Future home prices? Opinions vary widely
When it comes to predicting future home prices, nobody really has a clue. It’s very difficult to predict when the market is so heavily manipulated and the erratic decisions of a few key players can completely change the outcome. For example, the federal reserve controls the interest rate stimulus, and although they are currently saying they plan to leave interest rates low for years to come, they could change their minds. The supply of REO on the market is completely at the discretion of a cadre of banks colluding to restrict supply to drive prices higher in order to lose less money on their bad loans from the bubble. This is a cartel, and if it begins to break down, the liquidation of REO may not be orderly, and price may collapse in certain regions, cities, or neighborhoods. Government regulators have turned a blind eye to the bank’s accounting practices by suspending mark-to-market accounting. At some point, and nobody knows when, this will likely be reversed, and lenders will change the rate at which they liquidate their REOs. Government policy makers control housing finance through the GSEs and the FHA. Any changes they make to lending standards or fees could move the market up or down, and there is no way to predict what they will do.
The bottom line is with all these manipulations, anyone who accurately predicts what will happen to future home prices made a lucky guess. The most reasonable hypothesis is for slowly increasing house prices punctuated by brief sharp rallies and deep air pockets caused by short-term fluctuations in supply. The range of predictions out there cross the spectrum from a 20% decline to a 20% rally.
More good news on the home front. The latest S&P/Case-Shiller Home Price Index indicates that home prices gained 1.6% in July compared to a year earlier. Every city tracked in the 20-City Composite has seen prices rise for three straight months and 16 of the 20 cities saw year-over-year increases. “The positive news in both the monthly and annual rates of change in home prices over the past few months signals a possible recovery in the housing market,” noted David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, in a statement.
Blitzer is the latest housing expert to toss around the “r” word. Last week, for example, the National Association of Realtors reported that existing home sales climbed about 9% nationally in August from a year earlier. “The housing market is steadily recovering with consistent increases in both home sales and median prices,” explained Lawrence Yun, chief economist of NAR.
The chorus of bottom callers is getting louder. The discussion is turning from a debate about the bottom to a discussion of what comes next. Perhaps were in the West where the supply constriction is having the best effect such discussions are warranted, but on the East coast where shadow inventory processing is just beginning, the bottom is nowhere in sight.
All that good news begs the question: what can we expect from housing in the coming months?“ We got to the point where housing couldn’t fall any farther,” notes John Canally, an investment strategist for LPL Financial.
That’s nonsense. House prices easily could have fallen much further. If interest rates hadn’t been pushed down to 3.5%, and if regulators had not suspended mark-to-market accounting which delayed millions of foreclosures and subsequent liquidations, prices would have fallen much, much further. There is still downside risk in the market.
“Seven years into it and we are finally seeing a turnaround — but it will be modest at best.”
Canally likens the national-level housing market recovery to a “crooked U” in shape: home prices fell dramatically from 2006 through 2009, then bounced along an uneven bottom (falling a bit more following the expiration of the 2010 home buyer tax credits) for three years before finally beginning to turn upward in recent months.
He can characterize the shape all he wants. The bottom was an artificial flattening created by a series of stimulants engineered by the government and federal reserve. The recovery may be a head-fake caused by continuing stimulants, or it may be real if the stimulants are removed slowly as prices recover.
Lauren Pressman, director of real estate at Aspiriant, also believes housing is making a U-shaped rebound. “It does seem that we are on solid ground for a recovery, or least no more continued depreciation in home prices in most markets,” says Pressman. Yet she doesn’t expect prices to rise dramatically any time soon, thanks to the lackluster jobs market, an overhang of distressed shadow inventory, and ongoing credit issues.
The lackluster job market, overhang of shadow inventory, and credit qualification issues will certainly weigh on prices. What we are all groping in the dark to evaluate is how much of a weight these forces will be. None of us knows because these aren’t typical market conditions subject to laws of supply and demand.
Stan Humphries, chief economist at Zillow.com, has expectations that echo Pressman’s. “We think the bottom is going to be a long flat affair where home value appreciation over the next two to four years, depending on the market, will be in the 1-3% range,” explains Humphries. Zillow’s formal home value projection (which includes all homes, listed for sale and off the market) entails a 1.1% rate of appreciation from June 2012 through June 2013. Humphries believes a healthy (non-bubble) 2.5-5% rate of appreciation won’t kick in until sometime between 2014 and 2016.
That’s as reasonable a guess as any. All the major market manipulators are intent on creating some level of appreciation. Counterbalancing their desires is the realities of unemployment, shadow inventory, and a depleted buyer pool. Tepid appreciation is the safest prediction to make.
