Home prices in the U.S. dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March.
The value of a house dropped 1.4 percent in the first three months of the year from the same period in 2006, according to a report today by S&P/Case-Shiller. Prices last fell during the third quarter of 1991.
The retreat may deter owners from tapping into home equity for extra cash, economists said. Combined with record gasoline prices, lower home prices raise concern consumer spending, which accounts for more than two-thirds of the economy, will slow.
``We don't see a big rebound in economic growth,'' said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis.
For anyone who is calling a bottom to the housing market, this news essentially blows you out of the water. There is no good news coming from this part of the economy right now. Considering the massive overhang in inventory, I don't expect this trend to stop in the near future.
Compounding the problem is the sentiment of industry insiders who don't see a rebound in homebuilding until 2011:
New home construction in the U.S. may take until 2011 to return to last year's level, said David Seiders, chief economist for the National Association of Home Builders in Washington.
Monthly construction starts would need to jump by 21 percent to reach Seiders's benchmark for full recovery, which is 1.85 million. There were 1.53 million in April, the Commerce Department said. At the height of the five-year housing boom in January 2006, construction began on 2.29 million homes.
``We've fallen way below trend because we soared way above trend during boom times,'' Seiders said in an interview. ``The upswing will be relatively slow, unlike earlier cycles.''
The inventory of unsold homes is the largest since the Chicago-based National Association of Realtors started counting them in 1999 and house prices have suffered the steepest drop since the Great Depression, according to the realtors' group. Defaults and foreclosures also may rise as about $650 billion of loans to subprime borrowers, those with poor or limited credit histories, reset at higher interest rates by 2009.
The article points out a very important point: we're still working our way through the ARMs resets, and will be for the remainder of this year. I would guess the fallout from that part of the market will continue for at least another 6 months, and probably longer.
4 comments:
The rebound in the majority of CT, which had benefited from the 1980s real estate boom in New Englad, took eight years to recover to the prices seen just before the collapse. What makes anybody think that this situation nationally will be any different. Yeah, nationally, we might not see the slow economic growth which has been New England's lot for the last twenty years, but the elimination of the go-go sub-prime market will likely have the same impact in terms of the potential market size for home buyers. The bobbleheads reportng this on TV and radio don't want to address the issues affecting the real estate market. All they want to report is "Go-o-o-d No-o-o-o-ze".
I've been of the thinking that things were going to be worse than this, but my thinking was premised on an interest rate driven decline in the market. Basically, that rates would go up, and that this would dry up the market, drive down prices, etc. What we're seeing today is purely about loans that should have never been made because they were too risky. The rates are, in essence, going up, but only for those in the sub-prime market.
What I'm worried about is if we get into a situation where the fed is compelled to push up interest rates or we otherwise see some driver for higher interest rates on mortgages. Then what we'll see, on top of the existing mess, is a lot of people who have more conventional ARM loans getting hammered as rates go up.
If interest rates don't go up, maybe we'll see some rebound in the nearer term as the bad sub-primes work their way out of the system. If they do go up, we're in for a world of hurt.
Sterno, the relative stability in standard mortgage rates for the time being is certainly welcome but it will not alone assist any rebound in the real estate market. The decline in sub-prime lending standards was an exogenous input which rapidly expanded the market for housing. That driver has suddenly seen its relative weight severely reduced. It will suddenly contract the market for housing by removing a significant portion of the population from potential home ownership. Housing price drops and the housing overhang reflect that. Until something comes along which can return the market for housing to its former glory days we'll be seeing a long, hard slog in the real estate market. Only a major drop in the input costs in housing would have a similar effect in new construction. How many contractors are willing to take major hits in their profit margins or construction workers are open to 80% reductions in their wages? I don't see how it can be pretty.
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