Tuesday, December 30, 2008

Home Prices Continue to Slide

The latest Case/Shiller data is still pointing towards more decline in the housing market. According to the index, home prices have retreated back to early 2004 levels.

The peak in the market was in early 2006, so far the market has dropped about 23% from those highs. Based on the supply of reserves held at the Fed (see post from last week) and the level of residential mortgage rates, neither lenders or borrowers believe the bottom is in sight.

Household creation seems to be at a secular norm, so I can't see how the market can correct itself in less than 3-4 years. The Center for Economic Policy Research published a paper a few summers back that stated that home price declines were the major cause of default, not interest rate increases. The recent data prove that to be the case.

My humble guess: another 20% decline from current levels is needed to clear the market. This would point to a bottom during the 3rd quarter of 2009 and represent a 40% drop from the 2006 peak.

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