Home Prices: Short-Term Versus Long-Term

When it comes to prognostications on home prices, it’s important to distinguish between the short-term and the long-term, especially given current circumstances. In a nutshell, short-term trends will be governed by supply/demand factors, while the long-term will be influenced by (potential changes in) buyers’ general attitudes towards housing.

According to the Case-Shiller Home Price Index (check out this great interactive NYTimes graphic to see how individual cities have fared, compared to the national trend), the market has been in recovery mode for the majority of 2010. If only all of the housing data points were so strong. New home sales and existing home sales continue to decline, and are currently near record lows. Housing inventory is now at 12 months, or twice as high as 2009. The proportion of mortgages that are delinquent has ticked up, and foreclosures are expected to follow: “July showed an astounding 24.5 percent month-over-month increase in foreclosure starts…It also reports that seriously delinquent (6 mos.+) cures [loans that are made current again] have declined by 25 percent…So with fewer cures and more newly delinquent loans…hence more foreclosures again.”

Besides, it’s likely that home prices are stable only because of repeated government intervention: “It’s unclear whether the stimulus simply caused buyers to speed up their purchases or actually made homeowners out of those who wouldn’t have bought otherwise, but it is certain that home prices in the second quarter wouldn’t have been this high without it.” In addition, with calls intensifying for the government to simply leave the housing market alone [the subject of my next post], it’s unlikely that this stabilization will continue for much longer. The consensus among economists and housing market forecasters is that a real recovery can’t take place until the broader economy recovers. [Of course, there is a chicken-and-egg issue at stake here, since an economic recovery might also depend on a housing market recovery....but that's another topic altogether]. In addition, with jobless claims high and the unemployment rate any higher, existing homeowners will continue to have trouble paying their mortgages, and homebuyers will remain scant.

Over the long-term, economists are just as grim: “Few expect the unemployment rate to dip below 7 percent through the end of 2012…Once the economy finally is back to normal again, the government will almost certainly have to…deal with various entitlement crises. That will either require higher taxes, less government spending, or both….So we’re talking a best-case scenario of 2023 before after-tax incomes have much of a chance of rising at even a moderate pace.” Whether this is even relevant, however, depends on one’s conceptualization of housing: is it a luxury good or a staple good?

If you think it’s a luxury good, then you support the notion that it will remain constant (in relative terms), as a share of income. For example,over the last 30 years, spending on housing remained constant, at 15% of income. As incomes rose, then, so did housing prices. According to this line of thinking, flat income growth over the next decade should be accompanied by limited appreciation in home prices. On the other hand, if you believe that housing is really a staple good, it should grow at the rate of inflation over the long-term. Unfortunately, “If this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation.” This would imply that “housing was in a multidecade bubble and has now entered a multidecade slump.”

Regardless of which camp you fall in, the data suggests that home prices will either remain flat or decline in both the near-term and the medium-term. The long-term, however, is naturally more nebulous. There is cause for cautious optimism, but also reason for unmitigated pessimism.