The Case For A Price Bottom In Housing (Not Mine)


It seems that most economists, as well as the soon-to-be-former CEOs of Fannie and Freddie believe that the bottom in home prices is still a ways away.

But a well-known name, namely Prof. Karl Case of the oft-quoted, more oft-watched S&P/Case-Shiller Index of home prices, begs to differ.

Prof. Case, whom I’ve met, and who has more numbers streaming through his head than anyone I’ve ever come across, claims that his usually dire-seaming index points to the bottom in prices. The index measures prices in the top ten and top twenty U.S. markets as well as a new national index. He notes that of the 20 top markets, nine have been steadily improving over the last few months. He also claims that affordability, that is the relationship between income and home price, is approaching a level that we’ve seen before at the end of other housing recessions.

Since home prices directly correlate to mortgage defaults and foreclosures and therefore directly affect the balance sheets of many financial institutions, then it’s good news to hear that we’re near the bottom, but I’m afraid I have to differ with Prof. Case, much as I usually defer to his expertise.

I don’t think today’s housing correction is all about affordability. That’s one part of it for sure, but it’s just one piece of the puzzle. Two reports out today show the foreclosure crisis is not exactly abating, despite an increase in the number of loans being saved by lenders willing to renegotiate terms. The Office of Thrift Supervision and the Office of the Comptroller of the Currency, in a report on the first two quarters of this year, show that while loss mitigation is improving, credit quality is doing just the opposite.

(Video: New housing data shows another month of increased foreclosure filings)

We’ve never, since this data was tracked, seen this high a level of foreclosures, and foreclosures put huge pressure on home prices. We already know that a full 40% of sales in California and nearly a third nationwide are foreclosure sales. Foreclosed properties often go for pennies on the dollar. We also have historically high inventories of unsold homes due to an unprecedented building boom.

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I do think the market is improving in that foreclosures, while rising, are not rising as fast as earlier this year, and prices, while still falling, are not falling as fast either. Certain local markets are seeing month-to-month improvements, so we are, I believe, nearing a bottom. I just don’t think we’re there yet.

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Questions? Comments?