Are Home Prices Headed for a Double Dip?

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Double dipJust as home prices appear to be stabilizing, we may be falling into what economists call a "double dip." In other words, after climbing back from the near death spiral of the last few years, yet another round of housing pain may be on its way.

U.S. housing prices have plummeted a jaw-dropping 32.6 percent from their peak in 2006, based on sales in the 20 metropolitan areas tracked by the influential Case-Shiller index. That means residential real estate values are back to where they were in the summer of 2003. Nearly 1 in 4 homes in the country is underwater, owing more on its mortgage than the home is worth, according to First American CoreLogic.

In recent months, the housing market appeared to gain steam. Unfortunately, prices dropped another 0.6 percent from December 2009 to January 2010, according to the Federal Housing Finance Agency (FHFA). And just last week, economist Paul Dales reported that increases in excess housing supply are beginning to tamp down any upward price momentum.

But good luck getting a consensus on where home prices are headed. Aiming to gain a broader perspective, HousingWatch decided to conduct its own informal poll of economists. Experts Barry Ritholtz, David Crowe, and Mark Thoma graciously offered their own divergent opinions on whether the residential real estate market is due for a double dip. Their edited answers follow:Barry L. Ritholtz, blogger at The Big Picture and CEO and Director of Equity Research at Fusion IQ, an online quantitative research firm

"I think there's a good chance [for a double dip in the housing market].There is no basic reason for this to end sooner rather than later. You have to keep in mind that whatever housing pain we should have had, we've kind of avoided by the grace of the Federal Reserve. And I think we've now run to the end of the useful lifespan of first-time home buyer credits. What we've done by subsidizing homes, is that we prevented the market from leading house prices to return to where they should be, especially with all the mortgage bonds and the foreclosure payments.

"We've now had 5 million foreclosures, and were probably looking at another 4 or 5, maybe even 6 million, foreclosures, going forward. So you're about halfway through it. A third of the houses out there have no mortgage. Of the remaining two thirds -- 1 in 4 is underwater. That's an astonishing number. That means you nearly have 20 million homes that are underwater.

"Home prices are still too high. It's just working from a basic concept of mean reversion, where we look for standard deviations above the norm on the traditional metrics. Whichever metric you look at--income-to-home price, rent-versus-buy, percentage of GDP--we're still 10 percent or 15 percent above that. And the way you can get back to trend is either by dropping 15 percent tomorrow or going sideways for 5 to 7 years."

David Crowe, Ph.D., Chief Economist and Senior Vice President at the National Association of Home Builders (NAHB)

"It's a legitimate question. The sales figures were disappointing in February and maybe some of that can be blamed on weather. But it's not clear it all can be blamed on weather. I am still of the mind that we will continue to go forward, that we won't have a double dip. [The real estate market] will be soft and somewhat erratic, but I don't think we're going to go back down. The sales for new homes are the lowest ever. There are very good mortgage rates, and I don't think they're going to go up significantly after the Fed stops buying. There is very good affordability. So there's a lot of people that can qualify, even under the newer, more restrictive standards, and there's a lot of pent-up demand.

"A big part of my confidence is due to my belief that there will be a return in the employment market. It hasn't happened, but everything says it's about to. Just like the cherry blossoms in D.C. are about to come to their full flower. Temporary employment has been going up, the number of job losses has been going down. The new unemployment claims have been going down. Retail sales have been going up.

"The people there to buy houses are the ones who've been working along. I'm not talking about the person that just got a new job, or the person who's had a job but has seen the fragile nature of the employment market and postpones their move. So the conditions are alright and there is a line waiting at the door. That's the trigger, and I think that can happen. We still have over half the stimulus money to be actually deployed.

"Consumers will ultimately stabilize housing prices with more demand -- even with more foreclosures on the horizon -- but it's going be gradual."

Mark Thoma, blogger at Economist's View and Professor of Economics at the University of Oregon

"I think there is a chance there will be a double dip in the economy and in the housing markets, but I'm more concerned that we're not out of the first dip yet. So we can't even get to the second dip. When I look at home sales, there was a brief blip in the market when the government intervened with some programs. But it looks to me like we sort of hit bottom, and we haven't really moved away from that.

"I was worried for a long time about small banks and the commercial real estate market. And I still say, if the economy blows up, the housing market will take a hit. I don't think the chances are very good right now. I think there's some optimism that we're seeing in long-term rates during edge up now. So as long as that optimism stays in the market, I think it is going to go up. But I think it's going to be slower than people want.

"To have the chance of a second dip would almost be good news right now, because that means we recovered enough in the first dip to have a second one. When you look at long-term rates, as Jim Hamilton mentioned, you ask whether consumers are being driven by fear of inflation or the anticipation of a better economy. The fact that the stock market and mortgage rates are moving in the same direction sort of tells you that the increase is not fear of inflation, but probably in anticipation of a stronger economy in the future. I think we're probably going to head upwards, but slowly."
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