Are There Really Two Housing Markets?

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As we head toward the end of the year, for some reason the drumbeat to claim that housing has bottomed is growing louder.

There were a few positive indicators in September, rising housing starts and rising home sales, that gave some analysts fodder for optimism, but the readings on prices are far less rosy, and alas far more complicated.

Two reports out today show home prices are falling again after seeing some gains in the Spring and Summer. Lender Processing Servicessays they're down 3.7 percent annually in September, erasing the gains of the Spring, and they say all of the 13,500 zip codes it tracks are in the negative.

Meanwhile CoreLogic says prices fell 3.9 percent in October, but when you take out foreclosures and short sales (the latter when the home is sold for less than the value of the mortgage), home prices are down just 0.5 percent annually. The vaunted S&P/Case-Shiller home price index was down 3.9 percent in September, and that's a three month running average including distressed and non-distressed property sales.

So why are analysts now predicting a house price recovery?

Goldman Sachs put out a report late last week predicting that S&P/Case-Shiller would drop 2.5 percent further and then bottom, probably in the summer of 2012. This when the S&P/Case-Shiller folks themselves predict a 3.5 percent drop and a bottom later in 2012. The Goldman theory is based on some kind of "equilibrium" price model for each market. They also claim that homes no longer appear "expensive." when you look at price/rent ratios, and that historical models suggest that income and population, as always, will drive improved demand.

Then this week analysts at Barclays Capital honed in on the difference in price drops between distressed and non-distressed properties. They claim the non-distressed market is stabilizing, so that must mean that a foreclosure or short sale is, "increasingly being seen as a poor substitute for a non-distressed home," according to analyst Stephen Kim. He claims the disparity will in fact widen over time.

So are we just supposed to ignore the distressed market? What about the fact that in some cities more than half of the properties selling are distressed? And what about the fact that there are more distressed properties coming to market, as the banks ramp up the long-stalled foreclosure process? And how about appraisers using distressed properties as comps to non-distressed properties?

I realize many of you think I'm too bearish on housing's recovery, but trust me, nobody's more sick of reporting the same lousy numbers than I am. The problem is that while sales are improving slightly, and consumer sentiment may be settling a bit, the mess left to clean up from the past is still weighing heavily on the future. The economy may be improving slightly, buyers may be considering getting back in, but we are barely half way through the overhang of distress, and any change in the economy could set us back even further.

I am in no way claiming that housing is in for a quadruple dip nor that we are going to see more big losses. Frankly I think we're going to be flat in housing for a long time, which is not a very interesting story to tell from a reporter's perspective. While there may be two types of properties (distressed and non-distressed), there is just one housing market, and you cannot negate one to inflate or deflate the other.

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