Wednesday, December 30, 2009

Could Property Prices Tumble Again?

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's doesn't think that the double dip housing decline in the 1980's will be repeated next year. However, when the banks unload their millions of foreclosures onto the market and the government stimuli end, prices could tumble again. See the following post from The Mess That Greenspan Made.

The latest report for the S&P Case-Shiller Home Price Indexes showed another small monthly gain in October for the 20-city index, up 0.37 percent on a seasonally adjusted basis or a gain of 0.05 percent when seasonal factors are not taken into account. On a year-over-year basis, prices are now down 7.3 percent and indexes for all 20 cities are shown below.

Note that the top-to-bottom end-positions of the curves on the right of the chart correspond to the order in the legend in the upper left to aid in viewing the data - this represents how well areas have clung to housing market gains since the 20-city index began in 2000.

Naturally, Washington and New York continue to hold their gains better than any other areas in what seems most unfair since the housing bubble was spawned in these two cities.

Meanwhile, at the other end of the price appreciation spectrum, Phoenix moved back ahead of Atlanta for the 17th spot and Las Vegas held onto 19th position, fending off Cleveland again while Detroit maintains its lock on last place and, at 73.07 and rising, may soon re-enter the colorful graphic above.

Monthly data (NSA) for all 20 cities along with the two indexes are shown below.

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's noted:
Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip. Before jumping to conclusions, recognize that the one time that happened at the beginning of the 1980s, Fed policy saw dramatic reversals, which is very different from the stable and consistent Fed policy we have today. Further, sales of existing homes – those included in the S&P/Case-Shiller Home Price Indices – have been very strong in recent months, working off the inventories of houses for sale. At the same time, housing starts remain weak, fears that the market will be swamped by a wave of foreclosures are heard and government programs aimed at the housing market will expire in the first half of 2010.
Maybe Mr. Blitzer should re-read his Federal Reserve history a bit to learn more about how different the early-1980s are from today and of the long-term impacts of Fed policy. For one thing, back then mortgage rates were three or four times the current level.

While it shouldn't be surprising that efforts by the central bank in pushing mortgage rates to freakishly low levels when combined with a Washington D.C. give-away of $8,000 for each new home purchased would provide a boost to home prices, it also shouldn't be surprising (if not likely) that prices may again tumble when these supports are removed.

As for the period immediately ahead, seasonal factors are now working decidedly against home prices and the "second derivative" is now clearly signaling the return of more minus signs in the monthly data as indicated in the non-seasonally adjusted data.

Seasonally adjusted data tells a similar story of the pattern taking shape, but, it's difficult to lend too much credence to seasonally adjusted data that looks very seasonal.

The direction and magnitude of home price changes over the next few months will be quite interesting indeed as traditional sellers await the spring selling season, whereas, banks itching to unload foreclosed properties may not.

But, more than anything else, it is likely that there will be a much bigger increase in sellers than buyers in the year ahead as the recent price stability will encourage the former while we see just how much the latter are affected by rising mortgage rates and how much demand has been "pulled forward" due to government incentives.

If there is one thing that is clear after the events of the last six months it is that an $8,000 check from Uncle Sam and 30-year fixed rate loans at below five percent were an irresistible combination for many homebuyers who are likely unaware of any second derivative in the Case-Shiller data that may portend future price declines.

This post has been republished from Tim Iacono's blog,
The Mess That Greenspan Made.

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