June 2, 2011
Guest Post By E.H. Martin: The housing market crash that was responsible for the worst recession in the country ever since the Great Depression of the 1930s seems to be lurking again in 2011. Battling the recession of the 2007-2008, the housing market started showing some kind of semblance in the next couple of years – some discernible signs of improvements were observed in 2009 and 2010. This led even the staunchest of the skeptics to think that recovery has already set in. But, to the utter disbelief of the skeptics, national home prices have actually sagged, starting from the last quarter of 2010.
The Case-Shiller Index, prepared by the leading rating agency, S&P, reveals that home prices in the country have nosedived to their 2002 levels. According to the Case-Shiller report, the decline in the home prices had started in the last quarter of 2010 when it dropped by 3.6%. And, again in the first quarter of 2011, ending in the month of March, it declined by another 4.2%. Experts are referring this phenomenon as ‘double dip’ in the home prices. In comparison to the first quarter of 2010, home prices in the first quarter of 2011 are down by 5.1%. These are not pleasant signs and are adding to the worries, with no immediate signs of abatement in sight.
Digging deep to double dip
This decline in the house prices has been very widely entrenched. Out of the 20 cities covered under the S&P/Case-Shiller Home Price Index, home prices in 19 cities decreased over the prices of the last year. In important cities such as Las Vegas, Detroit, Cleveland and Atlanta, home prices plummeted below the January 2000 levels.
The current fall in the housing prices can be attributed to the excess supply that was generated in the aftermath of the housing market crash in late 2006. According to the statistics provided by Daniel Martin, a renowned economist associated with the Economist Intelligence Unit, currently there are nearly 1.5 million vacant houses, spread all over the country. This is equivalent to housing supply of 9.2 months whereas the normal housing supply is of 5 months. The prevailing economic situation is such that majority of the people in the country do not have the required money or possess the ability to borrow money to own a home. People are now thinking twice before taking out a mortgage loan. In the aftermath of the housing market collapse, lending standards have also been made more stringent, further adding to the downward movement of the home prices. This has significantly reduced the demand for housing in the country. This fragile demand along with the steep supply, have led to the fall in the home prices.
Another factor which aggravated the situation is the increasing number of foreclosures in the housing market. The year 2010 saw foreclosures of nearly 2.9 million properties. According to RealtyTrac, a leading real estate consulting firm, maximum number of foreclosure cases were reported in California, Arizona and Nevada. David Blitzer, the Chairman of the Index Committee at S&P Indices has opined that the downward movement of the home prices will perhaps bottom out in the second half of 2011 and it may take another 5 to 6 years for the housing market to recover completely.
Housing price is an important determinant of the overall health of the economy. This is so because for majority of the people, home is the most important asset. Given the current lull in the housing market, the net worth of the people in the country is indeed in a very bad shape. Tension is also creeping in that housing market crisis may even spill over to other sectors of the economy. And this is not at all unfounded since the earlier recession in the country had its origin in the housing market only.