Home Prices Continue Their Slide

Also widely reported today is the continued decline in US home prices.  The WSJ’s take on it:

Home prices continued to drop as the economic downturn deepened further in October, according to the S&P/Case-Shiller home-price indexes, a closely watched gauge of U.S. home prices, with home prices in the Sun Belt continuing to be hit hardest.

“The bear market continues; home prices are back to their March 2004 levels,” said David M. Blitzer, chairman of S&P’s index committee. He added that both composite indexes and 14 of the 20 metropolitan areas are reporting new record declines. As of October, the 10-city index is down 25% from its mid-2006 peak and the 20-city is down 23%, Mr. Blitzer said.

The outlook remains glum:

The glut of housing remains as credit stays tight and the economic outlook remains bleak as mounting job losses have added more stress to U.S. households. Even intensified efforts to help borrowers stay in their homes have made little headway.

Looking at the Japanese experience, there is reason to believe that the decline in house prices could go on for a very long time.  As this chart shows, Japanese real estate prices hit their bubble peak in 1991 and have declined every year since then.  In fact, Japanese real estate prices today are at 1988 levels.  That’s over 20 years of lost price appreciation in an island nation where they really don’t make any more land. The commentary that accompanies the chart reads in part:

Japan had the same overvaluation problem in their stock and real estate market at the end of 1989. Their real estate market was even more over valued than the U.S. was in 2006 and declined by about 44%. Japan tried to do the same thing we are doing now to alleviate the pain of both asset bubbles bursting. They brought their interest rates down to close to zero, and tried to print their way out. However, by 1991 their money supply collapsed since the banks refused to lend to questionable borrowers and well healed potential borrowers would not bother taking out loans. This is the old concept of “pushing on a string” and the attempt of government intervention dragged out the Japanese deflationary bear market for years. Their stock market declined from 39,000 on the Nikkei Average in late 1989 to about 7,400 in 2003 before doubling since then. Their real estate market is still bouncing around a bottom after declining every year for 18 years.

RGE Monitor (one of the first and most accurate to call the housing bubble) estimates that US house prices will fall 30-40% from their peak, compared to the 44% decline in Japan.  The Case-Shiller numbers are at a current decline of 23-25%, so we may still have a way to go.


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