I wrote a post already this week about home price declines that can be read here.
Today it’s CoreLogic’s turn to report on the precipitous declines in home prices nationally. All the major indices are showing significant declines, and the question is pretty simple: How long and how far will values decline?
First off, it’s worth noting that while the declines are widespread, some regions and neighborhoods are in far better shape than others. And there’s a natural floor under prices: prevailing rents will guide investors into the market when prices fall far enough. That’s true for areas where there is a significant amount of rental demand and where the population is not declining.
But prices are falling pretty much everywhere, and many of the fundamentals are still weak, especially the elevated levels of inventory.
So how much more will prices fall? Take a look at this graph from Calculated Risk with inflation adjusted home prices according to Case-Shiller and CoreLogic:
There are several ways of looking at this graph. We’re down to the levels of 1999/2000, when the indices synced to 100, which would indicate that values have hit an important benchmark.
But throughout most of the 1990s, the inflation-adjusted home values were closer to 90 — and they were even lower in previous decades. If those late-20th century trends are the best benchmark, then CoreLogic could easily slide another 10% from current levels and Case-Shiller national index another 10% too (a grim scenario that Shiller himself wondered about recently included potentially a 20% decline).
Frankly, those are the kinds of declines — 10% or more from current levels — that I foresee at this point for national averages, with the understanding that some areas will do better and some will do worse. The headwinds seem too great for prices to level off: slow GDP growth, likely continued cuts in government spending, tight credit, large numbers of REOs, etc., etc. A number of key analysts that I read and trust foresee prices bottoming later this year with a decline of another 5% or so. I suspect the declines will be greater and the timetable will be longer.
If inflation increases, that will also help support nominal prices and make this graph look a little better. As more households enter the rental market, that might boost rental demand and prices, which will help support sale prices too.
Still, I don’t expect a bottom until 2012, followed by several years of flatlining on a graph of inflation-adjusted prices.