House Prices Have Further to Fall

Next week we will see the National Association of Realtors (NAR) data on existing home sales. The report should show a seasonally adjusted improvement in volume of home purchases – while home prices continue to contract – compared to volumes and prices one year ago.

Using Pending Home Sales, Econintersect has forecast a 13% year-over-year improvement in sales volumes based on offsetting pending home sales one month and adding an error factor (as this methodology historically underestimates Octobers).

It is likely that sales volumes bottomed in the second half of 2010 during the contraction caused by the expiry of the first home buyers stimulus. This is based on the year-to-date (January thru September) sales volumes from the NAR:

  • 2006 = 5,007,000
  • 2007 = 4,487,000
  • 2008 = 3,810,000
  • 2009 = 3,774,000 (stimulus effects in data)
  • 2010 = 3,790,000 (stimulus effects in data)
  • 2011 = 3,785,000

It shows 2011 is doing relatively well without incentives but with lower home prices.

  • 20% of homes are bought by investors;
  • 30% of the home sales being either short sales or foreclosures being sold at sharp discounts.

Although the volumes are probably at least partially driven by a decline in prices, it is doubtful the home price decline is over. The following graphic conveys the basis of this belief.

The blue line is the US Federal Housing Finance Agency’s House Price Index (HPI) – a quarterly broad measure of the movement of single-family house prices. This index is a weighted, repeat-sales index on the same properties in 363 metro centers, which is a much broader basis than Case-Shiller.

The red line is the HPI index divided by the Consumer Price Index (CPI-U). This division approximates chained dollar look at home prices. Home prices remain 20% above their pre-bubble price levels. In other words, home prices need to fall another 20% to get into the price range enjoyed in the 1980’s – before the effects of the Baby Boomer home price bubble.

One might argue that low interest rates allowed prices to leave the historical range – as one could now “buy” a mortgaged home and pay less per month. But mortgages only work when home prices are stable or increasing – low interest rates are no longer part of the equation for home ownership. Mortgages are NOT affordable if home prices fall.

This past week, Calculated Risk posted a portion of a HUD report on the Mutual Mortgage Insurance Fund for FY 2011. Cutting to the chase, the fund’s net worth had declined more than anticipated due to several causes. But the interesting part of this report was a graph on the effects of home prices if a new recession occurred.

Note that even the base scenario in the above graph does not have home prices bottoming until 2012. IMO, the recovery curve projected in the above graph may be overly optimistic – but I have no basis to project my own recovery curve.

There is no dynamic to put a floor under home prices – home price decline begets home price decline. 99% of the population is not enjoying increased ability to consume. If consumption is needed, either consumers need more disposable income or prices need to contract. Real (inflation adjusted) per capita disposable income is flat – therefore home prices must continue to fall to increase “consumption” of homes.

Economic News this Week:

The Econintersect economic forecast for November 2011 continues to predict weak growth.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect’s data is not recessionary (one month look-ahead) – we take this recession call seriously. This week the actual level of ECRI’s WLI index continues its “less bad” trend for the third week in a row – but is still indicating the economy six months from today will be worse.

Initial unemployment claims fell 5,000 (from 393,000 which was revised up from a preliminary 390,000 last week) to 388,000. This is the second week that claims were under 400,000 – an important economic point.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The weakness this week is the traders and investors running around like old women.

Weekly Economic Release Scorecard:

Container Counts: Troubling contraction in import container volumes
Greece: It is easy for Greece to exit the Euro
November Conference Board Leading Indicator: Economy expanding in Spring
November Philly Fed Business Survey: Shows weak growth
October Building Permits: It is apartments which are fueling permit growth
October CPI: Price Inflation moderates to 3.5%, but core climbs to 2.1%
October Industrial Production: Up strong and YoY rate of growth stable
September Business Sales: Continue to show solid YoY growth
November Empire State Manufacturing: Shows growth for first time in 5 months
October PPI: Price inflation for finished goods moderates to 5.9%
October Retail Sales: Up a weak 1.7% year-over-year inflation adjusted
Eurozone: Is there any possibility for a healthy Euro economy?
Banks and Bankers: Is the OWS movement correct – banks cause bad economies?
Housing Crisis: Did Congress or Fannie or Freddie cause the housing bubble
Euro: Are there ways Germany did not benefit from the Euro?
Voters: Surveys reveal want their cake – and eat it too.
China: Can China help the Eurozone, or will Germany have to do the heavy lifting
Alabama’s Jefferson County: How the bankruptcy has J P Morgan’s footprints
Euro Crisis: Will the next stage of the crisis be a new political order?
What to short next: German government bonds?
2012: Are election years good for the market?
Eurozone: Is an unavoidable meltdown underway?
Small Cap Stocks: Do they outperform the market?
Cash: How much cash should you hold?
Volatility: Is it possible to capture the market swings?
Defense Spending: Is spending on the military for defense of USA?
Inflation: Is it impossible for the Fed to create inflation?
Monetary System: Is it time for a monetary Bill of Rights?
Eurozone: Will Italy remain in the Eurozone
TBTF: Did Dodd-Frank legislation do away with this issue?
Social Security: Can it REALLY run out of money?
Regulatory State: Is deregulation of the banking system the way to go?

Bankruptcies This Week: Privately-held SP Newsprint Holdings, Trailer Bridge, General Maritime

Failed Banks this Week:

One reply on “House Prices Have Further to Fall”

  1. i think an in depth study of 19th century “Victorian” real estate trends is in order here. Depressions were quite common then but so were incredible speculative booms. they all had the same result: real estate was like a “game” or “toy” for the rich who played in the stock market all day. this was true for decades since “the gambling houses” took all the money and nobody had any money for housing…let alone food or clothing. this “business model” is very much alive and well right now. “En vogue” as well…with the CNBC and Bloomberg looney tunes telling us “trade, trade, trade” everyday (whilst they “trade, trade, trade” by fixing professional and college sports and “move up” from there.) don’t get me wrong…i’m a big believer in the equity markets, but i’m a bigger believer that “crime pays” and as such housing….and i mean the entirety of the complex…is dead. if you’re into building castles in Topeka on the other hand…

Comments are closed.