5 Reasons Why Your Home Will Be Worth Less in 3 Years


Home pricesReal estate bulls are relishing this week's fresh housing data.

The S&P Case-Shiller Home Price Index -- a widely tracked metric that measures what homes are selling for -- showed a 3.6% sequential uptick during the second quarter.

This is a positive, but don't go popping champagne corks or tossing confetti just yet. We need to frame this upbeat nugget of news appropriately. This is a quarter-over-quarter metric, not a year-over-year one. Home prices are still down 5.9% over the past year through the end of June. Plus, the second quarter's climb also wasn't enough to offset the first quarter's decline.

In other words, home prices still fell during the first half of the year.

Don't Bank on a Rebound -- Yet

Apologies for being a downer, but when it comes to real estate, it doesn't pay to be a Pollyanna. And a handful of signs indicate that the residential real estate market hasn't bottomed out yet.

1. Some pros still see lower prices

Housing analysts -- in other words, brainy specialists who know a lot more about this than I do -- aren't very optimistic.

McCabe Research & Consulting CEO Jack McCabe believes the housing market won't bottom out until foreclosures and short sales are less than 10% of the industry sales and the unemployment rate falls below 6%. He doesn't see that scenario happening until 2013 at the earliest, he told The Miami Herald this week.

Stifel Nicolaus analyst Michael Widner told TheStreet.com last week that his firm sees national home prices falling 15% more.

Earlier this year, Robert Shiller -- the worrywart Yale economist who has been more right than wrong in his Chicken Little housing prognostications in recent years -- felt that home prices could drop 10% to 25% more before landing. He should know: he's the Shiller behind the Case-Shiller index.

2. Fresher data shows a stale economy

The rosy S&P/Case-Shiller Home Price Index gauge covers the three months ending in June.

Do you want a painful refresher on what has happened since then? The stock market tanked. S&P downgraded the country's credit rating. Faith in the U.S. government is rattling on the left and the right. Unemployment rates continue to clock in stubbornly high, and it's not going to get any better with Cisco (CSCO), Research In Motion (RIMM), and Bank of America (BAC) revealing thousands of layoffs apiece this quarter.

The end result is that the S&P/Case Shiller news wasn't the only piece of economic data that the market is munching on this week. The Conference Board is reporting that consumer confidence hit a two-year low. This is a dipstick measuring the country's sentiment for the month of August, a more current pulse of the economy than what housing prices did on the other end of this bruising summer season.

3. Mortgage rates won't stay this low forever

The average 30-year mortgage clocked in at 4.41% last week, according to rate tracker Bankrate.com. It's the lowest interest rate Bankrate has reported since it began aggregating mortgage information 26 years ago.

How long do you think this will last?

Home prices are obviously swayed by prevailing rates. If banks inch mortgage terms higher, prospective homebuyers get less bang for their borrowed buck. Buyers will need to lower their targeted price ranges -- and so will sellers.

4. There is still a glut of housing inventory on the market

The Commerce Department reported that new housing starts dipped 1.5% in July. Building permits, an accurate measuring stick for future construction, fell 3.2%.

Dig deeper into the data and you'll find that single-family homes actually fell by a problematic 5%, partly bailed out by a 6% increase in apartment building.

The disparity is telling. For starters, it indicates that consumer demand for ownership is waning. Too many condo flippers and realty speculators got burned by buying too many vacant houses that are now worth less than their underlying mortgages. Renting is the easy way to go these days, especially given that real estate has been a depreciating asset in recent years. Folks also can't afford new and existing single-family homes at today's prices. Banks need meatier down payments that many just can't afford.

5. Location, location, relocation

Another likely explanation for the uptick in renting over home ownership is the urbanization trend that's driving up demand for metropolitan digs.

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The American dream is no longer a sprawling house in the suburbs with a white picket fence. Young adults are flocking to revitalized downtown areas where there's stuff to do and the mass transit infrastructure to make it all accessible without the hassles of housing multiple cars, maintaining a lawn, and suffering through draining workday commutes.

Census data shows that we're marrying later and having fewer kids. Did you really need that fifth bedroom?

The arms race is over. The Joneses lost -- but so did you.

There's no need to panic. We have likely seen the worst of the freefall in real estate prices. However, if you're banking on a rebound over the next few years, you haven't been paying attention.

Home is where the hard is.

Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Research In Motion and Bank of America. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems.

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