time the CoreLogic index has ever recorded an annual housing price drop. According to their analysis, home prices have fallen by an average of 28.2% from their peak in April 2006.

And, in a report released by DSNews.com, the S&P Case-Shiller index also indicated that home prices dropped from July to August. Their 20-city composite index registered a 0.2% drop over the month, but still records an increase of 1.7% over August 2009.

While the Wall Street Journal reported last week that home sales picked up by 10% in September over August, at the seasonally adjusted rate, both they and other analysts do not see signs of any significant recovery any time soon. Indeed, the difference between the small drops indicated by the retrospective indices (using data from mid-2010) and the Clear Capital “real time” index, which indicates accelerated price losses, suggests that worse times may be to come.

Many analysts attribute price drops over the last few months, at least in part, to the expiry of the federal government’s “home buyer tax credit” program - which allowed a tax credit of up to $8,000 for home buyers who had not owned a home in the last three years - but which expired this past April. This tax credit induced a flurry of home buying early in the year, as prospective buyers rushed to make purchases.

The Clear Capital analysis indicates that the recent home price drops, of nearly 6% over September-October, bring average home prices to the same level they were at in mid-April, immediately before the expiry of the tax credit.

Analysts are pessimistic about any recovery in home prices over the next one to two years. The Morgan Stanley report predicts a continued drop in home prices of 5 to 10% through to 2011 and another four years of flat prices (this prediction, based upon mid-year data, comes before the recent 6% drop recorded by Clear Capital), as well as an increased risk of a continued downslide even through 2012. According to the Wall Street Journal, half of 109 economists polled predicted housing prices to bottom out in 2011, while the other half did not expect the trough to hit bottom until 2012.

In addition to the expiry of the home buyer tax credit as a purchase incentive, another factor in continued low prices is the current high level of housing inventory. With somewhere between 4 and 5 million American homes either currently under foreclosure, or more than 3 months delinquent and soon to face foreclosure, the number of homes on the market stands to double. Greater supply leads to drops in price. Additionally, as some of these homes fail to sell at auction and move to REO “shadow inventory,” banks as owners will be more likely than private homeowners to drop prices to accelerate sales and shed inventory.

A report released this week by the National Association of Realtors, quoted by the Wall Street Journal, indicated that over one third of home sales in September were foreclosures or “distressed” sales (e.g. short sales). Short sales have become an increasingly favorable option for distressed home owners to take charge of their finances rather than await foreclosure. But, perhaps more importantly, short sales will aid in the longer-term housing price recovery by keeping homes on the market, rather than moving through foreclosure and into an ever-increasing shadow inventory that will only delay any chance of home price rebound.