Saturday, January 1, 2011

Why House Prices Will Now Drop Another 20%

Writing in Business Insider, Gary Shilling of A. Gary Shilling Co., lays out the basis of his opinion that house prices have another 20% to fall. Referring to what he sees as the contrast between 'Great Expectations' and 'Reality', Shilling notes how in the spring of 2010 the belief became widespread that not only was the housing crisis at an end but that solid rebound was underway. In this period many investors were rushing into foreclosure sales and bidding up prices in CA. This was encouraged by the tax credit of up to $8,000 for new home-buyers that egged buyers on and many thought that housing activity nationwide was being kick-started. The Home Affordable Modification Program intended to help 3 million to 4 million homeowners with underwater mortgages contributed to the rosy outlook being claimed by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.

Professionals will want to study all 27 of the charts in Gary Shilling's article. To illustrate some of what he is saying I have included a couple here.

Chart 4 shows very starkly the false dawn of earlier this year when sales of existing homes skyrocketed under the influence of the factors mentioned above. It also shows how this development collapsed as dramatically as it rose. The upshot was that existing home sales fell to a new low. All the measures to support a revival of the market had only
“borrowed” sales from the future.

This is taking place against an employment picture that resists all attempts at revival as Chart 7 shows.

This also means NAR’s Housing Affordability Index, reliable for the earlier post-World War II period, is no longer relevant today, especially with its additional threats of layoffs, wage and benefit cuts and the proliferation of part-time jobs. Homeownership hardly makes sense to someone who doesn’t know the size of his next paycheck assuming there is one?

The situation is made even worse by the almost a quarter of all homeowners with under-water mortgages. With the principal owed exceeding the value of their houses, many can’t sell their existing homes, obviously essential for an active resale market, even if they wanted to.

It is difficult to see how the situation overall is going change for the better anytime soon and those charged with the job of improvement are not to be envied.

Enhanced by Zemanta