Shiller: Up to 25% further drop in housing prices possible

From CNN Money:

In an off-hand remark before cameras and microphones, economist and housing market guru Robert Shiller opined earlier this year that he would not be shocked if there was another 10% to 25% in the nation's home price plunge — and he's not backing down from that statement.

At a S&P Housing Summit in New York, Shiller on Thursday reiterated his fears of falling home prices. It's not a forecast, he said, just a comment on his understanding of housing market trends.

He explained that speculative markets, like stocks or commodities, act like random walks. They go up and down all the time. Housing market direction tends to be more consistent.

"I worry that this is a real and continuing downturn, like in Japan," Shiller said. "It had a boom in the 1980s that peaked in 1991. Prices declined in the major cities for 15 straight years after that."

Graph: The real 30-year mortgage rate

The above graph shows the real (inflation-adjusted) 30-year conventional mortgage interest rate since 1971.

Government confirms weak job market

As a follow up to yesterday's blog post about the interdependency between employment and housing, today's government employment data confirms a weakening job market:

After several months of strong job growth, hiring slowed sharply in May, raising concerns once again about the underlying strength of the economic recovery.

The Labor Department reported on Friday that the United States added 54,000 nonfarm payroll jobs last month, following an increase of 232,000 jobs in April. May’s job gain was about a third of what economists had been forecasting.

The unemployment rate ticked up to 9.1 percent from 9.0 percent in April.

A recovering economy is dependent on a recovering housing market, and vice versa

The economy and the real estate market are caught in a Catch-22 situation:

Home prices won't rebound until jobs come back. But jobs won't come back until the housing mess gets fixed.

That's a problem because both the housing market and the broader economy are having trouble getting back in gear. Hiring is losing steam, and after home values hit a post-boom low, many are projecting further price declines.

"The economy can move forward without housing," said Mark Zandi, chief economist with Moody's Analytics. "But I don't think it can flourish and create enough jobs to bring down unemployment in a significant way without a revival of the housing market." ...

Housing typically helps lead the way in an economic recovery not only through a surge of construction and the hiring that goes with it, but though demand for goods and services that go into forming a new household. ...

Doug Duncan, chief economist of mortgage finance giant Fannie Mae, is focused on the impact of jobs on housing — and vice versa.

"Our mantra all along has been employment, employment, employment," Duncan said. "Until you see employment growth and then income growth and then household formation, you don't get to the bottom of this." ...

On Wednesday, payroll processor ADP reported that hiring by businesses ground to a halt in May, raising concerns about the recovery in employment.

Here's more on the weak job market:

"The ADP Employment report coughed up a hairball in May," Robert Dye, senior economist with the PNC Financial Services Group, said in a research note, referring to a report by payroll processing company ADP released Wednesday.

That report showed private sector employers added only 38,000 workers in May, far lower than the revised 177,000 jobs added in April and much weaker than economists had expected.

That level of job growth is the weakest number since September. ...

The ADP report followed on the heels of an already disappointing jobs number released by outplacement consulting firm Challenger, Gray & Christmas on Wednesday morning.

According to that report, the pace of planned job cuts edged higher in May, as 37,135 jobs went on the chopping block — a 1.8% increase from April's planned job cuts.

But government sector layoff announcements dominating those numbers.

Case-Shiller national index down 5.1% YoY

This housing chart shows the year-over-year percentage change in the 20-city index, which is down 3.6% since March 2010:


The S&P/Case-Shiller national index is down 5.1% year-over-year:

U.S. home prices fell 4.2% in the first quarter, hitting their lowest levels since mid-2002 after falling 3.6% in the fourth quarter, according to the S&P Case-Shiller home-price indexes.

"This month's report is marked by the confirmation of a double-dip in home prices across much of the nation," said David Blitzer, chairman of S&P's index committee. "The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight," he added. ...

Once federal home-buyer tax credits expired last year, the indexes — based on the three-month averages of home prices — started to fall again in August, increasing fears of a double dip in the home-buying market.

While other parts of the economy have started to show improvement, the housing market continues to sputter as U.S. unemployment remains high and a steady supply of foreclosures weigh on home sales and prices.

And The Wall Street Journal gives us this little reminder:

The National Association of Realtors said earlier this month that existing home sales eased 0.8% in April from March, while prices dropped 5%.

Yep, that's right, "eased," which means journalists are parroting the Realtors' spin verbatim.

And this is for you, Partisan:

Only the Washington, D.C., and Seattle markets saw month-to-month growth of 1.1% and 0.1%, respectively.

Finally, here's how the Case-Shiller results compare to other indexes:

What are other price indexes showing?

The CoreLogic index, which is used by the Federal Reserve, shows that prices in March were down 7.5% in March from one year earlier. When excluding distressed sales, prices were down by 1%. A separate repeat-sales index that excludes foreclosure sales from FNC Inc. shows that prices nationally were down 6.3% in March from one year ago.

Zillow’s national home value index, which excludes foreclosures but not short sales, was down 8.2% in March from one year ago and has declined for 57 consecutive months.

Personally, I think this would all be behind us if Congress hadn't artificially propped up the market from 2009-2010.

April pending home sales decline from month earlier and year earlier

April 2011 pending home sales fell 11.6% since March 2011, and 26.5% since April 2010:

The number of people who signed contracts to buy previously occupied homes in the U.S. tumbled last month, the latest sign that the battered sector is struggling to rebound.

The National Association of Realtors’ seasonally adjusted index for pending sales of existing homes decreased 11.6% on a monthly basis to 81.9, the industry group said Friday.

March’s reading was revised down to 92.6 from an original reading of 94.1. ...

The pending sales index was 26.5% below its level in April 2010, which is when a tax subsidy for first-time home buyers expired. ...

A sale is considered pending when the contract has been signed but the transaction hasn’t closed. Pending sales typically close within one or two months of signing.

Lawrence Yun, the NAR’s chief economist, said the drop may reflect an economic soft patch in April driven by higher oil prices, severe weather and a bump in unemployment claims.

FHFA reports declining Q1 2011 home prices

I think I've said this a few times in the recent past, but just to reiterate: Home prices are still falling!

Here’s some more bad news for the housing market: U.S. home prices posted the sharpest quarterly decline in more than two years in the first three months of this year, according to a government index.

On a quarterly basis, home prices adjusted for seasonal factors were down 2.5% in the first quarter from the fourth quarter of 2010 and were down 5.5% from the same quarter a year ago, according to the Federal Housing Finance Agency’s home price index released Wednesday. It was the steepest quarterly decline since the end of 2008. ...

The FHFA’s index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae and Freddie Mac.

New single-family home sales up 7.3% MoM; down 23.1% YoY

New single-family home sales are up 7.3% in April from a month earlier, but down 23.1% from April 2010:

New U.S. single-family home sales rose unexpectedly in April to notch their second straight month of gains and prices increased, according to a government report on Tuesday that offered some hope for the stagnant housing market.

The Commerce Department said sales increased 7.3 percent to a seasonally adjusted 323,000 unit annual rate, the highest level since December, from a slightly upwardly revised 301,000-unit pace in March. ...

However, compared to April last year sales were down 23.1 percent. ...

While the report cast a positive light on the housing market, it did little to change perceptions the economy remained mired in a soft patch.

Data ranging so far ranging from retail sales to industrial production have painted a picture of an economy struggling to regain momentum as the second quarter started, with employment only the bright spot.

What caused (and didn't cause) the housing bubble: A look at the evidence

About a month-and-a-half ago, I gave a presentation on the housing bubble in an economics of money and banking class I was taking. I have been meaning to explore some of the parts of the presentation on this blog, but I haven't gotten around to it. Anyway, I thought I'd share the outline of the presentation with you, although it lacks my commentary. I can summarize my commentary as follows: All of the hypotheses about what caused the bubble have problems, although Ben Bernanke's "global saving glut" idea is the best so far.

You can read the outline of my housing bubble presentation here.

Realtors: Existing home sales "eased" in April

Note that when the Realtors say "eased", they really mean "declined". From their press release:

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, eased 0.8 percent to a seasonally adjusted annual rate of 5.05 million in April from a downwardly revised 5.09 million in March, and are 12.9 percent below a 5.80 million pace in April 2010; sales surged in April and May of 2010 in response to the home buyer tax credit. ...

A parallel NAR practitioner survey shows 11 percent of Realtors® report a contract was cancelled in April from an appraisal coming in below the price negotiated between a buyer and seller, 10 percent had a contract delayed, and 14 percent said a contract was renegotiated to a lower sales price as a result of a low appraisal. ...

The national median existing-home price for all housing types was $163,700 in April, which is 5.0 percent below April 2010. Distressed homes – typically sold at a discount of about 20 percent – accounted for 37 percent of sales in April, down from 40 percent in March; they were 33 percent in April 2010. ...

Total housing inventory at the end of April increased 9.9 percent to 3.87 million existing homes available for sale, which represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March. ...

[NAR President] Phipps added that proposals and regulations are being considered in Washington that could further constrain the housing market. “One of the most damaging proposals would effectively raise downpayment requirements to 20 percent, which would slam the brakes on the housing market,” he said. “What we need to do is simply return to the sound standards that were in place before the introduction of risky mortgage products.”

I strongly believe mandatory 20% down payments would have prevented the housing bubble, and thus the financial crisis and recession, because home buyers would have paid more attention to the price of the house rather than just the interest rate (which quite often was just a teaser rate).

Single-family home sales slipped 0.5 percent to a seasonally adjusted annual rate of 4.42 million in April from 4.44 million in March, and are 12.6 percent below the 5.06 million pace in April 2010. The median existing single-family home price was $163,200 in April, which is 5.4 percent below a year ago.

Existing condominium and co-op sales fell 3.1 percent to a seasonally adjusted annual rate of 630,000 in April from 650,000 in March, and are 15.0 percent below the 741,000-unit level one year ago. The median existing condo price5 was $167,300 in April, down 2.3 percent from April 2010.

Not a lot of good news for those hoping for an end to the real estate decline—and this is from a NAR press release!