Are We Nearing a Housing Market Bottom?
By Mike Caggeso
Associate Editor
Money Morning
It’s been a long, downslide for homeowners or anyone trying to buy a house.
But a Moody’s Economy.com report, “Housing in Crisis: When Will Metro Markets Recover?”, says we could be nearing the end.
Specifically, the study estimates that:
- House prices will stabilize by the end of this year.
- The national Case-Shiller house price index will decline by another 11% from the fourth quarter of last year for a total peak-to-trough decline of 36%.
- Before the downturn ends, house prices will have declined by double-digits in nearly 62% of the nation’s 381 metro areas. House price declines will exceed 30% in about 10% of U.S. metro areas.
“The housing bubble was inflated by numerous forces,” the report said. “The most important were the flawed process of mortgage securitization, a lack of regulatory oversight, and old-fashioned hubris. The bubble is now deflating with a vengeance.”
Overall house prices have fallen 25%, from their highs the report says, bringing average prices to where they were at the beginning of 2004.
“More than three years since the market began correcting, inventories are flattening, prices are coming back down to earth, and sales are approaching stability,” the report said.
The report factors more aggressive action from U.S. lawmakers, and says that the housing market won’t fully recover until the end of the year even with more government help. Housing starts, the number of new homes on which construction has started, will remain very depressed until 2011, the report said.
Echoes of a Housing Market Bottom
Moody’s isn’t the first to call the bottom. And its prediction is even conservative by some standards.
Arjuna Mahendran, Singapore-based head of investment strategy in Asia for HSBC Private Bank, expects the housing market to bottom in May or June.
Kiplinger’s calls for a second-half bottom, but also a good amount of pain before getting there.
Karl Case, economics professor at Wellesley College and co-creator of the S&P Case/Shiller home price indexes, said the housing market should begin stabilizing in the next year.
Housing starts clocked in at 550,000 houses in December, the lowest in the 50 years the government has been measuring them. That pushes down inventories, Case said. And with home prices falling, demand should rebound as banks stabilize their capital and begin lending at low rates.
“It’s not going to be a terrible year for the housing market, believe it or not,” Case said on a Bloomberg Radio interview. “I think these stabilizing forces are there, and over the next year you’ll see the housing market come back into equilibrium.”
Of course, there are dissenters.
Housing analyst Ivy Zelman said the market will continue reeling well into 2010 and won’t bounce back until 2012.
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“There’s still a tsunami of expected foreclosures, and that has to abate before there’s a recovery,” she told CNNMoney.com.
But the majority of heavy hitters are forecasting a bottom or turnaround in the next year.
What Makes a Turnaround
Standard & Poor’s also believes that the market may reach the bottom in the next nine to 12 months. According to Kenneth Leon, CPA for S&P Equity Research, there are five forces that will eventually drive a market rebound:
- Buyers’ confidence in their jobs and income levels
- Ease of housing price declines to market stability
- Affordable housing in relation to household income
- Access to mortgage financing with low interest rates
- Ability to sell one’s own home in order to move into a new one.
“We would first watch the existing housing market, which has high inventories and many potential sellers on the sidelines,” Leon wrote, adding that seven out of every eight home sales are tied to existing residences. “In market downturns, homebuilders are typically the first to lower prices, as unsold home inventories tie up companies’ working capital and reduce their return on investment.”
And that explains last week’s encouraging news: The index for pending home resales climbed 6.3% from November to December, signaling that demand could be on the rise, according to the National Association of Realtors.
Record foreclosures pulled down home values, making them more affordable to those able to get financing.
And financing is the asterisk that makes each housing-bottom prediction slightly or enormously different.
News and Related Story Links:
-
Moody’s Economy.com:
Housing in Crisis: When Will Metro Markets Recover? - Bloomberg:
Obama Plan Needs $1 Trillion ‘Bad Bank,’ HSBC Says
- Kiplinger’s:
Housing to Bottom in Second Half
- BusinessWeek:
Housing Recovery: Not Yet, but When?
Comment by Ron Wallace on 9 February 2009:
All the analyses seem to miss one important point. How does the current price of a typical house relate to the cost to build the same house? Based on what I see in the Atlanta market, the cost to build is well below the current market prices. This certainly depresses new development but is a situation that will certainly adjust. Either the cost to build will come down which would indicate deflation of materials, labor, or both or the price of a house will go up as inventory is reduced by obsolescence or natural factors (fire, flood, etc.)
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Comment by Busy Man's Workout on 9 February 2009:
Interesting article. However, if the lack of newer homes being built will cause the reduction in new homes for sale…who’s to say that the older homes will be sold?
Doesn’t this suggest a lack of buyers in both areas and a further price deflation in the housing markets?
Comment by Phil Steinschneider on 10 February 2009:
The formula for calculating a market bottom is relatively simple. Historically, median home prices have averaged two to three times median family income. In other words, if a family earns $100k per year, their home should cost $200k to $300k. If homes in an area average higher than three time the median family income in that region, the homes there are still too expensive.
In all likelihood, however, due to the overleveraging that took place for so long, the market correction will initially take prices below the lower norm.
Comment by Gary Wardell on 13 February 2009:
What will new built houses look like? Will they be smaller?
One of the main problems with the housing market is all the new built homes were either town houses or single family homes that were to large and/or to fancy.
Town houses over built the demand. People can not afford but would like to own large fancy single family homes.
Comment by todd on 15 February 2009:
Excellent review of the existing “Experts”.
I strongly urge more “experts” to focus on what was actually the cause of the economic collapse. It was the BUBBLE in prices and the speculators in flipping has far more than no doc loans and not the subprime mess.
If the base canard that prices will always go up had been burst early the subprime mess would never have begun.
It was the greed in pricing not Alt-A loans.
It was the greed of the so called “builders” who just greedily persued on any and every chance to overbuild at ridiculous prices. Why because they hoped there was always another sucker to buy it and flip or speculate on it. To continue to just blame the bank collapse on the subprime mess misses the mark. It was the exploding, huge, unjustified price increases that made the subprime mess necessary to “Keep the music going”. The afforability factor issue has been ignored to our peril.
IF we don’t recognize and understand that it was runaway price inflation that caused the problem and brought us the Sub Prime, no doc, and Alt A mortgage not the other way around.
The conventional view has it just backward it was not the subprime mess which was caused by the huge price escalation that (EVER HIGHER EXCESSIVE PRICES CAME FIRST) is what came first not the subprime mess driving the price increases., Todd
Comment by Rob W on 16 February 2009:
Ron Wallace,
Do you really mean “the cost to build is well below the current market prices. This certainly depresses new development.” ?
How is development depressed if market prices are higher than the cost to build?