Worried About a Double Dip in Housing? It May Be Here Already

House for sale with reduced price
House for sale with reduced price

While many home sellers fret over the possibility of a double dip in the real estate market, at least one economist thinks there's no sense in worrying -- it's too late. The double dip is here, says Paul Dales, of Capital Economics, an investment research firm.

Existing home sales are up -- they climbed nearly 7% in March -- but prices have dropped over the last three months, culminating with a 3.4% decrease in February, according to the Federal Housing Finance Agency. All told, prices are down 2.7% from November and 13.3% below the market peak in April 2007.

A double dip, according to Dales, would likely entail another round of price declines over a sustained period, perhaps a year or two of modest drops. The dip would be spurred by the lack of income and job growth. (Last week jobless claims unexpectedly jumped -- possibly because of the Easter holiday, while personal income is stagnant.)

Busy Market but Lower Prices

Dales doesn't expect all doom and gloom -- he thinks the home buyer tax credits may have created a frenzy of home buying activity, which could result in higher home sales from April through June -- but as soon as those transactions are cleared, "the combination of weak demand and high supply (due to around 6 million newly foreclosed properties) will mean [prices] fall back further, perhaps by at least 5% by the end of next year," Dales wrote in a note to clients.

Oddly, though, all signs point to a bustling market: new home sales in March unexpectedly shot up 27%, marking the biggest monthly increase in 47 years. Earlier this week, the Mortgage Bankers Association said that its Market Composite Index, which measures loan application volume, jumped 13.6% from last week. Of course, much of the activity could be a last minute rush to take advantage of home buyer tax credits before they expire at the end of the month.

The prospect of a double dip is discouraging, but it's not certain. And the National Association of Realtors, a trade group with a bullish leaning toward real estate, thinks the premise is all wrong.

"All of the major price measures have shown a broad stabilization of home prices for the past few months," says Walter Molony, spokesperson for NAR. "Fourteen out of twenty metro areas reported in March are showing price gains. If it weren't for the fact that 35% of sales were distressed, typically selling at a discount of 15% relative to traditional homes in the same area, we'd be seeing broad gains."

Molony says that based on NAR's "middle-ground" assumptions, the group expects modest price growth by the second half of the year.

And even if the housing market does experience a longer-term decline in home prices, it may not signal yet another Great Depression or a spiraling financial crisis. According to Dale, another drop in house prices will "undermine the strength and sustainability of the already fragile economic recovery."