Housing prices have “reentered a period of decline” according to the Case-Shiller home price indices, which have fallen to all-time lows. Housing markets have now dropped to 2002 levels, and will probably fall even further in the first half of 2012. But that might actually be a good thing, according to several analysts who expect foreclosure rates to pick up and help stabilize an ailing market sometime this year.
As prices take a turn for the worse, the end of the housing plight might be in sight.
The decline in housing prices accelerated as 2011 came to an end, Tuesday’s Case-Shiller report showed. The 10-city composite fell 3.9% over a year ago and both the 20-city and the national index tanked 4% in 2011.
Prices are now down 33.8% from their June/July 2006 peak, prompting index chairman David Blitzer to predict further declines going into 2012. “Up until today’s report we had believed the crisis lows for the composites were behind us with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011,” he said, adding “now it looks like neither was the case, as both hit new record lows in December 2011.
Marking eight consecutive months of declines, the ominous double-dip many feared has definitely reared its ugly face. But that may not be such a bad thing. Indeed, for any recovery to actually take place, an initial marked decline in prices must occur, as the foreclosure pipeline comes back on-line and begins to pick-up speed.
“Invisible inventories, so-called shadow inventories, [are] implicitly weighing on home prices,” explained Nomura’s economic research team, echoing comments by Fed Chairman Ben Bernanke. Depressed housing markets are one of the clearest remnants of the 2008 financial crisis that brought the global economy to its knees. With more than 20% of mortgage borrowers under water (i.e. owning a loan that is worth more than their property) and still about 3 million owners to be foreclosed on, the market is clearly still unhealthy, according to Capital Economics’ senior US economist Paul Dales.
Foreclosure rates have fallen dramatically since the so-called robo-signing problem took hold. Major banks and mortgage originators like JPMorgan Chase, Citigroup, Wells Fargo, Bank of America (which bought Countrywide), and Ally Financial, in their attempts to offload as many distressed properties as possible, employed shady foreclosure processes and, after a wave of litigation, were forced to stop after a major investigation by the Attorneys General of all 50 states.
The tide is beginning to turn, though. Foreclosure filings have begun to pick up steam, according to PNC’s head economists Stuart Hoffman and Gus Faucher, after the financial institutions decided to settle with 49 states and the Obama Administration. Nomura’s analysts expect “the pace of foreclosure activity [to] accelerate this year, [meaning] many distressed properties in pipeline will become visible and flow into the market.”
This, in turn, “will push home prices down through the first half of 2012,” according to PNC’s economists, as markets try to find a bottom where supply and demand find equilibrium. This trend might already be under way. As Case-Shiller shows 8 months of declines to January, RealtyTrac shows foreclosure filings jumping 2.9% to 210,941 in January over December, foreclosure sales up 15.4% to 75,353 at an average $166,861, a 0.5% month-over-month decline.
Case-Shiller provides further evidence. On a month-over-month basis, Phoenix and Miami were the only two cities to post price increases, two of the hardest hit areas in the country. On a year-over-year basis, Detroit was the only city to post a positive number. “It could be that the plunge in prices in these areas are attracting investors looking for bargains, which bodes well for national demand,” according to PNC.
Furthermore, housing is absolutely underpriced relative to rents and incomes. Currently, PNC estimates the home prices are 10% below fair-value vis-à-vis rents and 24% below compared to incomes. From their report:
Prices will start to turn around later this year as the housing market picks up. Sales are up from their bottom, and extremely low mortgage rates and the decline in prices has pushed up affordability. As access to credit improves and the labor market recovery continues, households will feel more confident, driving up sales and prices.
Thus, the current housing decline, while painful and protracted, might actually be the beginning of the end. If indeed the U.S. economic recovery, the very very modest economic recovery, continues, then the recent improvement in housing data (which accompanies general economic data) could feed into rising home sales in the second half of the year.
The recovery will be gradual, as there’s a 6-month lag between rising demand and rising prices, according to PNC. They estimate that total home sales jumped 13% in the six months to January, which means those price increases should begin to kick in at some point in the first half of 2012. Still, they aren’t expecting a surge in prices, 2012 and 2013 will probably be relatively flat, with significant sustained gains coming sometime in 2014.
by Agustino Fontevecchia, Forbes Staff