How low can the market go?
For real estate, some economists say, an end to the seemingly endless decline in housing values might be in sight.
Not immediately. At the moment, prices are still dropping. In 20 large cities, prices fell 0.8 percent in March from the previous month, according to the Standard & Poor’s Case-Shiller Home Price Index. That pushed the closely watched index below its level of two years ago to a new post-bubble low, and put it 33.1 percent under its July 2006 peak.
Few analysts expect housing prices to rebound anytime soon. But quite a few are predicting that the market is close to the moment when things will stop getting worse, which will be a major improvement all by itself.
“By far the bulk of the downturn of housing prices is beyond us,” said Paul Dales of Capital Economics. He expects the market to slip 5 percent further, slightly more than he was expecting a few months ago.
“There are some amazingly favorable signs. Housing is the most undervalued it’s been in 35 years,” Mr. Dales said. “At some point, it’s going to do very well.”
Peter Muoio, senior principal of Maximus Advisors, says he thinks the market has already bottomed, although he expects it to bounce around in a narrow range for a few years rather than recovering. And James F. Smith, chief economist for the investment firm Parsec Financial and a rare housing bull, is predicting a 25 percent climb from here by mid-decade.
“There’s a lot of pent-up demand for housing and someday it will be unleashed,” Mr. Smith said, adding: “Your guess is as good as mine when it will come.”
The new Case-Shiller data did not offer much room for short-term optimism. The national housing index, which is reported quarterly, fell 4.2 percent in the first quarter after a drop of 3.6 percent in the fourth quarter of 2010. This, too, is a new recession low.
Twelve of the 20 cities in the index hit a post-bubble low in March. Washington, D.C., was the only city where prices rose both in March and over the last year. In a double-digit drop that echoed the worst era of the crash, Minneapolis fell by 10 percent over the year.
“Home prices continue on their downward spiral with no relief in sight,” David M. Blitzer, the S.& P. Index Committee chairman, said in a statement.
Housing prices are now back to where they were in mid-2002 even before taking inflation into account. Such a decline was unimaginable to the boosters and many of the analysts in the middle of the boom, who were fond of saying that house prices never fell on a national basis. But as credit dried up and the easy refinances disappeared, the foreclosures began. Prices fell sharply in late 2006, 2007 and 2008.
The market turned around in 2009, prompting hopes that the worst was over. A government tax credit proved wildly popular, but the declines resumed after its expiration a year ago.
Some economists think there are still relatively large drops to come. Dean Baker, co-director of the Center for Economic and Policy Research, expects a 6 to 8 percent fall during the rest of the year. “There are a lot of forces pushing prices downward,” he said.
One of them is the excess number of houses. Builders built too much during the boom, and the mania for second and third homes has sharply diminished. New household formation will soak up the supply, but that will take years.
The financial blog Calculated Risk estimated the excess housing supplythis week using 2010 Census data, which it compared to 1990 and 2000. The blog concluded that the excess in April 2010 was about 1.8 million units, but probably several hundred thousand fewer now.
The wild card in all of this is consumer sentiment, otherwise known as confidence. The United States Conference Board reported Tuesdaythat its consumer confidence index unexpectedly fell to 60.8 in May from a revised 66 in April. Analysts had forecast a one-point rise, but the mood turned hesitant. The May level is the lowest since the fall.
People without confidence in the economy and their own prospects tend to put off major purchases.
“People are still scared,” Douglas C. Yearley Jr., chief executive of the high-end builder Toll Brothers , said in a recent interview. “If they look in the paper and see that Robert Shiller says prices have another 20 percent to go, it has to keep them at home.”
Mr. Shiller, one of the developers of the Case-Shiller index and a housing bear, did not respond to requests for his latest forecast, a development that no doubt made Mr. Yearley’s day.