Wednesday, February 23, 2011

4 Reasons Home Prices Are Likely To Keep Falling

It's been almost five years since the housing bubble peaked, and the bust isn't over yet.

Home prices around the country fell 4 percent last year. They're now down about 31 percent from their peak, according to today's Case-Shiller numbers (see graph).

Last year's declines were widespread: Prices fell in 18 of 20 major metropolitan areas last year. (The two exceptions were San Diego and Washington, D.C.)

More declines are likely to come. Here are four reasons why.

1. There's still a glut of houses on the market.

At the current pace, it would take about seven months to sell all of the newly built houses on the market, and eight months to sell all of the existing homes on the market. In an ordinary market, it would take about six months to sell all of the homes on the market. This excess supply tends to push prices down.

2. Distressed sales account for a huge chunk of all home sales.

Distressed sales include foreclosures and short sales, where the owner sells for less than he owes on the mortgage. According to one measure, distressed sales accounted for nearly half of all home sales in January. These homes typically sell at a discount.

That in turn tends to bring down the prices of other homes, even those that aren't distressed sales. This problem is likely to persist: Nearly 5 percent of all mortgages are in foreclosure, which matches the all-time high. (For more on distressed sales, listen to our interview with Mark Zandi.)

3. Interest rates are rising.

The rate on the average, 30-year mortgage hit 5 percent this month, up from a low of 4.17 percent last fall. Higher interest rates make it more expensive to buy houses. As this morning's WSJ points out, that pushes some would-be buyers to keep renting, which in turn reduces the demand for homes.

4. The government will continue to wind down some of the extraordinary measures it took to support the housing market.

More than 90 percent of new mortgages are guaranteed by taxpayers. This props up home prices by making it easier for people buy houses. This is exceptionally high by historic standards, and will decline over time.

The Obama administration has already recommended lowering the cap on the size of mortgages that are guaranteed by taxpayers through Fannie Mae and Freddie Mac. The cap was raised to as much as $729,750 during the crisis, and is scheduled to fall to $625,500 later this year.

The latest downward leg in home prices started after the end of the another government program — first-time home-buyer tax credit, where the government paid people thousands of dollars to buy houses.

It will probably be a long time before prices get back to the heights of the bubble. A study last year looked at more than a dozen financial crises from the past century, and found that home prices tend to remain below their bubbly peaks during the entire decade after each crisis.
by Jacob Goldstein
NPR - Planet Money






1 comment:

  1. marshall s6:13 PM

    what has not been mentioned has been the need of states/cities to fund increasing inflation and contract driven budgets and an easy place to fund them- increased property taxes. The predictable/obvious result will be an additional depressent to home affordability; i.e, forced sales from already overleveraged home owners.

    ReplyDelete