House Prices Weaken Again

I imagine this feels like old news, but in the only major report released today we learned that those home prices tracked by the Federal Housing Finance Agency, i.e. those homes with a mortgage backed or guaranteed by either Freddie Mac or Fannie Mae, declined slightly in July. The drop was only 0.5%, but it was enough to take prices to their lowest point in the past six years.

We don’t need to dwell on this trend: it is clear, and incomplete.

The problem for real estate is that the continued unwinding of the bubble has resulted in both reduced prices for normal sales, and strong downward pressure on prices from abnormal sales such as those of homes being foreclosed.

It is this inventory of distressed homes that is now deciding the fate of home prices. Some estimates put this inventory of distressed homes at around 1 million properties. If you add in the inventory displayed in the Multiple Listing Service, which presumably includes only non-distressed homes, then the number of homes for sale is vastly greater than current demand. More importantly it is far greater than that realtors will admit to. Inevitably there is only way for prices to move in such circumstances: down.

I see no reason for this steady decline to stop.

Prices are now at the same level they were in September 2004. I expect the current malaise to continue. It will be interesting to see what the Case Shiller index tells us next Tuesday. Given the difference in the two data series it is possible that Case Shiller will show a slight increase. The recent ending of the tax credit for first time buyers has tended to distort Case Shiller somewhat and it may be another month or two before a decline sets in there too.

Whatever happens: real estate is still dead in the water. That will weigh down on the economy as households adjust to the loss of paper wealth implied by the decline, and as other households swallow the actual losses caused by foreclosure.