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No, Home Prices Can and Will Keep Falling
The NYT told readers this morning that: "Home building and home prices, which had fallen for almost three years, appear to have almost no place to go but up." This one is very seriously wrong.
It is probably true that home building has no where to go but up. Construction had fallen to just one third of its bubble peak rate. It may not zoom upward, but the rate of building is unlikely to fall further in the next six months or year.
Prices are an altogether different matter. The basic story here is that real house prices are still 10-15 percent above their long-run trend level. Since the country still have a record housing vacancy rate, it is hard to see how this gets corrected with prices rising. Furthermore, virtually every economist in the country expects unemployment to rise and stay high over the next year. Also, mortgage interest rates will trend upward.
If this is a recipe for rising house prices, then I'm missing something.
-- Dean Baker
COMMENTS (5)
No, Home Prices Can and Will Keep Falling
I hope so. In my view the 2002 to 2007 rise in home prices was very bad but since the "important people" were already home owners few complaints were heard.
Housing is still not affordable enough. The median home should be affordable to the median earner. They should be able to save up a for a 20% down payment in 3 years and to pay off the mortgage in less that 30 years while spending about 25% of income on housing.
Posted by: Floccina | August 7, 2009 9:40 AM
What about the 1.8 TRILLION dollars in option ARMs that are resetting/recasting between now and 2012? 58% of those are right here in sunny California. I don't see prices here going anywhere but down until the remaining toxic loans have resolved themselves. My wife and I are happily renting until then.
Posted by: Robert | August 7, 2009 10:31 AM
"Meanwhile, the Federal Deposit Insurance Corporation has further subsidized lower borrowing costs for Wall Street firms and banks by offering federal guarantees on the bonds they issue."
It's nice to see some acknowledgment of that, at least...right?
Posted by: Brian J | August 7, 2009 10:50 AM
Floccina--
Unfortunately, the decline in housing prices isn't going to solve the affordability problems, which predate the housing bubble by a goodly number of years. I predict remarkably badly, but will predict that housing prices will fall to 2000 levels, but incomes will fall below that as the unemployment rises.
Posted by: PeonInChief | August 7, 2009 12:15 PM
Conventional mortgage rates can go lower if the Fed holds federal funds near zero. The rate was under 5% during the 40's when the discount rate was held constant at 1%, so around 4% for 30-year mortgages would not be unreasonable. Of course if the economy picks up the Fed may raise federal funds.
But the situation with respect to trick mortgages may be more important. Will these be regulated more tightly, or will the financial industry be allowed to go wild again?
Posted by: skeptonomist | August 7, 2009 3:25 PM