Supply and Demand: Are Buyers Still in Control?

by Steve Harney on January 5, 2010

 

Supply & Demand CurveComing into 2010, there are many people trying to decipher all the data that is being reported regarding the housing industry. The main goal is to try and bring clarity to a market that has been clouded with confusion for the last two years.

We must prevent ourselves from looking for a simple solution that will justify what we want to happen. We must not allow the truth to overshadow the facts. What do I mean by that? Let me give you an example.

The Truth: the housing market is improving.

The Facts: Home prices  are still falling and will continue to fall.

Again, we can not believe so much in the truth that we ignore the facts. Like most, I wish the housing industry was roaring back to the prices of 2005 -2006. I own enough real estate to REALLY wish that was happening. But it’s not.

Prices must still be adjusted in order for buyers to be able to afford the home. Proof of that is that the government is still subsidizing home purchases by artificially keeping interest rates low and offering tax credits to both first-time and move-up buyers. The good news is that those programs are creating a market for people looking to sell their home now. The bad news is that they will not last forever.

The question that begs to be answered is what happens when  interest rates rise (the government program that has kept them low ends on March 30) and the tax credit expires (April 30)? It is my belief that, when these inducements fade, so will demand.

Yet, people want to be swayed by the headlines about how pricing is stabilizing. Many of those headlines come after one of the housing industry’s pricing reports, The Standard and Poor’s Case Shiller Index, that comes out each month. This pricing index (one of several indexes) has shown stabilization in pricing on a month-over-month basis for the last several months.

However, before we get carried away with what appears to be proof that things are back to normal, let’s take a closer look. Below, is a graph from Tom Iacono showing the Case Shiller numbers on a year-over-year basis (the December index reported on sales through October. That is why you see October as the heading):

Case Shiller - Dec

As we can see, in EVERY city that the index reports on, prices have fallen! Well, you may ask, isn’t it a good sign that the prices have been leveling off at least over the last few months? I will leave that to people who are much closer to S&P Case Shiller to answer:

On the Wall Street Journal Blog on 12/29/09,  this is what Standard & Poor’s said:

“Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip.”

–David M. Blitzer, chairman of the Index Committee at Standard & Poor’s.

And, on 12/29/09 in a New York Times article, this is what one of the designers of the report said:

“I’m worried. Everyone’s worried,” said Karl E. Case, the Wellesley College economist who helped design the Case Shiller index that provided fresh cause for alarm on Tuesday. “If prices sink 15 percent from here, which is a possibility, and the 2008 and 2009 loans go bad, then we’re back where we were before — in a nightmare.”

Mr. Case, who chided himself for his optimism over the summer, said he now believed “the probability is very high of a serious double dip.”

So, what will happen with prices in 2010? With demand expected to weaken as the incentives disappear and with a new supply of distressed properties (an estimated 1.7 million foreclosures and short sales) coming to the market, I believe it is quite easy to forecast that there will still be extreme downward pressure on housing prices. What percentage?  I’ll leave you with some recent guesstimates from industry experts:

Wall Street Journal Blog 12/29/09 titled Economists React: ‘Prices Have Further to Fall

One in four mortgages are currently underwater. Foreclosure and delinquency rates, which hit a record high at the end of the third quarter of 2009, are therefore likely to continue to rise, perhaps sharply. In addition to this, the inventory of homes for sale remains near record highs. … Despite the recent positive reports on housing prices, we believe that prices have further to fall—about another 5%-10%. — Patrick Newport, IHS Global Insight

CNN Money.com article 1/1/10

But most forecasts predict price declines in 2010, with possible losses ranging from anywhere from 3% on up. Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%.

Housing Wire article 12/11/09

Today, Deutsche Bank researchers say these predictions will likely become a reality, with the total peak-to-trough decline of US home prices hitting nearly 40%. In the current outlook, they say home prices will drop a further 10 to 12% from current levels.

Pricing has always been about supply and demand. The current housing market is no different.

If you are considering selling your house, put it on the market now to take advantage of the increased demand before the aforementioned goverment incentives that created it disappear.  And please don’t wait for the distressed properties to come to market.