In January of this year, Westwood published two reports predicting a return to across-the-board declines in the 20-City S&P Case/Shiller index (see Home Prices’ Final Ride Down). It took nearly a year to demonstrate that the premature disruption – to the resetting of home prices to historically sustainable price-to-rent ratios and other indicia of value – in the form of tax credits, a “slow-walked” foreclosure pipeline, and the meeting of pent up demand accumulated during the recession, would be unsustainable.
The market has still not completed the price discovery necessary to determine the final value of housing – after all, easy money policy is still producing affordability that has masked the failure of prices to completely readjust to normalized levels. But we reiterate our call of January 2010, that the 20-City Index is likely to settle between 8% and 10% below the April 2009 lows – to a 20-City Index value in the high 120’s. The value for October was 145.32.
The Index for October set values back to mid-2003 levels. Note that the steepness of the bubble prices rises was such that our call above would only set prices back to mid-2002 levels.
The most striking thing about today’s report is that we are seeing a repeat of the price decline patterns that appeared during the 2006-2009 downturn (albeit in an accelerated fashion): the declines starting in the “sand state” markets and gradually (already) spreading to the balance of the 20 markets. This time around, however, lenders do not have the benefit of a homeowner equity buffer to shield them from the full brunt of declines in collateral value. Based in this latest data, mortgage holders will be well advised to reconsider the levels of loss provisioning and their plans for effective remediation.
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