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Time for house prices to start falling again

By Justin Fox

The big economic news of the day, and probably the week, was the big drop in existing-home sales in July reported this morning by the National Association of Realtors. This was to a certain extent expected after the expiration of the home-buyer tax credit in the spring, allowing NAR chief economist Lawrence Yun to offer up the delightfully sunny spin we have come to expect from NAR chief economists:

Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. ... However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

But the drop was a lot sharper than expected -- sales were at their lowest level in 15 years -- and the economy is not yet consistently adding jobs. CalculatedRisk has a more believable forecast:

I expect house prices to fall further later this year as measured by the Case-Shiller and CoreLogic repeat sales house price indexes, although I  don't expect huge declines like in 2008. My expectation is further price declines of 5% to 10% on the repeat sales indexes.

Whether or not that turns out to be exactly right, the main point is that we're still a long way from working through the aftereffects of housing bubble. And while the do-anything-possible-to-boost-housing-prices-and-keep-all-the-banks-from-going-under philosophy that has guided policymaking in Congress and at the White House, Treasury and the Fed over the past couple of years made a certain amount of sense in the midst of a financial crisis, it doesn't anymore. House prices need to fall some more (in real terms, at least) to lure in enough buyers to pull the housing market out of its depression. So why not accept that reality, and push policies that help people cope with the effects of it, rather than continuing to prolong the inevitable?

Justin Fox is editorial director of the Harvard Business Review Group and author of "The Myth of the Rational Market."

By Justin Fox  |  August 24, 2010; 1:56 PM ET
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It's not the prices that are the major problem, it's the lack of jobs. Maybe if a few of the corporate titans stopped salting away billions in profits while the carp about the pittance they pay in taxes, if they pay anything at all, and hired a few more people things would turn around a bit more. No, wait, that makes too much sense.

Posted by: EricS2 | August 24, 2010 2:30 PM | Report abuse

How much of this was just people rushing closing dates that normally would have been in early July to get in under the tax credit deadline? I guess the August numbers will tell that story.

Posted by: caseytorgy | August 24, 2010 3:01 PM | Report abuse

I currently have an offer for a "short sale" house. The "bank" (who by the peculiar rules of the sale, remains anonymous) is just sitting on the offer. In the meantime, a neighborhood house with exactly the same dimensions closed for 25% less than my offer.

Apparently, the bank want's to ride the market to the bottom.

Posted by: dcorley | August 24, 2010 4:12 PM | Report abuse

Housing prices have to drop to the point where the typical 2 earner household can afford an average starter home. Until this happens, housing prices and sales will continue to remain stagnant.

Posted by: AkCoyote | August 24, 2010 4:44 PM | Report abuse

The problem is jobs, but outsorcing by companies isn't the sole cause of the lack of hiring. Companies don't want to hire because they don't want to pay the additional costs coming down the pike courtesy of Obama Care and they're unsure if there will be further added costs because of cap and trade or any other stupid anti-business legislation this President and Congress can devise. The policies of the current administration actually encourages companies to out source jobs overseas because they're making American workers even more expensive to employ.

I agree that the proping up of the housing market by the Obama administration (and the Bush administration before them) needs to end immediately. But until policies change at both the White House and on Capitol Hill don't expect businesses to start hiring at the level we need them to in order to reverse this mess we've gotten ourselves in.

Posted by: CJMARTIN04 | August 24, 2010 4:51 PM | Report abuse

Yeah, programs like "HAMP" --which help the banks space foreclosures, not the homeowners.

They won't prop up the homeowners. They will help the banks, one way or another.

What model of the universe are you folks using at HBR? Is it pre-Copernican?

Posted by: tc125231 | August 24, 2010 7:13 PM | Report abuse

The implication is hilarious. It's the idea that somehow, "Wall Street" didn't know until *today* that home sale prices were down. Like none of the brokers have real estate? Seriously, it's not like someone suddenly flipped a switch. How would you NOT have seen this coming?

Posted by: james0tucson | August 24, 2010 7:37 PM | Report abuse

Prices will drop - especially when interest rates rise and they WILL rise. There just aren't enough qualified buyers willing to buy at current prices.

Denial and wishing it weren't so doesn't help the cause and only creates a delay in reaching an equillibrium where homes are priced to sell. So does the massive government interference with the influx of cash to bail out the banks and temporarily keep people in their homes who will eventually be foreclosed upon.

This will all correct itself in the future.

Posted by: GenXer1 | August 25, 2010 11:18 AM | Report abuse

@tc125231 I prefer to think of it as Pollyannish

Posted by: JustinFox | August 25, 2010 4:26 PM | Report abuse

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