As housing prices slow their massive drop from the highs we saw in 2006, economists and market analysts alike want to have their voices heard when they call for a bottom in the housing market.
It just isn’t time yet.
The Case-Shiller Home Price Index, a measure of home prices in the U.S., recently reported that prices fell 3.7 percent compared to the year before. David Blitzer, Chairman of the Index Committee at S&P Indices, said, “Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall. Nineteen of 20 cities saw average home prices decline in November over October.”
It’s regrettable, but the pain in the housing market has only eased, not fully dissipated.
For housing to have bottomed, we would need to see a significant pickup in the economy, with consumers going out and soaking up the excess inventory still in the market.
But with GDP in 2011 growing at the slowest rate in any non-recessionary year since 1947, according to Credit Suisse, it’s hard to make the argument that the U.S. economy has fully recovered. The economy, as a whole, has too many wounds that need healing before the housing market can stand on its own feet.
We still have 10.7 million homeowners who are underwater with their mortgages; 13 million Americans are still unemployed, and the amount consumers are able to save as a percentage of their personal income is still dropping.
People just do not have the ability to buy houses like they did before the financial crisis. Was it not for continued lifelines from the federal government (through the FHA, Freddie Mac and Fannie Mae), the housing situation would have already deteriorated even further. Fortunately, the swollen supply of homes has been going down, hitting a level in December that had not been seen since March 2005. We are likely to continue to see bright spots like this going forward, but they are not indicative that the housing market has hit bottom.
You may ask, “Aren’t houses selling at a bargain price by now?” They most definitely are. Prices are at historic levels that many haven’t seen in their lifetimes. The unfortunate fact is, when it comes to financial markets, history has shown asset prices hardly ever simply come down to “fair value” and then stop.
Just as home prices skyrocketed past what was believed to be fair value in the 2000s, they will likely drop past fair value on their way down, as well. I look forward to the day when the pain associated with home values disappears; we just aren’t to that day quite yet.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.
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'Big Joe' Clark: Housing market yet to bottom out
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