Historically, housing price gains have been an early benefactor of economic recovery. Currently, however, housing’s impact on consumer spending, unemployment and consumer confidence has been a detractor to recovery.
The latest data from the S&P/Cash-Shiller Home Price Index shows a clear path to a double-dip in housing prices. The 20-city composite index has declined for six consecutive months and is now back near its April 2009 low.
David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, said that the most recent housing data, “brings us weakening home prices with no real hope in sight for the near future. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing.”
The supply of homes for sale and potentially for sale is very large relative to demand, and it continues to be fed by high rates of mortgage defaults and foreclosures. At the same time, demand for homes is constrained by tight lending standards. Declining home prices are likely to intensify these challenges to the housing market.
According to research from Litman/Gregory, in September 2010, more than 10 million homeowners owed more on their mortgages than their homes were worth. That is close to 25% of all homes that have mortgage. More than 40% of those homes with negative equity had assumed market values more than 40% below the existing loan balance.
“Meanwhile, the number of homes already on the market reflects a supply that is about twice the normal level,” the Litman/Gregory paper indicates. “When you factor in shadow inventory of homes in varying stages of foreclosure, but not yet on the market, the supply increase to about four times the normal level. It will be difficult for home prices to mount a strong recovery until these excesses are worked through.”
We could be years away from meaningful recovery in home prices.