Home prices could be flat for 4 more years

Stan Humphries is the chief economist for Zillow.com, responsible for producing economic analyses and for helping to create the websites algorithms for its home-value Zestimates and the Zillow Home Value Index. We asked him to share some of his insights with us …

Us: Zillow reported that U.S. home values have dropped by $10 trillion since the market peak in 2006. Are prices still falling? When will they start going back up again?

Stan: Unfortunately, home values across the country are still falling. Several markets saw home values rise last year when the homebuyer tax credit was in effect. In California, where there were both state and federal homebuyer tax credits, home values in many regions rose substantially last year, leading many to believe the market was at a bottom. In Orange County specifically, the median home value, as measured by the Zillow Home Value Index, began to rise in March 2009, increasing by 5.8% by May 2010, before it began to fall again.

The good news in Orange County is that, while the median home value in April 2011 is the lowest we’ve seen in the current recession, home values are not falling as quickly as they were late last year. Instead of monthly depreciation rates of more than 1%, we’re seeing depreciation rates under a half of a percent. That’s going in the right direction.

Us: How long until the housing market gets back on its feet?

Stan: Nationally, we predict a bottom in home values in 2012, at the earliest. That will be followed by two to three years of stagnant home prices, after which we’ll see more historically normal housing appreciation of 2% to 4% per year.

Us: SP/Case-Shiller analysts say the housing market is in a “double-dip” recession. Are we?

Stan: We never predicted a double dip, nationally. According to our index, which does not include bank-owned homes, the median home value for the nation has been falling since June 2006.

The Case-Shiller index, because it measures the change in sale prices for the same homes over time and includes bank-owned homes, has been more volatile. We’ve done extensive research showing a bank-owned home sells for about 30% less than it would if it were not distressed.

To illustrate this effect, imagine a single home in the Case-Shiller index. In 2006, the home sold for $300,000 in a traditional, non-distressed sale. In 2008, that homeowner lost the home to foreclosure, and it was subsequently sold by the bank for $175,000. The Case-Shiller index would look at that as a decline of more than 40%, when in reality, only part of that decline can be attributed to what has happened in the market, while the other part is due to the fact that the home is distressed.

Let’s imagine further that the same home is sold again in 2010 for $205,000 in a traditional, non-distressed sale. That higher price relative to the prior distressed sale is made up of two components: A 30% increase in price due to the home no longer being distressed and a 10% price decrease because of falling market conditions. Case-Shiller is going to view this last sale as a data signal that prices have increased 17% between 2008 and 2010. We don’t believe that this is an accurate interpretation of the market data.

Us: What’s the outlook for Orange County and Southern California?

Stan: We don’t have market-level forecasts, but we do expect Orange County and Southern California to reach a true bottom in home values before the rest of the country. Foreclosures have moved through the pipeline quickly in California, allowing the state’s housing market to regain some of the momentum that will bring about a bottom in home values.

Us: While Orange County’s home price is down about 33% from the peak, our inland neighbors in Riverside and San Bernardino counties have gotten hit even harder, with prices still down 56% to 60% from the peak. Add the impact of higher gas prices, and you gotta ask: When, if ever, will the Inland Empire recover?

Stan: That’s hard to say. Gas prices factor into this, as do the likes and dislikes of homebuyers today. There is some evidence that when gas prices rise, people tend to move to areas where they have shorter commutes. There is also some signs that suggest that homebuyers today prefer to live in more walkable environments. Those are two trends that could have long-term effects on home values in the Inland Empire.

Us: Tax credits cost American tax payers $15 billion to $20 billion, you say. Did they help the housing market any?

Stan: No. They artificially buoyed the market while they were in effect, making it seem like home values were rising. That, however, has proven to purely be a response to the tax credits. We saw home values fall as soon as the tax credits expired, and values are still falling today.
In fact, it seems quite clear in the home sales data that the additional home sales produced during the tax credit were given back by the period of below-normal sales after the expiration of the tax credits. We essentially spent an enormous amount of tax-payer money to steal demand from the back half of 2010 and put it into the fall of 2009 and spring of 2010.

Us: How is the housing market doing absent tax incentives and stimulus money?

Stan: It’s still struggling. Home values are declining in nearly every market we track. However, we’re seeing a slowing in the rate at which they are declining. This is good news. It means we are getting closer to a bottom, and that we’re doing it in an environment free of the tax credits. For long-term stability, this is what we need.

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