According to an article in the WSJ, ‘Foreclosure Effect on Home Prices May Be Small’, three economists from the National Bureau of Economic Research (it may be my ignorance, but who are these guys and where have they been?) are saying prices will only go down about 6% from 2007 to 2009:

“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.

The authors’ model incorporated MBA foreclosure and Ofheo home price data from 1981 to 2007, and used home foreclosure forecasts for 2008 and 2009 from Economy.com. The model included data on employment, building permits and existing home sales. In their paper, the authors said the study was first to estimate the effect of foreclosures on home prices for all the U.S.

Even under an “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices only decline about 5.5% between the the second quarter of 2007 to the end of 2009, the authors estimated.

Home prices, they wrote, “are quite sticky,” and “fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”

“We conclude that a reasonable estimate of the future path of U.S. housing market prices is that they will remain essentially flat, on average, for the next two years notwithstanding the large predicted increase in foreclosures,” they wrote.

What warms my negative little heart are the comments on this article.Posters had a good time poking holes in the ‘sticky price’ argument.The comments are a bit pungent, but I am glad that so many people get it.Pricing has been anything but sticky.As the next wave of Alt A loans adjusts, we are likely to see another sharp drop.

U.S. gross domestic product increased at a brisk 3.3% annual pace in the April-June quarter, according to the Commerce Department. That was the best showing since the third quarter of 2007, beating the government's earlier estimates of a 1.9% growth rate and topping economists' forecasts of 2.7%.

And more good news:

Exports grew at a 13.2% rate in the quarter, more than double the first-quarter rate. Consumer spending rose 1.7%, the biggest increase in nearly a year, as government rebate checks of as much as $600 per person sent shoppers scurrying to malls and big-box retailers.

Here’s the reality check:

However, some economists questioned whether those factors could sustain economic growth through the second half of the year and into 2009.

And this is cause for concern:

The GDP report also showed that businesses cut investments in equipment and software by 3.2%, more than in the first quarter, and investment by home builders fell 15%, although this was an improvement over the first-quarter drop of 25%.

After-tax corporate profits, meanwhile, fell 3.8% in the second quarter after increasing 1.1% in the first three months of the year.

MSNBC’s article is less realistic, though the subtitle does back off from actually calling a bottom.
And the basis for calling the bottom? Home prices are still dropping, just not by as much:

"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”

(psst. If I were one of the rating agencies that screwed the pooch rating worthless mortgage backed securities as triple A, I would hesitate going out on yet another limb. Then again, they don’t have much credibility to lose. And ‘seeing hints of bottoms’ sounds more like a peeping tom than an economic analyst.)

The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.

Ending the practice of loaning money to completely unqualified people is not what’s slowing the recovery in the housing market. Whatever impediment is in place keeping home prices wildly out of whack compared to everything else, is what will slow the recovery in the housing market. And that includes bailouts.

The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.

As far as I have seen, the majority of banks have done anything but ‘aggressively price their backlogs of repos’. In fact, relatively few repos are priced to today’s market and even fewer banks can actually move quickly enough to close the deal. However, the ones that do have been rewarded with fast sales.

Let’s hope that trend changes.

As Patrick wends his way through Europe, I thought it would be fun to take a look over the next couple of days at a few of the markets he is either visiting or flying over...What is striking is how the bubble economy took hold in so many parts of the world, and with such similar (…even predictable? Nah!) results.This article in the Irish Times provides a succinct overview of how it all happened, and a surprisingly (to me at least) tough stance, Government must let Property Bubble burst:

Ireland's economy has grown in two broad stages in the last 20 years. The first one was a coupling of the country to the very powerful forces of globalisation (eg US multinationals), while the second saw the flourishing of the domestic economy with the tailwind of low interest rates.

Where the first phase saw Ireland grow in confidence, the second, arguably, saw it become complacent, uncompetitive and dazzled by its own unexpected success. This is standard behaviour in economies in the full throes of an economic bubble.

And:

The biggest mistake policymakers and politicians could make at this stage is to try to prop up the asset bubble in the property market.

However, the apparent bewilderment of some politicians in the face of the downturn, and the desire of many of our oligarchs (as expressed in these pages) to see their industries supported by the State, suggests that the short-term crisis and not the long-term future dominates attention spans.