Home Prices Have Further To Fall

Falling home prices are starting to turn some economists into optimists about the housing market. Their reasoning is simple and compelling. The cost of the average home has come down so much that buyers should move into the market to get bargains. Mortgage rates are dropping. The administration’s new plan to lower housing payments for those who are both needy and worthy should undermine the growth of foreclosures and steady prices.

But, the opposite case which says that housing has much further to drop is more powerful. The  federal government’s new “stress test” of banks, which is meant to determine which need extra federal aid, has as the worst case for its testing assumptions that unemployment will go to 10% and housing prices will drop another 20%. Clearly some sharp group of analysts working for the government knows what home prices will do if the bottom falls out of the economy.

The lead economist from S&P, which issues the S&P/Case-Shiller index that surveys monthly home prices, expects the average value of housing to continue to drop sharply. According to The New York Post, “While housing prices have fallen 32.5 percent over the last two years, they still stand well above levels before the bubble and need to fall up to another 20 percent to create demand and restore balance in the market.”

If the drop in the stock market continues and jobs disappear at the rate of 500,000 a month, it is nearly impossible to make a case that there is a sufficient pool of buyers to prop up home prices.

Douglas A. McIntyre