Housing prices forecast to fall in 2010 -- and could keep falling for years
Filed under: Economy
Fiserv, a financial information and analysis firm, is forecasting that national median home prices will fall 11.3 percent by summer 2010. The recent surge in home sales and new homes under construction have launched a feeding frenzy in the hardest hit Sunbelt and California markets as investors believe "the bottom is in." The Fiserv forecast -- and the fundamentals of supply and demand -- are throwing cold water on that confident enthusiasm.Foreclosures are still rising as defaults rise in prime mortgages, which were once viewed as immune to the high defaults hitting subprime loans. As I have reported here before, the foreclosure pipeline -- not just homes that have been foreclosed, but those in default -- is bulging.
Banks are holding foreclosed and distressed properties off the market, hoping to sell them in a stronger economy. This stock of homes is called the "shadow inventory" because lenders have numerous ways to hide how many loans are in arrears and how many homes are foreclosed but not listed on the market.
While many of the investors buying discounted homes are paying all cash, many marginally qualified buyers are purchasing homes with little or no money down and loan-to-income ratios which require 50 percent of their net income go to pay the mortgage.
The Federal government is pumping up the housing market with unprecedented giveaways like the $8,000 new home buyer credit, --but unfortunately it appears the program is riddled with fraud and abuse. Some 100,000 of the 350,000 credit issued are being investigated by the IRS.
All of these data points suggest some pernicious drivers of the bubble haven't changed in the three years since the housing bubble popped. The Federal government is still underwriting low-down loans to people who are at risk of losing the home if their income falls even marginally, and abuse and fraud have simply moved to another corner of the market.
Some readers have charged me with wanting to deny people the opportunity at homeownership, but we have to ask: Is giving people mortgages which require half of their take-home pay doing them a favor, or are we simply setting them up for financial ruin? I would say the latter.
Though those in the real estate, mortgage and building industries are quick to claim that "housing is a unique asset and that it doesn't act like other assets," a strong case can be made that all bubbles follow predictable patterns, whether the bubble arose in tulip bulbs, raw land, gold, stocks or housing.
Historically, bubbles tend to rise and decline in rough symmetry, meaning that prices eventually retrace to their pre-bubble levels, and the length of time it takes to retrace is about the same as it took to reach bubble heights.
I have illustrated this in the following chart.
If bubble symmetry plays out in this bubble as it has in many other financial and credit bubbles, then we can anticipate a retrace to 1998 levels by about 2014.
Some observers claim that housing can't possibly return to 1998 levels because inflation will have boosted the value of all assets, housing included. But with producer prices dropping this month and the "owner's equivalent rent" part of the Consumer Price Index (CPI) falling for the first time in over a decade, the data is pointing to the uncomfortable reality that prices and rents can actually deflate.
In general, as rents fall, so does housing. Historically, housing prices and rents are correlated, for the common-sense reason that if it costs considerably more to buy than to rent, there is less incentive to buy -- especially if house prices are declining.
The Fiserv forecast and the foreclosure inventory data should provide a note of caution for those assuming "the bottom is in."
Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently Survival+: Structuring Prosperity for Yourself and the Nation.
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Reader Comments (Page 1 of 8)
10-21-2009 @ 9:28AM
Mike said...
Rent tied to Houseing prices? Bull, it's tied to income. People with no jobs, and $7.00 an hour part time jobs can't pay much. Houseing cost have to go down, so the new buyers can afford them. The People causeing this mess are the realtors and easy money people. Prices have to go down to 1968 levels for people to make it. No one can make the payments now with the current prices. They need to go way down.
Reply
10-21-2009 @ 12:53PM
chris b. said...
Hey genius, How are realtors causing this?
10-21-2009 @ 1:03PM
Different Mike said...
