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Home Price Decline Nears Bottom, But Volatility Expected
The decline in national home prices should hit a bottom next year, but many markets could still experience huge volatility as the housing industry seeks to emerge from its worst downturn since the Great Depression, according to economists appearing last week at the NAHB Fall Construction Forecast Conference.
 Consensus expectations from the Wall Street Journal Economic Forecasting Survey are for home prices to reach their trough by mid-2010, said Richard Brown, chief economist at the Federal Deposit Insurance Corporation.
Citing data from the S&P/Case-Shiller Composite 10-City Index and its Futures Prices Index, Brown said home prices have declined 31.6% from their peak and are expected to fall another 4.1% through May 2011 followed by a price rebound of 7.8% over the next two years.
“We are close to the bottom,” he said.
Between the second quarter of 2008 and 2009, 270 cities posted an annual decline of 15%, unprecedented in the post-World War II era.
“This is outside of our historical perspective,” said Brown.
Freddie Mac’s Conventional Mortgage Home Price Index is down 7.5% through the second quarter of this year and is expected to decline another 5% by the fourth quarter of 2010.
 “Recent history implies even if we’re right on the total change, the path will be anything but smooth,” said Amy Crews Cutts, deputy chief economist at Freddie Mac.
Among the factors that could negatively impact home prices are rising foreclosure rates that have hit nearly 1.5 million home owners this year and what Brown calls a “shadow inventory” of homes owned by another 5.5 million delinquent borrowers.
“Together, this adds up to 7 million units, which can have a profound effect on prices.”
Another problem is that 16 million borrowers are currently “underwater,” with their mortgage exceeding the value of their home.
On the plus side, low mortgage interest rates and falling home prices have put housing affordability at its highest level in decades.
Brown said that today’s average family income is running at 160% of what is needed to purchase a home with a 20% downpayment.
Builders have further brought supply and demand into balance by curtailing production and the inventory of unsold homes continues to be whittled down, Cutts noted.
“You guys could only build fewer homes if you unbuilt them,” said Cutts, noting that if housing production doubled today, it would still be more than 140,000 units shy of 1946 levels.
The uncertainty of today’s housing market makes it even more challenging to forecast prices at the local level, she said.
“If a house loses a little value like in the Washington, D.C. area, people don’t worry about it,” said Cutts. “When you see a 50% drop like in Nevada, you wonder if you will ever get back to zero change.”
Cutts said that markets such as Detroit and California, which have suffered huge double-digit declines in home values during the current downturn, face different outlooks.
“Detroit is like driving through Mississippi after Katrina,” she said. “There are miles of boarded up homes. It’s hard to imagine Detroit making a big rebound; it’s much different than what could happen in Inland, Calif.”
Photos by Morris Semiatin
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