The Daily Capitalist: Home Prices Fall — Again

http://www.noozhawk.com/noozhawk/article/070109_the_daily_capitalist_home_prices_fall_again/

By Jeff Harding

History shows that the market is likely to continue to decline to an affordability level that makes more sense

The Case-Shiller 20 cities index showed home prices in April fell on a seasonally adjusted basis about 0.9 percent, or at a rate of about 10 percent per year. There has been an 18 percent decrease in home prices for 2009, and the decline is about 33 percent since the peak in 2006. This is seen as an improvement over the March 2.2 percent decline (unadjusted).

Home prices saw a “striking improvement in the rate of decline” in April, and trading in funds launched Tuesday indicates investors believe that the U.S. housing slump is nearing a bottom, Yale University economist Robert Shiller said.

“At this point, people are thinking the fall is over,” Shiller, co-founder of the home price index that bears his name, said in a Bloomberg Radio interview. “The market is predicting the declines are over.”

Is Shiller correct? The blog Calculated Risk does excellent analysis of the housing market and concludes that prices still will decline for quite awhile. The reason? If you look at charts of previous housing collapses, there is quite a long tail of smaller and smaller declines in prices.

Based on the extreme run up in prices from 1998 to 2006, housing affordability got way out of alignment, which is what fueled speculation in the housing market.

The market is getting back to an affordability level that makes more sense. In fact, affordability is at an 18-year high.

Will affordability stop the decline in prices? Not yet. Recessions have a way of discouraging people from making large financial commitments until they are certain of their economic future. While bargain hunters will continue to search for a bottom, there is more to it. People are still struggling with high mortgage payments.

The Office of the Comptroller of the Currency and the Office of Thrift Supervision reported:

» The number of loan modifications significantly increased, up 55 percent from the previous quarter and 172 percent from the first quarter of 2008.

» The proportion of payment-reducing modifications also increased.

» Seriously delinquent mortgages increased. Prime mortgages, which represented two-thirds of all mortgages in the portfolio, had the highest percentage increase in serious delinquencies, climbing by more than 20 percent from the prior quarter to 2.9 percent of all prime mortgages.

» Foreclosures in process increased. This increase represented a 22 percent jump from the previous quarter and a 73 percent rise from the first quarter of 2008.

I think the long tail theory from Calculated Risk makes the most sense.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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