Biggest Drop in Housing Prices in 19 Months

On the eve of publication of data on housing prices, DT Trading economists are predicting the biggest drop in a year ending in June, which assumes stagnation in the housing market and a continuing slow recovery in the US. According to the average estimate from 31 economists polled by Bloomberg, the S&P/Case-Shiller Home Prices Index in 20 cities dropped 4.6% since June 2010, which was the biggest drop in 12 months, since November 2009. Another report may show that consumer confidence fell in August to the lowest level in 10 months. It will probably only be possible to speak about a recovery in housing prices a few years from now, when the stream of cheap housing being offered as a result of unpaid mortgages finally dries up. The unemployment level is contributing more to the depressed situation on the housing market; it is hovering around 9%, while strict crediting regulations are painfully hitting borrowers’ pockets. DT Trading analysts explain that decreased equity in combination with the drop in stock prices this month will be detrimental to household welfare, increasing the risk that household expenses will continue to be restrained. “There are too many factors which will continue to pull housing prices down,” said Patrick Newport, an economist with HIS Global Insight in Lexington, Massachusetts. “We still have a lot of foreclosures on the horizon, a lot of overabundant supply, while demand for homes continues to weaken.” The three-month S&P/Case-Shiller Index will be published at 9:00AM in New York; estimates on the decrease are fluctuating between 4 – 5.5% after a 4.5% drop for the year ending in May.

Shares of property developers are significantly undervalued compared with other stocks on the broad market since the end of May, showing that investors are seeing more detrimental consequences for the industry in the current economic slump. The S&P Composite Index, which includes the stock of 12 developers, fell 26% yesterday alone compared with a 10% drop of the broad market S&P 500 Index.

During his speech at Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke said that “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” have held back the housing market. Bernanke added that the economy will likely improve in the second half of 2011 and said that the Fed may assist in the recovery if necessary. The housing issue is stabilizing, “if for no other reason than that ongoing population growth and household formation will ultimately demand it,” Bernanke reassured his audience.