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Case-Shiller Down 5.1%: What Will Stop It?

Wed, Jun 1, 2011

Economy and News

From zero hedge – on a long enough timeline, the survival rate for everyone drops to zero

This article originally appeared in The Daily Capitalist.

The Case-Shiller Housing Report for March 2011 is down 5.1% in Q1 compared to a year ago.

This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Since December 2010, we have found an increasing number of markets posting new lows. In March 2011, 12 cities – Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland (OR) and Tampa – fell to their lowest levels as measured by the current housing cycle. Washington D.C. was the only MSA displaying positive trends with an annual growth rate of +4.3% and a 1.1% increase from its February level.

As this chart points out, prices on a national basis have fallen to 2003 levels. The more depressing fact is that Washington, D.C. prices are rising, reflecting the growth and power of our national government. But see this.)


Another thing to think about is the decline of homeowner equity in their homes. At this point, CoreLogic would put it at about 28% of all homes in America. Another 10% decline would mean one-third of all homes would be under water. The question to ask is: is this one of those feedback loop things where the more home prices decline, the more defaults we have and the more defaults we have, the more prices decline?

In a true market situation, supply eventually meets demand, unless the government or the Fed distorts the market.

The first thing to look at is supply. We built an incredible number of homes during the boom and since the mid-1990s and especially since 2001:

Much of this growth was fueled by money steroids from the Fed and from government policies that encouraged home ownership (mainly Freddy, Fannie, and FHA guaranties).

Now we face the consequences of malinvestment, the Fed induced boom that led to the overproduction of things people didn’t want, but for the monetary and credit juice. It was housing during this boom-bust phase. The juice stopped flowing and the result was the inevitable bust.

At the height of the boom, housing starts grew from 1,600,000 (2001) to 2,200,000 (2006) per year and resulted in a vast oversupply of homes. This chart from Calculated Risk shows current sales versus supplies:

The chart on inventory is not declining:

Instead of shrinking over time, inventory has been growing, reflecting the damage that oversupply and economic stagnation from Fed monetary stimulus is causing. You will notice that the first-time home buyer tax credit did have an impact on housing from November, 2009 to April, 2010. Sales then dropped and then inventory climbed back up as prices went down. Inventory has gone down since August, 2010 mainly because of the problems that hit banks from processing so many foreclosures and defaults restricted foreclosure sales were resolved and foreclosure sales resumed. That has in turn, depressed prices, and defaults have risen, increasing inventory.

When will it end? Or, a better question is: When will supply reach demand?

The answer from economics is: when buyers believe prices are no longer dropping like a rock. Not a good answer, I know, but all I can say is that at some point the affordability of housing will be attractive to buyers and the market will bottom. There is nothing the government can do now, other than to further distort the market and delay the arrival of a bottom. I believe the first-time home buyer tax credit was a cruel hoax on those who took advantage of it, only to see the price of their homes decline beyond the value of the credit.

The factors that will determine that point are related to: positive economic growth, rising wages, and, unfortunately, monetary-induced price inflation. I don’t see any real turnaround in the housing market for the next two years. The likelihood of QE3 is a depressing thought that will only destroy more real savings (capital) and will suppress production and thus the economy. It is also likely that unemployment will remain high.

Once things stabilize, the housing market will recover, assuming the Fed and the Federal government don’t do anything to “help” the economy. But what is the likelihood of that?

Despite all that, there is another factor to consider. That factor is affordability. I believe that the desire to own one’s own home is a powerful force in our society. As I look at affordability indices, it appears that housing is becoming much more affordable.

The National Association of Realtors Affordability Index is based on the following assumptions: (i) a 20% down payment and (ii) that payments (PITI) can’t be more than 25% of qualifying income–rather traditional lending standards. The Index was at 100 at the height of the market in 2006, averaged about 135 from 1992 to 2004, but now it is at 185 (good):

At some point buyers will recognize this, and all things being equal, they will be attracted to housing and the market will find a bottom and stabilize. There are too many “ifs” in a forecasts, so I’m not going to suggest a time frame. It depends what the Fed and the government will do. Also, remember that this is a national average. There is no average price so to speak, which goes back to the rule that all real estate is local. But it will happen.

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