6/13/2011

The Housing Market Hasn't Bottomed Out Yet

Is it any surprise that economist Robert Shiller believes housing prices will continue to decline over the next 5 years? Not to me.

With the still large shadow inventory of foreclosed homes waiting to go on the market, prices can't help but fall. Shiller predicts prices will fall an additional 10 to 25 percent before they stabilize. That's on top of the price decline we've already seen.

U.S. home prices plunged 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to a Case-Shiller report on May 31. The decline signaled a “double dip” as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.

It took six years for prices to double and will take eleven years for prices to fall back to their 2000 level, assuming the economy continues on it's bumpy path along the bottom. And should the housing market recover we can only hope we won't fall into the trap created by Fannie Mae and Freddie Mac, with 'easy money' for mortgages on homes the borrowers cannot possibly afford to pay for.

We've seen the value of our home skyrocket by 25% in a year and then roll back until it is worth 16% less than we paid for it. That's a 41% swing in value over a period of 6 years. Others have seen a worse reversal, buying at the peak of the market in 2006 and now seeing their homes being under water, worth considerably less than the mortgage on it.