Debunking A Housing Myth

Posted In: Federal Reserve, Home Prices, Homeowners, Housing, Investment Banks, Realtors

One myth consistently heard during the recently-deceased housing boom was that “home prices always go up.” Utter nonsense. Earlier today, the National Association of Realtors reported that the median price of an existing single-family home fell 1.8% for all of 2007, the first time in the 40-year history of the survey. MarketWatch added, “Although no hard data are available, most economists believe home prices hadn’t fallen since the Great Depression of the 1930s.” Bloomberg reported that the median sales price fell 6% to $208,400 from December 2006. Nigel Gault, director of U.S. research at Massachusetts-based forecasting firm Insight Inc., told Bloomberg that:

We are not at the bottom in the housing market. The Fed is trying to battle against the fundamentals which say housing is not going to recover until we have a substantial decline in prices.

Economist Ellen Zentner of the Bank of Tokyo-Mitsubishi UFJ Ltd. in New York warned even before today’s report that it was unlikely fence-sitters would re-enter the housing market anytime soon. Zentner told Bloomberg:

Would-be homeowners are not going to jump into the market to buy new homes no matter how much prices have dropped until they get a solid feeling that prices have bottomed.

“Not just yet…”
Photo by Adrian Boca

And according to a Merrill Lynch report Wednesday, the worst housing crisis in
decades is only going to get worse. CNN Money said that Merrill Lynch is forecasting a 15% decline in U.S. home prices in 2008, an additional 10% drop in 2009, and the possibility of even more depreciation in 2010. In their report, the investment bank argued that housing prices still remain comparatively high, especially when compared to other measures such as rent or GDP. Merrill analysts said: