Home Prices Expected to Drop, but Only a Little, Economists Say

The storm clouds are gathering. Many experts see home prices dropping this yearWhat a difference a month makes.

MacroMarkets' June "home price expectations index" released this morning shows that 56 percent of surveyed experts see home prices dropping this year, compared with only 40 percent who thought so in May. In other words, experts -- the 106 economists, analysts, consultants and academics surveyed -- are becoming more pessimistic.

It's not a huge drop. The mean consensus is for a 1.36 percent drop in 2010, followed by a gradual recovery that would take prices up 10.46 percent by the end of 2014. By comparison, last month the consensus was for no change in prices this year, and a 12.36 percent price over four years.

Sometimes it seems that economists are just trying to read a crystal ball. Why the change in sentiment?

Bill Smalley, an analyst at MacroMarkets, tells AOL HousingWatch that it could be fairly technical. The experts are supposed to be predicting prices according to the S&P Case-Shiller Index, which has a two-month lag. So after the MacroMarkets' May survey already had been published, S&P Case-Shiller's March data came in weaker than expected.
Of course, there also has been a spate of negative housing data released in the past month: weak housing starts, rising inventories, falling homebuilder confidence.

Tony Sanders, real estate finance professor at George Mason University, says the consensus in May was overly optimistic anyway. The boost from the homebuyer credit is simply disruptive noise, he argues.

"There's too much supply and lack of demand in the housing market, anemic GDP growth, high unemployment and consumer spending is still disappointing," he says. "This is not a blueprint for higher home prices."

In May, Sanders had predicted a 2.40 percent drop in home prices for 2010, and revised this up in June to a 0.50 drop. The reason for his reduced pessimism, in the face of others' increased pessimism, is his growing conviction that the government will continue to extend homebuyer incentives.

"The government is going to continue pumping money into the housing market," he says. And that's not a good thing. Unequivocal government support for homeownership is what got us into this mess in the first place, he argues, and the White House should instead be focused on offering tax breaks to businesses who can revive the economy.

"All the elements are in place to recreate the fiasco that we just went through," he says.

Fortunately, many economists disagree.

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