Home Prices Still Falling

Several weeks ago I wrote a post about the inevitable continued decline in home prices in a post dated 18 January, 2011.  This morning the Wall Street Journal is reporting the results of its latest quarterly survey of regional home prices that confirms what I wrote recently.

Specifically, in all 28 metropolitan areas that the survey tracks prices declined as compared with prices one year ago.  Not only that, but also the price declines accelerated in 25 of the 28 markets.  This is not good.  Could it get worse?

In order for real estate conditions to improve nationwide two things have to happen:

1. the massive inventory of unsold properties has to decline, and…
2. buyers have to be willing and able to buy

Supply side of things

As I wrote earlier this month, there is just way too much supply in real estate markets right now.  In fact, the Wall Street Journal survey bears this out.  In many of the 28 markets tracked inventory is above 12 months.

That means that if no new real estate came on the market right now that it would take a full year to work through all of that property.  Yikes!

Clearly there is downward price pressure here.

Demand side of things

Now on the other side are buyers.  Many prospective buyers are still worried about the jobs market and the last thing on their minds is buying some illiquid property and undertaking the cost of a move.  Ouch!

Because of the continued decline in home prices brought about by desperate sellers, it is a “buyer’s market.”  In other words, if you are a prospective buyer of a home it behooves you to wait until prices fall further.  Buyers can therefore be assured of not having overpaid for a property.  So buyers are not willing to buy now.

Unfortunately, even willing buyers are still finding it difficult to piece together financing in order to buy real estate.  Having had such ridiculous and practically non-existent underwriting practices over the past decade, most lenders are now overcompensating and taking too little in the way of risks.  Lenders are doing this so that on average their portfolio of loans adheres to a stated riskiness goal.

The pressures described above will continue for some time to come.  Because of the importance of real estate to the overall economy, the above scenario will also continue to provide downward pressure on gross domestic product (GDP).  Sorry ’bout that.

Jason