Why Home Prices Are Falling -- Again

Anthony Mirhaydari MSN Money May 19, 2011

5/18/2011 12:25 PM ET

By Anthony Mirhaydari, MSN Money

Too few buyers with too many homes for sale depresses prices. Analysts foresee an additional 10% plunge -- an opportunity for landlords and investors, but bad news for homeowners.

Related topics: housing, real estate, economy, investing strategy, Anthony Mirhaydari

Is your home's price about to fall 10% further?

That's what two respected teams of analysts are predicting right now. And TrimTabs Investment Research is more pessimistic, suggesting it could be five or six years before home prices stabilize and move higher.

Of course, this is just one more problem for investors and consumers to worry about. The economy appears to be slowing again. Stocks have ambled sideways since February. The U.S. government faces the prospect of a technical default on the national debt.

Indeed, we're looking at a time of serious upheaval. We've had the Arab Spring in the Middle East. There's been a spate of natural disasters, including Japan's earthquake and nuclear plant meltdown, as well as floods and tornadoes in America's heartland. And frothy commodities markets have suffered violent setbacks, with silver in particular showing symptoms of excessive speculation. And don't forget that the dollar, after being left for dead, is rising like Lazarus, reanimated by new fears over Greece and the future of the eurozone.

The best and worst housing markets

In all of the tumult, it's easy to forget that the root cause of all this mess -- now entering its fourth year -- continues to fester like an untreated wound. I'm talking about the U.S. housing market, which, by some measures, has fallen to new lows. After showing signs of hope late last year in the wake of the homebuyer tax credit, it's now suffering fresh setbacks and reaccelerating price declines.

Anthony Mirhaydari

Consumers, weighed down by rising inflationary pressure and lackluster job growth, are losing confidence. At the same time, tight lending standards and efforts to reform Wall Street and Fannie Mae and Freddie Mac are restricting access to mortgage credit. Right now, housing finance survives on government largesse: Government-backed entities like Fannie Mae and Freddie Mac now account for 95% of new mortgages.

All of this is limiting economic growth by keeping pressure on the financial system. And it risks the creation of a negative feedback loop in which lower home prices result in more homeowners falling into negative equity, leading to more foreclosures, more bank losses, tighter credit and, ultimately, further price declines.

All this leads the analysts to predict another drop in prices before a solid bottom is found. For potential landlords, especially those with cash in hand, this could mean it's time to buy property. For investors, it means bargains on a lot of related equities; I'll have some names later in this column, though I wouldn't start buying just yet.

But for homeowners? More pain. Here's why.

Hopes dashed

Longtime readers will remember that last December, when the economic outlook was much brighter, I penned a column ("Why it's safe to buy homes again") encouraging buyers to jump back into real estate. And if you got a low interest rate and you planned to stay put, it was. I also wrote that barring some "unforeseen calamity, another self-perpetuating cycle of higher home prices" could be seen as early as this year.

Unfortunately, we've had a few calamities since then; Fed-induced inflation, the Portuguese bailout, unrest in Libya and Japan's quake have led to a manufacturing slowdown. Economic growth slowed dramatically in the first quarter of this year to just 1.8% from 3.1% in the fourth quarter. The team at Capital Economics noted that households had "been hit hard by surging prices for everyday necessities such as food and energy."

And now there is evidence that the job market is softening again, with the unemployment rate popping back up to 9% in April. (I covered the economic slowdown and its impact on stocks in my April 27 column, "Investors, it's time to run and hide.")

Housing activity is way down because of all this. Home sales have stagnated near recessionary lows after unwinding the temporary boost from the homebuyer tax credit. Demand for new mortgages has dropped back to levels not seen since the depths of the financial crisis in 2008. Homebuilder confidence has sunk to very low levels -- and stayed there -- for more than three years and hasn't been positive since April 2006.

As a result, home prices have started falling again. What's more, the price declines seem to be accelerating, with the 20-city Case-Shiller Home Price Index off 3.3% in February from its year-ago level -- a drop of a magnitude not seen since late 2009. That's the eighth consecutive month-over-month price decline. The homeownership rate also continued to fall as more and more distressed owners became renters.

