Why Home Prices Will Continue To Fall

4809381In the last week, a slew of economic reports and news articles have suggested that the U.S. housing market has bottomed out.

Don't believe it. More pricey areas, often in large metro areas, still have plenty of room to fall.

You wouldn't know it from Tuesday's release of the National Association of Realtors' index, which showed that nationally pending home sales had increased from the levels of one month ago.

Also on Tuesday, homebuilder D.R. Horton reported smaller losses, a day after Pulte Homes Inc. and Centex Corp. said that orders for new homes had been increasing.

And there was plenty of excitement last week after the S&P Case Shiller index seemed to show a mild rise in month-over-month prices for existing single family homes.

Well, not so fast. In reality, the seasonally-adjusted version of the Case Shiller index – which came out later in the day, after the initial headlines had been written -- reveals a continued month-to-month decline from April to May. And the year-over-year decline remains around 17 percent.

The reason to expect further declines in some areas is that the U.S. housing market has now bifurcated. It's true that some areas with lofty rises (and subsequent severe falls) may have stabilized.

Not so some of the more expensive areas, especially those in metro areas with houses that are over $750,000, which also experienced skyrocketing prices (a two- or three-fold increase since 2000 wasn't unusual) but are taking much longer to revert to normal.

Put another way, the U.S. housing collapse is affecting different markets differently. The yet-to-fall areas represent a small stock of the overall housing market, under 5 percent of the total, but a much greater share by total price.

This is the conclusion the Wall Street Journal also reached in an article on Monday. It looked at the differences between the less- and more-affluent suburbs of Chicago:

Inventory of expensive homes is rising. Overall, the inventory of unsold homes in June was enough to last 9.4 months at the current selling pace, down from 11 months a year ago, according to the NAR. But the supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60 percent, compared to 40 percent for the rest of the market.

Defaults are rising, too. Among prime mortgages, jumbo mortgages are now leading delinquencies and defaults and are the fastest-rising category for defaults of all types of mortgages. The rate of 60-day delinquencies on prime-jumbo mortgages jumped to 7.4 percent in May, from 4.5 percent in November, according to First American CoreLogic. By comparison, 60-day delinquencies on prime-conforming loans reached 4.9 percent in May, from 3.6 percent in November.

A recent survey by the NAR found nearly three-quarters of real-estate agents said buyers were purchasing smaller houses due to tighter credit requirements. "We're in a 'trade-down' environment for the first time since the 1930s," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

High-end homes are also being hurt by changing perceptions about how much home one should own. For years, people were encouraged to buy the most expensive home they could afford because there would be a payoff when it was time to sell. But buyers can't count on that any longer.

The San Francisco Bay area is another example. Residential real estate throughout the metro area zoomed upward throughout the bubble, and has fallen dramatically in areas like Antioch, where prices per square foot have dropped from $240 in late 2007 to around $100 today. The ratios are similar for Vallejo and Richmond.

More expensive cities on the west side of the bay like San Francisco, Palo Alto, and Burlingame also experienced a doubling or tripling of home prices this decade -- even though their residents' salaries have not followed suit. Nor have residential rents. That's a signal that those localized housing bubbles have yet to deflate.

As I wrote in a column in February that ran the numbers for some buy-vs.-rent comparisons, the same phenomenon is true in New York City and Washington, D.C. too.

One explanation for this is that real estate is not as liquid as stocks or bonds. Psychology plays a larger role, and without foreclosures to establish market prices rapidly, denial can be a powerful force. Homeowners will invent reasons to differentiate their property from their neighbor's – even if the square footage, age, and lot sizes are identical – to avoid admitting that 2006's bubble price is now a memory.

(This is one reason why stock market crashes can happen in a period of months, but real estate crashes tend to take years. During a more modest bubble, Los Angeles home prices peaked in 1990 and didn't bottom out until 1996 or 1997.)

So what happens next? That depends on monetary policy, inflation expectations, interest rates, unemployment, consumer confidence, and the overall state of the economy. In some markets, whether the temporary Fannie Mae loan limit of $729,750 (up from $625,500) is extended past December 31, 2009 will make a difference. So will the expiry, or extension, of the $8,000 tax credit for some home buyers, currently scheduled to end on December 1, 2009.

Jed Smith, an economist in the National Association of Realtors' research department, also thinks the market is bifurcated. "Most of the market action is in the lower end of the market," he told me in an CBSNews.com interview earlier this summer. Above $500,000 or so, "the market is substantially slower," he said. "For the jumbo end of the market, it's very much slower." (Jumbo loans exceed Fannie's limit of $729,750 and tend to be a few percentage points more expensive.)

"The outlook is probably for very modest price increases next year and market stabilization this year," Smith said. "I would guess that somewhere around the 4th quarter of this year we'll have agreement among most people that prices have stabilized."

Then again, asking a Realtor whether it's a good time to buy a house is a little like asking a used car salesman whether it's a good time to buy an automobile. Let's not forget that another economist for the National Association of Realtors, David Lereah, was the soothsayer who published a book titled "Why the Real Estate Boom Will Not Bust - And How You Can Profit from It" a few months before the housing bubble started to burst. He is, to put it delicately, no longer employed by the association.

A better way to come up with a prognosis might be to invoke another real estate agent maxim: location, location, location. Assuming the economy doesn't decay further, some areas may be stabilizing. But in many others, a historic boom means the historic bust is still to come.

---

Declan McCullagh is a correspondent for CBSNews.com. He can be reached at [e-mail].

