Why It's Too Early To Call A Bottom In Home Prices

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Photo: Iduke, Wikimedia Commons

There’s been a lot of chatter about a recovery in home prices after the closely watched S&P Case-Shiller home price index posted gains in February and March.But a new report from Beata Caranci, deputy chief economist at TD Bank Group, says it isn’t time to celebrate just yet. Housing is after all “inherently local and price momentum varies greatly from market to market”.

On the demand side home prices are impacted by the pace of job growth and foreign demand. On the supply side they are impacted in large part by the flow of foreclosures onto the market.

To better understand how these supply side forces impact home prices, Caranci looks at the experience in Florida and Atlanta.

A foreclosure backlog

Florida which continues to be “ground zero” for delinquent and foreclosed homes and has 14.3 per cent of its mortgages in foreclosure has seen home prices appreciate 4.7 per cent in the past year. This is because home prices aren’t driven by “absolute amount of foreclosures backlogged in a court system or review process,” according to Caranci. “Rather, it is the rate at which they trickle onto the market and, thus, their share of total sales.”

The share of sales of foreclosed homes in Florida has fallen nearly 15 percentage points in the past year, and this has helped support home prices. But because the long foreclosure process is creating a backlog of foreclosures, it raises the risk that a rush of property prices would lower prices again.

The Atlanta housing market is the perfect example of what could go wrong when the foreclosure process is lengthy. After weathering the initial downtrend in home prices relatively well, home prices in the Atlanta area are down 18 per cent year-on-year, according to Caranci. “This is the greatest decline of any metro area that Case-Shiller reports.”

In judicial states, lengthy court proceedings have restricted the flow of foreclosure inventory onto the market. This means distressed sales could easily rise in states like New York and New Jersey building downward pressure on prices.

What Arizona’s doing right

Arizona, another state which had been a hotbed of foreclosure activity, has been getting the right mix of foreclosure supply and price impacts, according to Caranci. 

Arizona allows for in-court and out-of-court foreclosures (but is classified as a non-judicial state), and it has steadily been clearing its shadow market. The Grand Canyon state has seen a 10 percentage point drop in foreclosed sales in the past year coinciding with a steady decline in the backlog of foreclosure properties. 

In the first quarter of 2012, its share of foreclosure mortgages was 3.6 per cent of its total market, down from over 6 per cent at the peak.

It’s only a matter of time

While the flow of distressed properties is important for home prices in the short-term, Caranci warns that in the longer-term the total amount of distressed properties can pressure home prices:

“It is the flow of distressed properties into the market that matters most for prices in the near term rather than the outstanding stock in backlog. But, the latter materially raises the risk that up- ward momentum in prices will eventually stall or reverse course.”

The bottom-line, “supply issues remain a wild card in the housing outlook”.

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