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Double-Digit Decline For Home Prices?

Tired of all the bad news coming out of the U.S. housing market? Me too. The Associated Press reported this weekend that many private economists are forecasting U.S. home prices, which exploded during the housing boom, will fall by around 10% before housing bottoms out late next year. Median existing home prices increased 54% during the boom which ended in late 2005.

According to David Wyss, chief economist at Standard & Poor’s, home prices have declined close to 4% from their peak set in early 2006, when measured with the Standard & Poor’s/Case-Schiller home price indices. Wyss predicts that before we see a turnaround in housing, prices will fall by 11%. Wyss is not alone when it comes to having a negative forecast. Even the National Association of Realtors is predicting the median home price will fall by 1.5% in 2007. Mark Zandi, chief economist at Moody’s Economy.com, predicts that median existing home prices will fall 10.4% (using the NAR gauge) before things get better. The Associated Press notes that these latest forecasts, if realized, would be “the biggest downturn in terms of prices since the Great Depression of the 1930s, when home prices dropped by about one-third.”

Economists stress that the projected fall in U.S. home prices must be seen within the context of a 54% price increase during a 5-year housing boom. According to Zandi:

We had a surge in investor demand, an explosion in the availability of credit and builders who became overly optimistic. All these things came together to whip the market into a frenzy, creating a huge bubble that is now bursting.

Throughout the 20th century, U.S. home prices consistently rose only about 1% a year (when adjusted for inflation) in response to rising incomes and growing population.