There are still some pluses

That's the bad news. The good news is that the long-term factors I mentioned back in December are still valid. These include record affordability, thanks to low prices and low borrowing rates, and still-favorable long-term demographics, as the United States is one of the few wealthy nations set to enjoy an expanding workforce in the years to come -- unlike Japan and most of Europe.

Continued: Why lower prices lie aheadSingle page12Next >RELATED ARTICLESIndexIQ Launches the First Exchange-Traded Fund ...Exchange-traded funds: List of ETFs & research - MSN MoneyWhy home prices are falling -- again - 1 - housing market - MSN MoneyIs it a gold bubble? 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NONSENSE!

I agree with the conclusion of this article that home prices are going to fall. However, the author's major premise that the US housing market is a "root cause" of the economic mess is pure nonsense! Here's what he writes - "In all of the tumult, it's easy to forget that the root cause of all this mess -- now entering its fourth year -- continues to fester like an untreated wound. I'm talking about the U.S. housing market"

In fact the US housing market problem is not a cause whatsoever - it's the result and a victim! Plummeting home prices are the result of so many factors. The obvious big factors are: irresponsible lending, irresponsible borrowing, increasing unemployment, excessive regulation and taxation of American based manufacturing, free trade (importation) of cheap products from unregulated foreign manufacturers, out-sourcing, excessive domestic entitlement programs, expensive wars abroad, an estimated 12 million illegal aliens, and the list goes on!.

And then finally - Lower housing prices are not a problem for any society. Low housing prices are an obvious benefit to any society! The only people that really suffer from falling home prices are investors, speculators, and bankers that get burned! Homeowners that lose their home will be better off in five years if they manage some savings - which should be easier than it would be with a burdensome and excessive mortgage payment on a house that cost more than it's worth. Their credit will be mostly restored if they are responsible (not to mention that they will be part of a huge status quo). House prices will be more affordable in five years. And their savings could end up being a much more significant down payment! Win, win, and win for the responsible future homeowner!

The big losers are the US taxpayer because the mortgage losses are mostly insured by HUD, Fannie, and Freddie = US! The banks are not desperate to sell at fire sale prices because they would become insolvent, be taken over by the FDIC, and the executives would lose their jobs! The big banks keep what the author calls "shadow inventory" off the market because the market values would be significantly less than their book values. The inflated book values keep their executives in power and in the money with their outrageous compensation. They get them off their books when their bank can collect the insurance on each property - after trying for a period of months (required by the insurance) to sell it - though at more than they're worth!

The housing market is correcting, and that's not the cause of our economic problems, it's the result!

2 0ReportSpamromacouex5 hours agoI'am beautiful lawyer and i love black man.....interracial romance is my dream... so i got Krystay2011 on ----βlαck'whitе'Hυb. СòM------it's where to meet black, white, gorgeous, beautiful for romance and enduring relationships ! -hope someone who love interracial friendship will hit me up , i m serious ! --.No surprise here. Supply is far outstripping demand. Nothing Bernanke and his envelope pushing money policy can do about rudimentary law. The question is this: When will this over-riding economic reality filter through to our entire economy? 3 5ReportSpammc (locdawg) 6 hours ago

Tony, one of your best columns. Very sound case you have presented, and I could not agree more. Another 10% drop is inevitable.

3 1ReportSpammustangwilli7 hours ago

There are a lot of factors in how prices of homes can change.

If there is a low or no demand for people wanting to buy a house in a different neighborhood, prices might drop to get the attention of buyers.

Jobs are hard to come buy in this economy and those who do have a job, might be affraid to make the change of buying a new house in fear of what the economy might do or if something happens to their job.

Banks are just not handing out loans to anyone like they were, before the economy took a dive. So those who missed out, might not be able to get a loan in this economy. And, for those who are able to get a loan, end up getting an insanely high interest rate because the banks are also affraid of the loan being defaulted on.

