Chapman: Excessive supply prevents appreciation in 2012

In a recent report Chapman University’s Anderson Center for Economic Research said, “More problematic is the inventory of unsold homes. Not only are there still too many unsold housing units in the market, there are a large number of homes in the foreclosure process that will keep the supply of resale housing units at an elevated level.” They are projecting the median sales prices will remain flat.foreclosure_debris

In this same report last year, Chapman blew it and projected an increase in the median sales price. The supply problems that caused their forecast to fail in 2011 became the reasoning for a more bearish forecast in 2012. Better late than never.

In my post on January 1, 2011, Predictions for 2011, I made the following predictions:

Basically, my outlook for 2011 is unchanged from 2010. (1) Inventory will go up. (2) Properties selling at or below rental parity will be the norm. (3) Sales volumes will increase. (4) Prices in Irvine will fall 2% to 5% in 2011.

I was right on all four points, and my first point, “Inventory will go up” is precisely what Chapman failed to recognize last year.

Chapman: No home price gain for 2012

December 7th, 2011 — posted by Jeff Collins

Forecasters at Chapman University predict that Orange County home prices will stop falling in 2012.

That’s the good news, considering that home prices here have done nothing but that in 2011.

But prices won’t go up much either. In fact, they’ll be virtually flat, with no more than a 0.2% gain.

So does this mean they are calling a bottom? Or is this a chickenshit forecast which could be interpreted either way? I think it’s overly optimistic to believe prices won’t decline further, particularly since we know lenders are increasing their foreclosure. Next year’s spring rally will be greeted with an abundance of REOs. The only real question is whether or not the number of REOs pushes prices a lot lower or a little lower.

“Our forecast calls for the median selling price of a single-family unit  … (to) remain flat in Orange County in 2012,” the forecast from the school’s A. Gary Anderson Center for Economic Research stated.

More problematic is the inventory of unsold homes,” the report said further. “Not only are there still too many unsold housing units in the market, there are a large number of homes in the foreclosure process that will keep the supply of resale housing units at an elevated level.

Of course, forecasting is a tough business. Last year, Chapman forecasters said prices would go up. They went down.

Oops. The problem with running complex econometric models and calling it forecasting is that these models all fail to account for the unusual or uncommon. We have never had a huge nationwide housing bubble before. The forecasters have never modeled what happens when banks foreclose on millions of homes.

Of course, the weaknesses of econometric modelling does not excuse forecasters for missing the obvious. The model should be a point of departure from which a good forecaster can adjust the findings based on a subjective interpretation of the unique circumstances of the day. Given the obvious problems with foreclosures and delinquencies, forecasting a drop in prices in 2011 wasn’t rocket science.

Among the highlights of this year’s housing forecast:

  • The index value of an existing single-family home is expected to rise to 219.5, with 100 equal to 1990’s base value. That’s up 0.2% from 219.1 this year.
  • This time last year, Chapman predicted that house prices would be up 3.3% in 2011. The university now project’s that the 2011 price will end the year down 5.1% from 2010 levels.

I predicted prices would be down between 2% and 5% in 2011. I was off by 0.1% as prices overshot my downside range.

  • By comparison, California house prices are projected to drop 2.5% next year, following a 5.9% decrease estimated for 2011.
  • The decrease in home sales has occurred despite historic high levels of housing affordability. A homebuyer earning the median family income in O.C. would need to spend 28.2% of his or her paycheck on housing at today’s prices. That compares to the need to spend 46.6% of the monthly earnings on housing back in 2006.

A 28.2% DTI is affordable, particularly by OC standards. If anything were to make the market strengthen next year, it is the tremendous affordability brought about by 4% interest rates.

The continued downturn in housing is putting a damper on the overall economic recovery, the forecast said.

“The sharp drop in home prices is the main culprit (for slow job growth), leading to a very weak recovery,” it said. “With high inventory of unsold homes and high commercial real estate vacancy rates, construction spending nosedived.

The forecast also predicted that Orange County employers will hire more than 21,000 new workers next year, an improvement over 2011, but it won’t immediately turn the economy around, Register staff writer Mary Ann Milbourn reported. To read the full report on Chapman’s overall economic outlook, CLICK HERE!

Next year will be more of the same. House prices will continue to drop, particularly at the high end, and the economy will be weak, albeit improved over 2011.