Why U.S. Home Prices May Continue To Fall
Yesterday, it was the CEO of mortgage buyer Freddie Mac, Richard Syron, who made waves in the U.S. housing industry when he predicted home prices have much further to fall. Robert Schroeder of MarketWatch wrote:
Speaking to analysts on a conference call, CEO Richard Syron estimated that housing prices, from peak to trough, have dropped only a third as far as he thinks they’re going to. The McLean, Va.-based company’s expecting a peak-to-trough decline of 15% in all.
Today, the spotlight of housing gloom-and-doom belongs to the Wall Street Journal’s Scott Patterson, who wrote in his “Ahead of the Tape” segment that:
The economic balance hangs in large part on how much further home prices will fall. A look at one important measure — the relationship between home prices and household income — suggests we might not even be halfway there.
Over the long run, home prices and income should march along the same path. As households earn more, they can afford to pay for more expensive homes.
Source: Wall Street Journal
Patterson explained that if home prices are to re-establish their traditional relationship with household incomes— prices are coming down. He wrote:
Home prices were down 10% through the fourth quarter from their peak in mid-2006, according to the S&P/Case-Shiller national home-price index. But to bring prices in line with incomes, they will need to fall further. If incomes continue to grow in the next year as they have in the past decade — probably an optimistic assumption — it would take a 9% to 12% drop in home prices to bring the two measures in line with each other.
Patterson also warned that the correction would be more severe in states that experienced bigger housing bubbles, and that it was also possible for home prices to “overshoot on the downside, just as they did on the upside.” He added that Goldman Sachs economists are saying prices could fall another 15%, while Merrill Lynch economists are predicting a decline of another 20% to 30%. Patterson noted:
Both banks have been more bearish than others on the economy — and so far look correct to have been so pessimistic.
Sources:
“Freddie Mac sees home prices falling further”
Robert Schroeder
MarketWatch, March 12, 2008
“Mind the Gap: Home-Price Downside”
Scott Patterson
Wall Street Journal, March 13, 2008
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