This past week John F. Wasik wrote an article on Bloomberg.com titled, "U.S. Home Prices May Be Lost for a Generation".
While I think a "generation" may be an extreme analogy, a lost decade for real estate values is well within our sights based on the continuing supply and demand imbalance for real estate.
A couple of things are worth pointing out:
The big picture is that the current month's supply of housing represents the relationship between supply and demand; this is the relationship which drives home values. The month's supply of housing has only improved by 2% from last year. In March of 2009 there is a 9.8 month supply, this is down modestly from the 10 month supply in March of 2008. As a result of this supply and demand imbalance, home values fell -12.4% year over year according to the NAR.
The supply side of this component appears to have yet to run its course as Credit Suisse is predicting over 8 million additional foreclosures over the next couple of years due to mortgage resets. And what is worth noting is that foreclosure moratoriums, modifications, and the banks' shadow inventory have made the current supply of real estate, as well as the month's supply of housing, look much better than it actually is.
Additionally, unemployment continues to rise at an alarming rate with over 600,000 Americans losing their job each month for the past six months. This means that the demand for real estate will continue to remain depressed and as a result the excess inventory will continue to sit on the market.
What all of this means is that there is every indication that the housing market that we have experienced over the past year is going to continue to be the housing market that we are going to continue to experience throughout the rest of 2009, 2010, 2011, and possibly 2012. This could very well translate into three more years of 10-15% property value declines.
With the current median home value sitting at $175,200 in March of 2009, and with the potential for three more years of 10% property value declines, it is reasonable to think that in the absence of a real housing stimulus, that property values could fall below the $138,000 median value that we saw in 1999.
And while this projection may seem extreme, it is based simply of the metric of supply and demand. If more homes come to the market in the form of foreclosures than there are buyers that are able to buy those homes, values will continue to deteriorate.
As we are seeing, a national housing rebound has very little to do with housing affordability as housing affordability is the highest on record and yet we are no closer to a bottom than we were 12 months ago. A housing rebound is contingent upon stimulating new demand for real estate, specifically investment demand, something that Washington has been reluctant to recognize. Relying on first time home buyers to drive a housing recovery is going to take a lot longer than most people want to recognize.