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[al_tinker]

I have been looking for a home since 2001, but personal conditions just weren't right for me to buy at that time. Then, the house prices started to rise. It is insane how much prices rose. Then, when I was in a position to buy, there was NO way that I could have afforded anything other than a shack. About 4 years ago, we were looking at 3 room houses for $250,000 with tin roofs and stick on flooring. lol. No way, I'd rather rent. Now, personal conditions are right and the market has adjusted downward enough that we can afford to buy. However, what I am seeing in the areas I am looking are a lot of short sales that are a total hassle. Forgive me for what I am about to say, but we bid on a short sale. The price was full price of what they were asking, but below the peak. The corrupt real estate agent that the bank hired as the negotiator conveniently lost our offer. The house needs a roof badly. And, it needs updating inside as it is still very 70's with old matted carpet, old appliances, etc. Not a glamorous house, and it would cost to update it. The bank just sits on it (has been on the market for over 400 days now), and the price keeps dropping, falls out of escrow because buyers find something else. Wow. Some of these houses have so much damage inside -- people stealing cabinets, fixtures, etc. Others so filthy because the owners allowed their cats to pee wherever they wanted for 20 years. The bank still wants top dollar and will sit on the house for a long time. So, buying a house in this market isn't necessarily very easy. Not to say there isn't inventory out there at great prices, but my experience is that there are a lot of short sale and foreclosures, and the bank sits on offers for up to 6 months (or longer) at times. For the person who said that houses should be $30k to $50K for a 1000 sq. foot house, I'd say that won't happen except in the most rural areas of California. And, even there, I'm doubtful. In the bad areas of town, those houses will go for $80K to $120K. In the decent areas, those still sell for close to $200k in Central California. I know nothing about real estate, other than that I have been looking for 8 years -- just watching prices in areas I want to live, and I wouldn't be surprised to see house prices drop some more. Some areas may be mostly stabilized, but they are still pretty high in some areas (in my humble and uneducated opinion). What a real estate agent told me is that prices are higher in spring and lower during winter months. So, people will feel confident, list their properties again in Spring for a higher amount. Some will swoop in and buy the truly good deals, but the junky bank-owned homes will sit on the market with no offers, and the prices will fall over the year unless there is real improvement in this economy. This will drive down comps. We still don't have a lot of new jobs, lots of people are being laid off and jobs going overseas (when are there going to be tax breaks for businesses to employ local talent instead?) and families will continue to lose their homes. Very sad.

[worstslidestory]

house price was 90% overpriced in the last few years, it is logical to see it come down 80%, I'm not surprised to see it dropping another 50% from this level

[Daveinfo]

I think housing market has still to fall because America is loosing on Jobs .

"There are four items in place that are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.
1) It?s the seasonally strongest buying season
2) There?s a foreclosure moratorium about to end
3) Federal tax credits offered for 1st time homebuyers
4) Historically low mortgage rates"

The unemployment rate in the nation, which stands at 9.4% currently, may even increase to alarming double digit number making the financial situation even worse for the borrowers to repay. The layoffs of many workers have been permanent and hence, their hopelessness in recovery of the jobs or helplessness to repay mortgage over time looks bleak and they resort to foreclosure than choosing to invest or borrow more money on something that they are not sure whether they would be able to afford in the long run.

Read More: <a href="http://www.housingnewslive.com/articles/housing-bottom.php">http://www.housingnewslive.com/articles/housing-bottom.php</a>

[caliguy55]

I don't know about other cities, but here in L.A. in places like Beverly Hills, Bel-Aire, Holmby Hills, Brentwood, Los Feliz, Malibu, Pacific Palisades, etc., the really high priced multi-million dollar mansions are still selling for more than they did in the past. In some cases, people with very high incomes are buying these home, tearing them down, and building new mansions in their place. This is especially so where you can find a nice 1 to 2 acre flat piece of land, high in the hills, with views of the ocean, downtown L.A., the Valley, etc.

[infojunkie1]

To caliguy55: I totally disagree with your statement, "multi-million dollar mansions are still selling for more..." Just one example: a 6,908 square foot house in Brentwood, on three acres. July 2007 listing: 23.9 million. January 2009 price: 19,995 million. Current price 15.15 million. Here is the link to the original article from the L.A. Times of July 11, 2009: all.http://latimesblogs.latimes.com/laland/2009/07/hot-property-dramatic-price-drop-or-overpriced-to-start-with.html

[infojunkie1]

correction: The figure should be 19.995 million, not 19,995 million ;)

[kenhamlett]

This is a simple example of why price and value are not the same thing. The houses are not worth any more than they were ten years ago but the prices kept rising due to the insane financing schemes fueling the frenzy.
But them most of us already know that, don't we? We also know that prices will continue to approach the actual value until some other scheme emerges to reverse the trend.
What I do hope is that no one tries to tie this in to the general recession as more than a symptom of the financing which IS a major part of the recession's cause. Many of those that are losing equity(?) never had it to begin with. Those were fictional dollars. Such is life.

[pepperwood2]

Private sector loses 371,000 jobs in July ..... .

"It is of course worse than expected, but the number is well off its highs, indicating modest improvement in the labor market," said Dan Greenhaus, an analyst with Miller Tabak & Co. in New York.

[imprisoncheney]

The market was artificially propped up to begin with -- duhhhhhhhh.

Of course prices have to return to reality at some point . . . and this is it.

In an ideal world, everyone would like to sell their home for more than they paid for it, and thru the magic of WS Smoke and Mirrors, that was true, for a long time . . .

St. Ronnie's "vision" for America is finally coming to fruition -- that's all.

[zonkzilla]

Stupid poorly written one sided article.

[longtree-2009]

there was the dot.com bubble, then came the housing bubble. wonder what the next one is around the corner? only the rich and powerful are profiting from these bubbles at everyone else's expense. nothing new really just the bubble changing from time to time.