I honestly, do not see things getting any better anytime soon. We are about to lose 2 states to China. We are in debt to the world in the tune of $14,000,000,000,000.

Why, did we as a country, go into Iraq, blow everything up, and then send them billions of dollars to rebuild what we blew up, when we cant even fund anything that needs replaced in our own country? Why, do we feel the need to bend over backwards for other countries when we cant do the same for our own country?

I know, it's ALLLLL for the oil right!! Well i would rather walk or ride my bicycle, then have a $14 trillion debt hanging over my shoulders. The serious lack of thought that has went into any decision making from the government, is absolutely ridiculously unexceptable. They dont care, at all, how much they spend because they know THEY, dont have to pay a single penny of it back, WE do.

Why is it that if WE spend more then what we have in the bank, or write checks knowing there isnt enough money in the bank to cover the check, go to jail but nobody in the government gets punished for doing the exact same thing.

How many of you have roughly $47,000 just sitting in the bank doing nothing? If 300,000,000 people in the US paid this much toward the countries debt, it would be totally paid off. The problem with this figure is a large portion of the workers in the US dont make this much in 2 years.

I still say the best bailout plan would have been to give $1 million to each and every US citizen, with no strings attached. Why no strings? Because everyone knows that most would automatically pay off their current mortage, buy new homes, buy new cars, go on large shopping sprees and some or most would invest what they have left or a portion of whats left back into wall street. Everything i have mentioned would fix whats wrong with the economy.

Would this be a permanant fix? Probably not seeing how most people would more then likely blow through the money in no time and be back where they were, but that would be their fault. But, i believe, there are enough smart people out there, that a bailout plan like i mentioned, would work and make a huge difference in our economy at first, then would level out and most likely stay level for a while.

Ask yourself this question. Which bill would you rather be handed to you to be paid back? A $1.2 trillion bill(last known cost of wall st bailout) or a $300 million bill? I choose the $300 million bill every day of the week and twice on Sunday.

0 2ReportSpamuvuvuv9 hours agodemand. the problem was starting during the vietnam years and beyond parents started having one or two kids only. well, here they are, and not enough of them. roe vs wade also is a factor. there just aren't enough people. if a garden center orders 500 flats of begonias and only sells 300, they mark down the remaining 200. well, does that not apply to housing? on the other hand if the begonias sell out quickly the garden center could even charge more for the next order. the run-up in prices was sustained on the belief that there was a sizeable population out there desperate to own homes of their own. but this was like wily e coyote running out over the cliff, and then oops, no ground beneath him. when i was in san diego i was going to refinance my condominium back home remotely, that is a local title company would handle the closing for a fee. well, it was hard to find one. the one on garnet, closed. the one on B street, closed. the one on granite ridge, closed. finally we found on in le mesa. and this was in 2008! 2008! then i tried to sell my place. it took one year, mid 2009 and i took a $10,000 loss. to hear that the situation is getting even worse is hard to imagine. 1 3ReportSpamhavasu469 hours ago Demand won't pick up until "real" unemployement drops to 6% or less. That's not going to happen for 2-3 more years. 9 1ReportSpamdendl11 hours ago

Anthony,

No surprise here. Supply is far outstripping demand. Nothing Bernanke and his envelope pushing money policy can do about rudimentary law. The question is this: When will this over-riding economic reality filter through to our entire economy?

Chad in CO

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But for homeowners? More pain. Here's why.

NONSENSE!

The housing market is correcting, and that's not the cause of our economic problems, it's the result!

Tony, one of your best columns. Very sound case you have presented, and I could not agree more. Another 10% drop is inevitable.

There are a lot of factors in how prices of homes can change.

If there is a low or no demand for people wanting to buy a house in a different neighborhood, prices might drop to get the attention of buyers.

I honestly, do not see things getting any better anytime soon. We are about to lose 2 states to China. We are in debt to the world in the tune of $14,000,000,000,000.

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Why Home Prices Are Falling -- Again

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