Watch Out for a Housing Head-Fake Later This Year

The recent moratoriums on foreclosures may produce some unexpected volatility and unreliability in home price numbers.

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Photo by:Seven_Null7
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House prices are now clearly headed downward in much of the country, as this mornings Case Shillers numbers showed. Those numbers are backward looking three month averages, so the decline in prices in three cities shows that we started double dipping over the summer.

One question many will be asking is how long the second-leg downward will last? Are we looking at a temporary drift downward or a full-on meltdown that could last years?

I think theres a significant possibility that the price data could produce some better numbers later this year. But far from being an indication that the market for homes is improving, this will be a statistical illusion caused by the foreclosure fiasco. And if this improvement does happen, it will likely foreshadow an even sharper drop rather than a continued rise.

As a result of the foreclosure freezes, many distressed sales were taken out of the market in October. Those sales are typically at lower prices, which means their absence could create a illusory price increase. The housing market could Freeze Upward. A sure sign that this is happening: home prices rise while the number of sales of existing homes declines.

Of course, the head-fake rise may never happen if buyers have been so frightened by the uncertainty caused by the mess that they have stayed out of the market. Alternatively, if mortgage lending slowed significantly during the freeze, this could also dampen the Freeze Upward effect on prices.

The Freeze Upward effect won't last long. Slowing down foreclosure sales will result in a build up of housing inventory, which will scare housing market investors and when that inventory comes onto the marketcreate excess supply that will push down prices.

CNBCs Diana Olick thinks I might be overplaying the possibility of a head-fake. She thinks that the adverse effects of uncertainty and lack of confidence may outweigh any Freeze Upward effect, so any bounce in prices we get would be small.

Plus, everyone knows that at some point these foreclosed properties will hit the market, juicing inventories significantly and pushing prices down again, she says.

In short, it's either going to look good before getting really bad. Or its just going to keep getting worse.


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