No Housing Recovery Before Further Price Declines

From today’s UP AND DOWN WALL STREET column comes these two charts, which should be quite familiar by now to TBP readers . . . plus a few words on what they mean, via Alan Abelson. They emphasize and repeat our prior assertions that home prices remain way too elevated:

“ALTHOUGH WE’VE ALWAYS BEEN a firm believer that a word is worth a thousand pictures, the two charts adorning this page, we’re forced to admit, provide eloquent and graphic descriptions of why housing still isn’t able to get out of its own way and why there’s still plenty of room on the downside for prices.

We lifted the charts from a recent commentary by our estimable friends at ISI Group. As their respective headlines nicely explain, one shows the ratio of house prices to rents; the other, the median house price divided by median family income.

At a glance, they both relate the same message: House prices are still too high, and not by a modest amount, either. Nor, ISI reckons, will reducing the number of foreclosures, desirable as that may be, halt the erosion in prices. While fewer foreclosures are likely to slow the rate of decline, they won’t reverse the downtrend or determine “where homes prices end up.”

And while the sharp contraction in residential construction of new houses is obviously a plus, the homebuilders, at last report, were still building appreciably more houses than they were selling, and inventories of unsold houses are huge.

But given the remorseless rise in unemployment, which, if anything, is destined to accelerate in the months ahead, the simple fact that so many people are too strapped to afford to buy a home, is, we believe, the most formidable barrier to even a tepid housing recovery.

For that to happen (much less to get a sustained and reasonably robust rebound) will require home prices to suffer a further steep decline, in tandem with a radical improvement on the jobs front.

House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we’re talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn’t in the cards for certainly as long, if not longer.”

As mentioned on FM, its taken 2 years of housing price declines — and a 25% drop — to get us to the 5th inning or so. From here, another 10% is a modest decline, and another 20% drop, forecast by ISI, is a more significant price drop.

However, these are not worst case scenarios, and I will spare you the details of those, as they are truly sickening.


Residential Real Estate Price Freefall (January 27th, 2009)

Homes: Still Too Pricey to Stabilize (February 18th, 2009)

Double Trouble
Barron’s FEBRUARY 23, 2009

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