Yet housing inventory levels are down and new construction will take years to move through the development pipeline. Realtors in some markets, like Phoenix, Miami and San Francisco, even report bidding wars. The rapidly diminishing supply of sought-after inventory has some analysts making larger projections. NAR estimates prices of existing homes will rise 10% cumulatively over the next two years.
The NAr is such a joke. Why would anyone predict a 10% cumulative appreciation over a two-year period? Why not say 5% appreciation next year? Is it because prediction 10% appreciation sounds more bullish? Of course it is. The bullshit and spin the NAr puts out is insulting to the intelligence of buyers everywhere.
Barclays equity research division warns that a possible shortage of quality inventory could even fuel a “dramatic, multi-year recovery in home prices that could drive prices up 5% to 7% per year through 2015,” according to my colleague Agustino Fontevecchia.
For as ridiculous as that sounds, I foresee a multi-year period of 5% to 7% appreciation in the most beaten down markets but not until after the shadow inventory is liquidated. We must endure a multi-year flat period while shadow inventory is liquidated. Lenders would prefer that flat spot be at peak prices so they can recover their capital, but with prices 30% ore more below the peak in most markets, it isn’t likely lenders will have their dreams come true.
U.S. home prices, which climbed more than forecast in July, are unlikely to come “roaring” back as the housing market reaches bottom, according to Karl Case, the economist who co-created the S&P/Case-Shiller index.
The gauge of property values in 20 cities rose 1.2 percent from July 2011, the biggest 12-month jump since August 2010, a report from the group showed today in New York. The median forecast of 23 economists surveyed by Bloomberg called for a 1.1 percent gain.
A forecast of modest appreciation is the safest call, so that’s what most economists will predict.
“We’re at a bottom but I don’t think we’ll come roaring out of here,” Case, professor emeritus at Wellesley College in Massachusetts, said today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “You’ve got problems in the economy, problems abroad, and got the demographics to worry about.”
Most economists haven’t spoken about the problems with demographics. The baby boomers are soon to retire, and many will want to sell and downsize. The generations following are saddled with excessive debts, and there are fewer of them. Many boomers may not find buyers for their houses, at least not at the price they want.
Record-low mortgage rates, a smaller share of sales of foreclosed properties and low inventory are boosting prices, Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts, wrote in a note to clients today. Further gains may be held back by an overhang of distressed properties from homeowners in default or foreclosure, he said.
“We are expecting prices to continue rising, but not much faster than inflation, at least over the next five years,” Newport wrote.
I’m expecting prices to rise at about the rate of inflation for the next several hundred years because prices can’t appreciate faster than inflation over the long term. Prices are determined by wages, and inflation keeps pace with wages because people bid up the value of goods and services with their wages. Houses can’t appreciate faster than inflation any more than trees can grow to the sky.
Everyone thinks the housing market in the U.S. looks like it’s starting to bottom.
Famed economist Gary Shilling is not one of them—you could call him notably bearish on housing.
In fact, he expects prices to drop another 20 percent from here and doesn’t think we will see a bottom in the market for another several years.
The main reasons Shilling is so pessimistic: There is a huge supply of excess inventory not being accounted for, and prices still have not fallen to anywhere near long-term historical averages.
In his monthly INSIGHT client newsletter, Shilling outlined his bearish housing thesis and used several charts to illustrate why he thinks there is no bottom in sight for the U.S. housing market, and more pain is ahead for American homeowners.
Based on historical trends, there are still about 2 million excess housing inventory units
That’s such a huge number because the number of new housing starts and completions before the collapse was only about 1.5 million per year
The fact that housing starts and completions has been at all-time lows for four consecutive years is a good sign for housing. We did not continue to overbuild once the problem became apparent.
Many point to measures of decreasing supply as bullish for housing…
…but those numbers don’t take into account around 5 million delinquent mortgages and foreclosures that add to supply…
…and they also don’t include all of the vacant units that aren’t currently listed for sale
Home prices need to drop another 22% to reach their 1890-2000 long-term average
The chart above is inflation-adjusted home prices. It is likely that houses will fall back to their inflation-adjusted price levels over time. However, this can happen in one of two ways: price declines, or inflation. The federal reserve is intent on making it the latter. Our super low interest rates will likely prevent further nominal price declines, but we will pay for this nominal price stability in housing with price inflation in other goods and services. In my view, nominal prices may bottom, but inflation-adjusted prices will still decline through inflationary pressures created by low interest rates. It’s only a matter of time.