Home prices have already bottomed

A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.

“Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.

Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”

In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:

This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.

Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.


First, the Case-Shiller index is up five months in a row–a sign of substantial strength.

Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.

Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:

Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)

Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)

Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.

Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.

But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.

And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar.  At least one major lender has dramatically reduced the number of  foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.

Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.

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19 Comments on “Home prices have already bottomed”

  1. […] WELL, THAT WOULD BE SOMETHING TO BE THANKFUL FOR: Jesse Malkin: Housing Prices Have Bottomed. […]

  2. Think of it, not as a fall in prices, but as a recovery in House Affordability.

    House inflation above wages is a generally not a good thing.

  3. scrubjay says:

    Wait until the government borrowing in 2010 kicks in. Then private capital markets will dry up, more people will lose their jobs and even more foreclosures will occur. It will be blood in the streets. The stock market is in a dead-cat bounce due to the recent spending. Look for another decline next year. ‘President’ Obama is leading us into a depression. When people realize what a disaster Democrat control of the government is and they are voted out of office that will be the time to buy.

  4. devildog666 says:

    “Home prices have already bottomed”

    In your dreams only. The next drop will be here in weeks and if home prices ever go up 10% it will be because inflation has gone up 100%. On our present course the economy is doomed.

    Maybe India will end up sending us aid in a few years.

  5. wtfo says:

    If home prices have bottomed, it will only be because of devaluation of the dollar.

    The amount of new-construction empty housing is still increasing, and new home sales cannot hope to keep up.

    • writejesse says:

      I agree that devaluation of the dollar may lead to an increase in demand from foreign buyers, particularly in high-end markets such as Los Angeles, Orange County, San Francisco, and New York.

  6. ThomasD says:

    As an aggregate the ‘housing market’ may have bottomed. Sort of. but otherwise it is all local, local, local. South Florida remains an absolute crap shoot, with zombie mortgages galore, still declining rents, and untolled numbers of properties waiting out off the listings.

    Other places may look better in the short term, but the Sword of Damocles that hangs over everything is interest rates. When interest rates rise affordability goes out the window. Only then can the market ‘bottom’ be known.

  7. Sailfish says:

    REF: http://tinyurl.com/ylk5go5

    Maybe in selective sectors but I’m not optimistic at all for the overall picture. My gut feeling is that an additional 20% drop is more realistic.

  8. Ben says:

    Ignoring a huge shadow inventory, artificially suppressed mortgage rates, a federal government as a lender of last resort (FHA), a tax credit pulling forward demand, then yes, housing has bottomed.

  9. Tom says:

    Perhaps this is all correct but what about unemployment? Adding unemployment and underemployment, one in five people is afflicted. No one in this sector is going to be buying a home.

    The low end properties are selling, true. But there investors and regular Joes and Janes have been pouncing on the bottom.

    The 8k credit will continue through next election, at least. I think the fear is that the threat of double dip in recession chills the bones even further.

    And what of “shadow inventory?”

    We’ll see.

    http://www.ownercarryit.com for seller financing properties all over the country.

  10. Mark Noonan says:

    They’re now selling 2,200 sq foot homes on a large lot an in-ground pool for as little as 140k out here in Las Vegas. Such houses were going for 500-600k three years ago – we’re no where near the bottom.

  11. John Eden says:

    “Tax credits” What a joke. Just call it what it is. Redistribution.

  12. Anonymous says:

    Check out the entries in Mark Hanson’s blog for detailed info on shadow inventory, recent distortions to Case-Schiller, the weakness of the middle and upper real estate markets and so on.
    Let alone the employment picture. We seem to be in a “job loss” recovery.
    Would be nice if the bottom is in, but it seems unlikely.

  13. Sean says:

    Local local local. Ignore talk of a nationwide recovery. Depends on where you are people. A few points:

    1) Yes, interest rates are low, but they can only go up. Watch the treasury yeilds.

    2) Lending has really tightened up. No matter how you look at it, lenders have very litte motivstion to lend (see below).

    3) Fed is paying 7% interest on reserves. Typical yeild on a mortgage is in the 1.5% range. You do the math. Banks have no motivation to lend. This will catch up to buyers this year.

    4) The orgy of cash expedtiture ‘on the bottom’ of the market (ie the uptick in investment and bidding wars on distressed in Vegas, etc) is a temporary rush. Eventually, the market has to rely on regular old home buying of owner-occupied houses.

    5) Inflation/deflation uncertainties. We don’t know what our currency will do next week. Won’t for a couple of years. Huge effect on the housing market.

  14. writejesse says:

    Wow, not one commenter agrees with me. Since markets often move in the direction that the fewest people expect, the bearish consensus on housing prices among Instapundit readers reinforces my view that prices will probably continue to rise. As to some of the specific arguments raised here:

    1) If and when mortgage rates rise, I agree that this would exert downward pressure on housing prices. Until this happens, however, I remain bullish on housing prices.

    2) “Lending has really tightened up.” That’s true for private lenders, but not for the FHA. If and when the FHA tightens up, I would re-consider my bullish position.

    3) with respect to unemployment, I believe we are probably near the top. Considering the federal government’s massive fiscal and monetary stimuli and the fact that the economy has already begun to grow, unemployment should stabilize or decline by the end of 2010.

  15. […] Home prices have already bottomed A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or […] […]

  16. gaius marius says:

    you know already, i’m sure, that across the american historical record real home price declines strongly tend to bottom some 8-12 quarters following the roughly coincident reversals in new home starts and new home inventory.

    what makes you think this time will break with the pattern — particularly with a quarter or more of american mortgageholding households already in a negative equity position and badly in need of balance sheet repair? the revival in activity and prices is mostly at the lowest end, driven by cash investors and first-timers. seems to me that move-up buying is crippled until these folks can either repay or default and rebuild.

    fwiw, i’m more hesistant on the economy. titanic fiscal stimulus was barely enough to aid an inventory cycle in propping q3 to roughly a zero per capita rate of growth. now that stimulus — which figures not to be renewed, if obama’s noises about fiscal rectitude mean anything — is going to start making negative contributions to GDP through 2010 and 2011 with job openings at record lows. without government spending, where will income come from? do you really think new hiring/wage growth is going to pick up so swiftly as to counteract the fairly rapid runoff of stimulus in 2h2010?

  17. […] I wrote a post last month arguing that housing prices had bottomed, the response I received from our readers was […]

  18. […] I realize that it appears the housing market has finally stabilized and prices have likely bottomed. But when I continue to hear stories like the ones above and read these kinds of statistics, I cannot help but feel that the structural fundamentals of the housing market remains seriously flawed. […]

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