The Thoughtful Roar of the Housing Bears

DESCRIPTIONUwe Gerig/Deutsche Press Agency, via Corbis

I was a housing bear for a long time. And I’m not exactly bullish now. But I am a bit less bearish than some other real estate watchers. They’re making some thoughtful arguments today about why we should expect home prices to soon fall more.

Tyler Cowen and Felix Salmon both point out that the market itself seems to be gloomy about house prices. Mr. Cowen writes, referring to lenders and bondholders, “the private sector interest in mortgage securities [remains] quite weak, which suggests the market knows which way prices have to move.” Mr. Salmon makes a related point about home buyers:

… houses are not clearing right now. And insofar as they are, they’re only doing so because of trillions of dollars of implicit federal subsidies being pumped into the mortgage market via Fannie, Freddie, the F.H.A. and other state-owned agencies. The government has prevented home prices from dropping to their natural level. Which might be sensible policy, but also means that you can’t take today’s prices as market-clearing.

Meanwhile, Daniel Indiviglio, at The Atlantic Wire, suggests that the weakness of the American economy will weigh on the housing market for years:

The U.S. is likely in a period of recovery, but very, very slow recovery. Few expect the unemployment rate to dip below 7 percent through the end of 2012. If we’re lucky, we’ll be close to full employment a year after that. Then, once the economy finally is back to normal again, the government will almost certainly have to begin chiseling away more aggressively at the debt and deal with various entitlement crises. That will either require higher taxes, less government spending, or both. It would be surprising if it takes less than a decade to make any progress on that front. So we’re talking a best-case scenario of 2023 before after-tax incomes have much of a chance of rising at even a moderate pace.

I think — and sure hope — that real after-tax incomes will start rising sometime before 2023. But the broader points here seem reasonable. House prices are more likely to fall than rise in the immediate future. The price-to-income and price-to-rent numbers suggest to me that the market is still about 5 to 10 percent overvalued, nationwide. Barry Ritholtz, at The Big Picture blog, says 5 to 15 percent. Other real estate specialists — like Tom Lawler and Mark Zandi — think many markets are close to being fairly valued.

The most likely path seems to be a modest decline over the next year and then slow growth — trailing inflation, thus bringing about real price declines — for several years after that. That would then be followed by a resumption in price gains above inflation and closer to income growth.

But all of us are just weighing probabilities. I certainly would not rule out the possibility that real house prices a decade from now could be 10 percent higher or 20 percent lower than they are today.