Take a look at the latest read on the housing market, and you'd be convinced the bottom dropped out. Existing home sales plunged 27% in July to the lowest level since since tracking started in 1999, while new home sales fell at the lowest level on record. The quantity of unsold homes rose 2.5% to almost 4 million last month, causing housing inventories to balloon to their highest level in nearly a decade -- at the current rate it would take 12.5 months to clear inventory.
The seemingly grim data follow the expiration of the federal government's homebuyers tax credit, which served to pull home sales forward. And while a decline in housing was expected following the expiration of the government's homebuyers tax credit, two housing experts, Robert Shiller, co-creator of the S&P/Case-Shiller Home Price Index and professor of economics and finance at Yale, and Jed Smith, managing director of quantitative research at The National Association of Realtors, don't view the breadth of the recent decline in housing data as more drastic than anticipated.
"It looks pretty on target for what I would have expected," Shiller said in an interview. "You don't see big swings in existing sales like this historically. But we've never had a program like this where the government was giving so much money to support the market." He thinks there's been an overreaction to the recent numbers for existing and new home sales and that sales will come back.
Smith agrees, noting that he expects sales to decline on a monthly basis for a couple of months, as housing sales were pulled forward to take advantage of the tax credit. Unsurprisingly, luxury homebuilder Toll Brothers (NYSE: TOL ) said in its quarterly report that new orders dropped, as fewer buyers signed contracts.
But Smith prognosticates the market will finish out the year at about a rate of 5.1 million-5.2 million sales. "When you look at this economic news, you've got to realize that the recovery from the greatest recession is anemic," Smith said in an interview. "But we are getting a positive recovery ... [so] we don't really see things diving or decreasing significantly at this moment."
Home sales are 10% to 15% below the number of sales that would occur if we had full economic prosperity, according to Smith. The major issue now is jobs. Until there is significant job growth, Smith says he thinks the housing market will continue to move sideways with modest increases at best. Based on current projections for unemployment levels, Smith is estimating we'll see more normalized sales growth in two to three years.
But what do the sales numbers mean for home prices?
Given new and existing home sales numbers for July, the increase in inventory, and high unemployment, should we expect to see a leg down in home prices in the coming months?
Smith speculated that home prices will continue to slide along current levels rather than decline.For the next year or two, he projects prices that will be relatively constant, with the possibility of increasing 1% or 2%. Looking out toward the future, traditionally housing prices have gone up at about the rate of 1% or 2% above the rate of inflation. Since inflation remains low, Smith expects a return to a normalized market where housing prices increase modestly on a consistent basis, rather than the exuberant run-up seen from the late 1990s to 2006.
In shocking contrast, Shiller said it wouldn't surprise him if home prices slowly decline for years: "This is not what people expect, and it's not what professional forecasters expect, and I'm not saying it's going to happen. I'm saying it wouldn't surprise me."
Shiller bases the possibility on a parallel between what has happened in the U.S. housing market and what happened in Japan. After a sharp increase from the late 1990s through the peak in 2006, home prices in the U.S. have declined for three years until the recent sharp government intervention. In Japan urban land prices (home prices) peaked around 1991, and then fell for 15 consecutive years in major cities of Japan. "That's the way these markets typically, historically have worked, and it reflects changing public attitude," Shiller said. "These are not professional markets that trade on exchanges and turn on a dime. The only reason they turned on a dime this time is because of a massive government intervention."
A monthly survey on home price expectations conducted by Shiller's firm MacroMarkets found only 21% of those surveyed are now predicting positive growth in prices nationwide for 2010. On average, the experts' expected cumulative price appreciation through 2014 fell almost one-third from levels just three months ago. This is the third consecutive month the survey's experts -- ranging from economists to real estate experts, investment and market strategists -- showed weakened overall confidence in the U.S. housing recovery. The survey is based upon the projected path of the S&P/Case-Shiller U.S. National Home Price Index over the coming five years.
Still the consensus, as tabulated by MacroMarkets, for the expected recovery path remains positive and implies a $1.4 trillion gain in U.S. homeowner equity from current levels by the end of 2014, assuming other relevant factors such as mortgage debt levels do not change.
Shiller says he thinks it could be five or even 10 years or more before we see a real turnaround in the housing market. "People forget that these things don't happen overnight, and the government stimulus created a euphoria," Shiller said. "The big question is, 'Will the same old path just set in?'"
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