Economy: On The Home Front

My overall impression of incoming home price data is that truly dramatic home price declines have become very rare. In many markets, the price of existing homes has already stabilized.

Although Georgia never developed a home price bubble, the combination of too much supply and plunging demand caused the price of existing single-family homes in the state to drop by 26 percent from peak levels, erasing many homeowners’ equity. Home prices have been reset to where they were in the third quarter of 2000. On an inflation-adjusted basis, existing home prices in Georgia are 31 percent lower than they were in 2000.

Nationally, the drop in existing home prices was 19 percent compared to Georgia’s 26 percent. Prices here have declined slightly more than those for the nation as a whole because we did not miss the supply bubble.

The S&P Case-Shiller index for the Atlanta MSA can be broken out into three home price tiers: low, middle and upper. Prices for all market segments rose by about the same percent during the boom, but performance varied significantly during the bust.

As of May, low-tier home prices were performing much worse overall, with peak-to-May-2011 price declines of 57 percent compared to 32 percent for middle-tier homes and 21 percent for upper-tier homes. The decline in  low-tier home prices accelerated dramatically in the wake of the expiration of the federal homebuyers’ tax credit program. As of mid-2011, the price index for Atlanta’s low-tier homes was still searching for a bottom, but prices for middle- and high-tier homes appear to be relatively stable. I expect home prices for all tiers, in most markets, to bottom by the end of the first quarter of 2012.

An important difference between Georgia’s housing recession and the recessions that played out in many other states is that Georgia had a huge supply bubble, but there were no investor-driven home price bubbles to burst. For example, investors’ share of mortgage originations peaked at only 8.5 percent in the At-lanta metropolitan area in 2005, nearly equal to their 8.2 percent share in 2000. Households buying homes for use as their primary residences were setting house prices rather than investors, speculators or people buying second homes.

Georgia’s large homebuilding industry, a seemingly inexhaustible supply of land suitable for new residential development, plus relatively few restrictions imposed by local governments on new home construction helped to ensure that home prices never really got too far out of line with household income levels or replacement costs. Home price bubbles did not develop in Georgia.

A major factor driving down home prices in Georgia is the elevated number of foreclosures and other short sales, which are priced by banks to sell very rapidly. Consequently, existing home prices have not been as sticky as they typically are during severe recessions. In Georgia, prices declined the most in the outlying suburbs and in neighborhoods where mortgage foreclosures  were ubiquitous.

Initially, many foreclosures were attributed to lax lending standards or innovative mortgage products. But in 2010 through 2011, foreclosures often were the result of job losses or other forms of economic stress rather than poor decisions made at the time the home was purchased. In the weak housing market, medical catastrophes, divorces and other factors were much more likely to result in a foreclosure or a short sale than if housing market conditions were more benign. Dire market conditions simply made it difficult for households to unload their homes.

Although the Great Recession ended in mid-2009, home price stability has proved elusive. That’s because a huge inventory of unsold homes has kept downward pressure on home prices. Shadow inventory – homes that would normally be on the market but are not because of poor market conditions – has also been a huge problem, especially in foreclosure-ridden neighborhoods.

Many such properties are owned by banks or other creditors. As soon as the housing market shows signs that home prices are firming, shadow inventory comes onto the market, further postponing recovery. Nonetheless, I expect that many creditors capitulated in 2010 and 2011, and this should pave the way for price stability in 2012.