Uh, yeah - rent IS tied pretty much directly to housing prices. How do you think I come up with my rent price? I start with the payment I make on the property and inflate it by a percentage to cover depreciation. The only impact income has is indirect and occurs over a very long period. You seem to be saying that you think it's "unfair" that rent isn't tied to income. If that's how you think, I believe there are some very cozy apartments for rent in Moscow that you'd just love.
10-21-2009 @ 1:24PM
dbloomslm said...
If lower prices are to be had then sensible homes must be available. A "starter" home doesn't have to be 2000 sq ft. It is up to the public to set the style and size.
10-21-2009 @ 3:15PM
Dan DeNuccio said...
You really should study up on your economics 101 or just stay out of the housing market arena genius.
10-21-2009 @ 4:23PM
dave said...
Mike,
1968 is really a stretch. Think about the value of all materials that go into a house. You really think you can build a 1500 square foot house for $15,000? That's what it cost in 1968.
10-21-2009 @ 6:24PM
Brando said...
If you make $7.00 an hour you are either a high school student or someone who has a part time job used to supplement the breadwinners income in the household. You should never expect to own a car let alone a home for that kind of pay. Get a real job. NO ONE IS ENTITLED TO HOME OWNERSHIP!!! Get a degree, join the military, or do something that will generate the income to own the home you want at the prices they are. I am sick of losing value on my home because of a bunch of deadbeats that should not have been allowed to purchase in the first place.
10-21-2009 @ 10:05PM
FIWIKI said...
people like Mike are bottom feeders, that never had a pot to pi$$ in ....... never will.
10-23-2009 @ 12:22AM
K.M. said...
Thank you Mike, here in Northern California, the housing prices have sky rocketed to near astronomical heights. Many of my friends and coworkers jumped on the band wagon, only to learn later the true costs of home ownership. Too many have lost their shirts, so to speak and literally and there is no help to be found. There needs to be stronger regulation and scrutiny as well as a considerable correction in the market. Most of us economy wise individuals stayed out of the market because it just seemed to good to be true, and it was.
10-21-2009 @ 9:48AM
NICK said...
Your chart looks like what the folks think of Obama and the liberal slime in Congress!!!
Reply
10-21-2009 @ 12:12PM
Paul said...
Nick, your comment is dead wrong, why do you think that the housing prices keep going down?, it was not Obama who was responsible for this mess, just think if he did not bail out the banks during the crisis, it would have been a disaster, more job losses, more foreclosures, the blame can be passed on to all the people who bought second homes for rentals, supply and demand drove the prices through the roof, it is happening right now, people are still buying second homes, some even on three homes, I call it Greed, wages are not going down, they are frozen, but will continue to rise in the years to come, then we will have inflation, high interest rates again
10-21-2009 @ 1:50PM
Daniel said...
A big part of this real estate mess was the subrime from Barney Frank and other liberals giving loans to people who didn't have the means to pay them back. It was old fashioned feel sorry for someone liberalism and now we are paying. That clearly back fired so next up is free healthcare for the lazy! Thanks Obama.
10-21-2009 @ 2:06PM
luckysunday22 said...
And BTW Paul, a VERY large part of the liberals pushing low income, bad credit, unworthy loans was ACORN. And Obama was the ATTORNEY for ACORN at some point in his hollow career. So...Obama may be DIRECTLY responsible for the housing crisis.
10-21-2009 @ 10:04AM
Benedict Arnold said...
I got my tax assesment from the county to weeks ago. Told me my house went from $139000 to $110000. Now your saying they're gonna knock off another $12000? I'd like to see you build this house for $98000. A freakin piece of drywall costs $6 these days.
Reply
10-22-2009 @ 12:46PM
JIM said...
This has been removed from this article and others on Bloggingstocks. What are they afraid of? The truth? I would like to know why this is being removed.
If you are in or near foreclosure, you should possibly consult a real estate attorney using the following information.
