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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