A housing report released Tuesday delivered this telling economic news: American home values in metro areas fell by 27 percent from their peak, according to the Standard & Poor's/Case-Shiller index.
As the U.S. economy contracts, any sensible forecast calls for this slide to accelerate. Yet the federal government seems intent on trying to halt the normalization process, even though it would offer more affordable housing to prospective homebuyers.
The reason for this forecast is that buy-vs-rent ratios in such areas remain far higher than historic norms, a sign that localized housing bubbles have yet to deflate. The buy-vs-rent ratio is the equivalent of the price-to-earnings ratio for stocks; the Federal Reserve Bank of San Francisco uses a variant in its own analysis and noted back as far as 2005 that the "ratio is about 40 percent higher than the normal level" for San Francisco and Los Angeles. (You may have seen its cousin, the price-rent ratio.)
But if it's a heck of a lot cheaper to rent, why buy? For the last decade, the reason was price appreciation. When prices are falling, that's no reason at all.
One way the buy-vs-rent ratio can return to normal is for rents to rise. But a recent New York Times article about falling rents in Manhattan, and similar reports in Crain's Chicago Business and the Los Angeles Times suggests that's not terribly likely.
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It's starting to look like the main stream media has caught on. This is the 3rd or 4th article just this week preaching the gospel of "let the prices correct" Unfortunately our government is still hell bent on keeping house prices unaffordable for the majority of Americans. They don't seem to care that a whole generation will retire with nothing if that happens. This will put an even greater burden on the government when they retire. And the current generation of young buyers will have to overpay for their homes.
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Sales may be humming in the lower priced areas of California, but else where in the US sales are still tanking.
Sales of existing homes sank unexpectedly last month to the lowest level in nearly 12 years as potential buyers worried about their jobs and awaited details of President Barack Obama's plans to stabilize the housing market.
But the banking industry's teetering fortunes and mounting job losses could stall any recovery. Falling prices and low mortgage rates don't make much of a difference for people who are out of work -- or fearful of losing their jobs.
"Buyers are sitting back," said real estate agent Sandra Lipmann of Prudential Centennial Realty in Westchester County, N.Y., home to the upscale properties of many Wall Street workers. "They don't have the full story of what's going to happen in this economy."
Sales of existing homes fell 5.3 percent to an annual rate of 4.49 million last month, from 4.74 million in December, the National Association of Realtors said Wednesday. It was the weakest showing since July 1997. And some analysts don't see sales bottoming out until later this year as prices sink further. Economists had expected sales to rise to an annual pace of 4.79 million homes.
Without adjusting for seasonal factors, sales nationwide fell 7.6 percent from a year earlier. The West was the only region to show increased sales.
"With supply overhang still huge and mortgage financing difficult to obtain, home prices are likely to decline considerably further in the quarters ahead," he wrote.
Prices have been falling as thousands of Americans lose their jobs every week. Employers took an especially large ax to their payrolls last month, the Labor Department said Wednesday, and the cuts are likely to get worse over the next few months.
Mass layoffs, or job cuts of 50 or more by a single employer, increased to 2,227 in January, up almost 50 percent from the same month last year. More than 235,000 workers were fired in last month's cuts.