Home Prices Nearing the Bottom, says Case Schiller

by Kyle Colona on April 13, 2012

The downward spiral of the residential real estate market may finally be coming to an end if the recently released S&P/Case-Shiller report is accurate.

The relentless decline in home prices in the wake of the economic crisis has been widely reported on. And it is well understood that the US economy cannot begin to recover until the housing market turns around. But Reuters reports that the Case-Shiller 20-city home price index through the end of 2012 will remain unchanged.

This means that the decline is close to the bottom, unless another round of foreclosures trips up the anticipated recovery. A number of leading economists were polled by Reuters regarding the index and there is a general consensus that prices will begin to rise in 2013, albeit that rise is likely to be modest.

One of those economists polled, Yelena Shulyatveya at BNP Paribas, reportedly said that the bank expects “a gradual improvement” but that a new wave of foreclosures could still push home prices lower.

But the devil is in the details and the S&P/Case Shiller survey sees the home- price index rising 2.0 percent next year, up from 1.5 percent in the previous survey conducted in January. While these numbers are quite modest and residential construction accounts for about 2.3 percent of gross domestic product, there is a ripple effect.

This is so because home prices have an effect on the broader economy. And that effect influences “a wide range of consumption decisions by households.” But the real estate bubble and the eventual collapse of the housing market has been dramatic. In fact, some reports indicate that house prices fell by almost 32 percent from their peak at the end of 2005.

More importantly, about 11 million Americans owe more on their mortgages than what the homes are worth, which has been a key ingredient in the market’s long decline. Meanwhile, the federal government’s attempts to ameliorate this situation through a variety of mortgage relief and loan modification programs implemented by Fannie Mae, Freddie Mac, and the Federal Housing Administration have fallen short.

And the persistent wave of foreclosures has hampered the housing market’s recovery. Here, the S&P Case-Shiller survey indicated that about 1.5 million foreclosed properties will come on to the market this year. And many analysts believe the foreclosure problem is “close to topping out,” says Reuters.

Moreover, in light of the fact that foreclosures and related price declines are the main impediments to a housing market recovery, the Federal Reserve’s purchases of mortgage-backed securities will not alleviate the problem. Fed officials are slated to meet later this month to determine if other action is needed to drive borrowing costs lower to spur stronger economic growth.

That being said, mortgage rates are already near record lows and house affordability is the best in history, and the real situation is the persistent high unemployment rate. And that means the recovery will be tepid until the US economy returns to growth and starts to create JOBs, and jobs are the bottom line.

Kyle Colona is a New York based freelance writer and a Feature Writer for the Compliance Exchange. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications.

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