Why the housing report presages lower prices

By Felix Salmon
August 24, 2010
Stephen Gandel finds an interesting theory for why home sales plunged so much last month, even as prices remained steady:

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Stephen Gandel finds an interesting theory for why home sales plunged so much last month, even as prices remained steady:

What’s going on here? I called Celia Chen who covers housing at Moody’s Economy.com and she had this interesting take: It might not be the housing credit that is wreacking havoc on the housing market. Another government program might be doing the trick: HAMP. For the past year or so, the government’s program to help people refinance their mortgages into affordable loans has been slowing the pace of foreclosures. But the key word is slowing. Most of the those foreclosures are likely to happen anyway, because statistics from HAMP show that most people who get trial modifications end up dropping out of the program or not getting approved for the actual loan modifications. So for the past few months the number of distressed sales, or sales of homes by banks that are just trying to unload properties as fast as possible, has dropped or remained stable. That has hurt sales, but helped prices. And the result is what we saw today.

It’s a cute theory, but I don’t buy it. There are more than enough seriously delinquent homeowners who aren’t in HAMP for the banks to be foreclosing on — and selling — as many homes as they like. The rate of bank repossessions is limited not by HAMP, but rather by banks’ appetite for repossessions and the capacity of their foreclosure pipeline.

On the other hand, Gandel is absolutely right that the drop in home sales presages a coming fall in house prices. With mortgage rates at record lows already, and unemployment remaining high for the foreseeable future, it’s hard to see what could possibly drive home prices higher. This market isn’t clearing at present levels, even with vast amounts of artificial support from the government in the form of Frannie guarantees. That support can’t last forever, and neither can current mortgage rates. So if and when we see an uptick in home sales, it’s pretty reasonable to assume they’ll be at lower prices.


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You could be right, but I don’t think it’s as obvious as you seem to think it is. The market could fail to clear because:
a. Sellers aren’t coming to grips with the new reality and will eventually have to lower their prices to the “real” value.

b. Buyers don’t realize that prices aren’t going to continue falling forever and will eventually have to start bidding what the sellers are asking for.

My point is that a not-clearing market reflects on both the buyer and the seller, and unless you believe that one side of the buyer/seller relation (in aggregate) has much more discretion in transacting than the other, it’s not clear what will happen to prices when transaction volume picks up.

Posted by Beer_numbers | Report as abusive

Is there any merit in looking at the number of foreclosures that are occupied. Spec housing units that are empty are not the same as overpriced but occupied houses? An occupied house implies some sort of demand by endusers.

Posted by canuckA | Report as abusive

main reason as far as i understand is that the housing price numbers lag by a few months plus they are in and of them selves moving averages. so if the prices go down this month we won’t see that in the case schiller until at least october for instance.

Posted by q_is_too_short | Report as abusive