The news is bad.
The most recent S&P/Case-Shiller housing-price data show a second month of seasonally adjusted price declines. The overall 20-city index dropped about 3.4 percent from October 2010 to October 2011, after falling less than one percentage point during the previous year. In nominal terms, the 20-city index is at the lowest point since March 2003, and in real terms, we’re below where we were in October 2001.
When it comes to housing prices, it hasn’t just been a lost decade: Many metropolitan areas have had two lost decades. In nine out of the 19 Case-Shiller cities with data going back to 1991, real prices are lower today than they were 20 years ago. In four of those areas — Atlanta, Cleveland, Detroit and Las Vegas — real prices dropped more than 15 percent over that period.
This has wiped out people’s dreams — and also their net worth.
That was then. This is now. What about 2012?
History suggests that 2012 will see neither a big housing rebound nor a second crash. After the last housing collapse, which first bottomed out in April 1991, prices stayed almost perfectly flat for about six years. The Case-Shiller 10-city index was only 2.3 percent higher, in nominal terms, in April 1997 than it had been six years earlier, which meant that real prices had fallen by an additional 13 percent even after the first trough.
What should sellers do? Cut their prices.
Home sellers are often loath to take nominal losses, and that means they can sit on their property for years, keeping prices from dropping further in a market that otherwise offers enough inventory to prevent any major price upswing. Looking ahead, price swings in many markets will be limited by housing supply. In places such as Atlanta, Dallas and Phoenix, there are armies of home builders who would be delighted to supply housing once prices tick upward. Elastic supply always limits price growth — a market truth that should have deterred more home buyers in Las Vegas and Phoenix six years ago.
None of this deals with shadow inventory — homes being kept off the market because lenders refuse to foreclose or refuse to sell empty houses.
Long-0term, there will be demand for living space. “During the great housing boom from 2004 to 2006, builders completed about 1.9 million units annually, but the number of new households increased, on average, only by about 1.33 million each year.” But the supply is way above demand at the phony prices of today.
The mismatch between supply and demand helps explain why the inventory of vacant homes rose by almost 3 million units from 2005 to 2008. New construction was always going to be slow, as the country worked its way through that housing glut, but during the recession, the rate of new housing formation also plummeted. As the number of young adults living with their parents increased, the number of new households fell below 400,000 per year, less than the number of housing units being built. Despite two years of building fewer than 800,000 homes a year, the overall number of vacant homes has barely fallen.
Why hasn’t the number of vacant homes fallen? Because lenders have not evicted owners who have stopped paying their mortgages. The author refuses to mention this obvious fact.
The single best fact of 2011 for the construction industry is that the rate of household formation finally began recovering. The Census reported an increase of more than 1 million households from 2010 to 2011, and if that continues, the U.S. will finally begin working through its excess housing inventory. Enough new households will ultimately create sufficient demand to bring back the construction industry, even if it won’t bring back boom-level prices.
That is why investing in houses that are sold at desperation prices is still a good strategy.