Tag Archives: Economy

Builders Wonder If The Double Dip In Prices Will Include New Homes

Much depends on the economy’s recovery and buyers looking beyond unsold existing homes and foreclosures.

The fear that home prices will continue to fall over the next several months appears to have gripped economists who insist that a “double dip” in home values is either inevitable or already in motion, despite recent signs of recovery in the general economy.

However, there is also evidence that prices for new homes—which generally aren’t included in the widely watched housing indices—are stabilizing. Some large production builders have had success raising their prices (see chart below), although it’s hard to gauge whether that trend is sustainable on a broader scale when so few new homes are currently being sold—only 290,000 units on an annualized basis through November, according to Census Bureau estimates.

Some economists have been predicting for months that the housing market wasn’t finished adjusting to the stark realities of weak buyer demand, a surfeit of unsold existing homes and an ongoing deluge of foreclosures. “We should expect house prices to continue to fall, with nationwide prices dropping another 15 to 20 percent to complete the process of deflating the bubble,” wrote Dean Baker, co-director of the Center for Economic and Policy Research, in the New York Times last August.

The latest release of the Standard & Poor’s/Case-Shiller Housing Index, in which all 20 markets tracked showed month-to-month and year-to-year price declines in October, confirmed for some economists a trend they have been dreading. That includes S&P’s David Blitzer, who uttered the words “double dip” in his comments on the index’s findings. “It’s pretty clear the housing market has already double dipped,”Columbia University economist Nouriel Roubini told CNBC after the Case-Shiller data came out. “And the rate of decline is stronger than in previous months.” Roubini was one of the first economists to foresee an implosion of the housing bubble.

Patrick Newport of IHS Global Insight observed that existing home prices in several metro markets had actually triple dipped during the recession. And a provocative and depressing blog on the website The Automatic Earth on Sunday quotes a number of economists—including one of the more bearish, Peter Schiff—to make its predictive argument that home values will need to drop another 20 percent because capital for mortgage lending will be scarce and mortgage defaults will continue to rise, putting more distressed homes back on the market at discounted prices.

In an interview with BUILDER on Tuesday, David Crowe, NAHB’s chief economist, conceded that all this talk about home prices double dipping “certainly concerns us. Opinion drives impressions, and if you get enough economists saying the same thing, people will believe them. And you have to reflect on the dismal performance of the [housing] indexes of late.”

Crowe remains convinced, though, that the declines in the indexes—“and Case-Shiller in particular”—are the result of the tail end of the expiration of the home buyer tax credit. “We’re finally seeing a full three months worth of results and the consequent softness in house prices.”

In addition, Crowe points out that there’s no index tracking new-home prices on a consistent basis, so it’s difficult to draw conclusions about those prices from what’s going on with existing home sales. (The Census Bureau’s latest data show the median price of a new home sold through November, $213,000, was off by 2.7% from the same period a year ago.)

Crowe says NAHB’s membership is currently in a “spotty period” when it comes to pricing their products. “Builders who have figured out the segment of their markets that is robust are doing okay—not great, but okay because no one is doing great right now.” Indeed, if one looks at pricing trends among the industry’s public production builders, a definite leveling-off pattern emerges for most.

Builder Average selling price, 2010

(% chg. from 2009)

D.R. Horton              $206,100 (-3.4%)

Pulte                        $257,261 (-0.22%)*

Lennar                     $244.000 (-0.41%)*

NVR $295,700 (-1.6%)*

KB Home $208,100 (-0.26%)*

Hovnanian                $280,715 (-1.1%)

Ryland Homes $241,500 (+0.11%)*

Beazer Homes           $221,700 (-3.9%)

Meritage Homes $253,500 (+5.3%)*

Standard Pacific         $344,000 (+14%)*

MDC Holdings            $280,800 (-0.35%)*

Toll Brothers              $565,769 (-4.4%)

M/I Homes $226,000 (+11.9%)*

*through nine months of its fiscal year

Source: SEC filings

Some companies have enjoyed decent year-to-year price gains at least through last fall, including Standard Pacific Homes, which attributed its price increases to “the delivery of more higher-priced homes within Southern California and the reduction of deliveries in Florida.”

M/I Homes noted that it had benefited from a significant recovery in its business in the Midwest, where through September 30 its sales were up by 38% and its average selling price up by 12%.

Crowe of NAHB believes that most builders remain optimistic about growth in jobs and income levels in 2011. If those kick in, “that will bring out demand.” What builders have to be wondering, though, is how much steeper they might need to bring down prices to encourage long-sidelined buyers to re-enter the market and consider the purchase of a new house.

John Caulfield is senior editor for BUILDER magazine.


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Question #1 for 2011: House Prices

Question #1 for 2011: House Prices.

by CalculatedRisk on 12/31/2010 04:20:00 PM

Two weeks ago I posted some questions for next year: Ten Economic Questions for 2011. I’m working through the questions and trying to add some predictions, or at least some thoughts for each question before the end of year.

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? Will house prices bottom in 2011?

There is no perfect gauge of “normal” house prices. Changes in house prices depend on local supply and demand. Heck, there is no perfect measure of house prices!

That said, probably the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides.

Real House Prices

The following graph shows the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).

Real House PricesClick on graph for larger image in graph gallery.

In real terms, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.

As I’ve noted before, I don’t expect real prices to fall to ’98 levels. In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.

If real prices fall to 100 on this index (seems possible) that implies about a 10% decline in real prices. However what everyone wants to know is the change in nominal prices (not inflation adjusted). If real prices eventually fall 10%, that doesn’t mean nominal prices will fall that far. House prices tend to be sticky downwards, except in areas with a large number of foreclosures. That is key a reason why prices have been falling for years, instead of adjusting immediately.


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratiosHouse Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph through October 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

I’d expect this ratio to decline another 10% to 20%. That could happen with falling house prices or rents increasing (recent reports suggest rents are now increasing).

Price to Household Income

House Prices to Median Household IncomeThe third graph shows the Case Shiller National price index (quarterly) and the median household income (from the Census Bureau, 2010 estimated).

Once again this ratio is still a little high, and I’d expect this ratio might decline another 10%. That could be a combination of falling house prices and an increase in the median household income.

This isn’t like in 2005 when prices were way out of the normal range by these measures, but it does appear prices are still a little too high.

House Prices and Supply

House Prices and Months-of-SupplyThe final graph (repeat) shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).

House prices are through October using the composite 20 index. Months-of-supply is through November.

We need to continue to watch inventory and months-of-supply closely for hints about house prices. Right now house prices are falling at about a 10% annual rate.

Note: there have been periods with high months-of-supply and rising house prices (see: Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” ) so this is just a guide.

My guess:
I think national house prices – as measured by these repeat sales indexes – will decline another 5% to 10% from the October levels. I think it is likely that nominal house prices will bottom in 2011, but that real house prices (and the price-to-income ratio) will decline for another two to three years.

Previous Questions (#2 and #3 still to come):
• Question #4 for 2011: U.S. Economic Growth
• Question #5 for 2011: Employment
• Question #6 for 2011: Unemployment Rate
• Question #7 for 2011: State and Local Governments
• Question #8 for 2011: Europe and the Euro
• Question #9 for 2011: Inflation
• Question #10 for 2011: Monetary Policy

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