BACKGROUND
Mortgage-backed securities (MBSs) are simply shares of a home loan sold to investors. They work like this: A bank lends a borrower the money to buy a house and collects monthly payments on the loan. This loan and a number of others -- perhaps hundreds -- are sold to a larger bank that packages the loans together into a mortgage-backed security. The larger bank then issues shares of this security, called tranches (French for "slices"), to investors who buy them and ultimately collect the dividends in the form of the monthly mortgage payments. These tranches can be further repackaged and sold again as other securities, called collateralized debt obligations (CDOs). Home loans in 2008 were so divided and spread across the financial spectrum, it was entirely possible a given homeowner could unwittingly own shares in his or her own mortgage.
Eventually, the most desirable, qualified customers dried up; they all had homes. So banks turned to customers they'd traditionally shunned -- subprime borrowers. These are borrowers with low credit ratings who pose a high risk of defaulting on their loan. But lenders of all stripes bent over backwards in the early 2000s to get this type of borrower into homes. The no-document loan was created, a type of loan for which the lender didn't ask for any information and the borrower didn't offer it. People who may have been unemployed as far as the lender knew received loans for hundreds of thousands of dollars. Why?
One answer is that, with the introduction of MBSs, lenders no longer assumed the risk of a loan default. They simply issued the loan and promptly sold it to others who ultimately took the risk if payments stopped. And since MBSs created early on were based on mortgages granted to the more dependable prime borrowers, the securities performed well. They performed so well that investors clamored for more. In response, lenders loosened their restrictions for mortgage applicants and borrowed heavily to create cash flow for loans in order to create more mortgages. Without mortgages, after all, there are no mortgage-backed securities.
http://www.pbs.org/wgbh/pages/frontline/warning/view/
THE QUESTION
As mortgages were packaged/bundled into mortgage back securities (MBS) and sold to investors and since these MBSs were bought by investors, with some mortgages being split and owned by several institutions or people (tranches), how can the homeowner/borrower know who actually owns their mortgage? If the homeowner /borrower does not know who actually owns their mortgage, then how does the foreclosure court know who actually owns the mortgage and CAN actually proceed with the foreclosure?
The real estate attorneys representing these possible foreclosed homeowners should request that the foreclosing institution show that they ACTUALLY own the mortgage and can bring foreclosure action to court and are not just the mortgage servicer.
10-27-2009 @ 1:39PM
thec2u said...
The price of housing materials will fall with the decline in housing prices. Houses will get cheaper to build and cost less.
10-21-2009 @ 10:45AM
Joe said...
Want to know whose fault this really is?-http://www.pbs.org/wgbh/pages/frontline/warning/view/
Reply
10-21-2009 @ 10:54AM
Jim said...
Joe asks whose fault this is. Well, in reply I can only quote that famous statesman, Albert Alligator. "We have met the enemy, and he is us."
(Thank you Walt Kelly.)
Reply
10-21-2009 @ 11:56AM
ron said...
We can thank the Republican slime buckets for the mess that we are in. They are sittin gin their gated communitites laughing at the rest of us who have to struggle every day to survive. Damn them all and all of them who continue to blame the current administration.
Its just a smokescreen and any intelligent person out here knows that we can place the blame squarely upon the Republican greedy pigs.
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10-21-2009 @ 1:49PM
Paul said...
A brain is a terrible thing to waste. I see you have been busy wasting yours for some time. The financial bubble began in the Clinton era with Rubin, Greenspan, Sumners, etc. and simply continued with Bush and his laissez faire attitude toward government regulation. As long as folks (including little folks) were working the system to their own selfish ends in all terms of investment (housing, 401Ks, etc.), things were just fine and dandy. Once derivatives were in place and remained unregulated, the sky was the limit on what could be deemed a reasonable investment in the financial market. Well the bill came due as anyone with half a brain (sorta like you) could see coming. The anointed one has done nothing but seize upon the chaos to further his ideological agenda of Socialism, heavily compounding the problem in the process. Exactly what do you think "...we're going to fundamentally transform America" means. Get a clue.