House of cards: Home prices may be headed back down

house-of-cards-after-artificial-rise-home-prices-may-be-headed-downEveryone heaved a sigh of relief as the latest S&P/Case Shiller U.S. National Home Price survey showed a price increase for the fifth straight month. Home prices may finally have hit bottom, but Dean Baker of the Center for Economic Policy is not so sure. In his weekly Housing Market Monitor, he says he thinks the boost may only be temporary, driven by the first-time homebuyers tax credit.

"Sales are clearly headed sharply lower in the months ahead," Baker warns in his Wednesday report. "The extension and expansion of the first-time buyers credit will have a positive impact, but it will not be sufficient to prevent a downturn." John Silvia, chief economist of Wells Fargo (WFC) agrees. He told the The New York Times that he forecasts a new decline in prices of as much as 10%.
Baker notes that the current oversupply in housing is pushing down rents. He pointed to the fall in nominal rents in the CPI, the first time such a decline has been recorded. That's because landlords are lowering rents on existing tenants. "The drop in market rents will eventually put downward pressure on house prices," Baker adds. "The amount that homebuyers are willing to pay for a home will inevitably adjust to rents in the market. Also, landlords will be more likely to put homes up for sale as rents drop."

I've seen this happening where I live in central Florida; people are walking away from homes on which they've lost $100,000, then moving down the street and renting another house at half the cost of their mortgage. Tenants are negotiating lower rents and landlords are accepting the deals because they know if they don't, they'll likely end up with vacancies.

The large supply of houses on the market is acting like a brake on any price increase, Maureen Maitland, vice president for index services at S&P, told the Times. Right now, there are 3.57 million homes for sale. That's a figure which has declined, but it's still seven months' worth of inventory. Three months' worth of inventory would be a healthier number.

The high joblessness rate continues to be the elephant in the room that is blocking any real gains in the housing market, but some of the hardest hit markets are showing rebounds. Baker reports that in Phoenix, prices rose at a 13.1% annual rate over the last quarter. Los Angeles has seen a 13.4% price increase. In San Diego, the annual rate of increase has been 19.8%, and in San Francisco, 32.5%. But Baker warns, "These increases follow very sharp price declines earlier this year and in 2008. It seems unlikely that these price rises will be sustained."

Have we hit bottom? The answer is probably yes in some markets, but no in others. While real estate took a big tumble nationwide as the bubble burst, the recovery is going to look very different in different areas. Now that the major moves have been made, expect the market to go back to its traditional driver -- location -- rather than following a national trend in one direction -- down.

Lita Epstein has written more than 25 books, including The 250 Questions Everyone Should Ask About Buying Foreclosures.
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