Monday, December 14, 2009

EXISTING HOME PRICES NATIONWIDE GRADUALLY BEGINNING TO STABILIZE

With residential real estate sales on the rebound nationwide, experts say a slight uptick in home prices finally is beginning to show on the radar, indicating the worst housing recession in decades may finally be coming to an end.

Freddie Mac reported that its Conventional Mortgage Home Price Index posted a 0.9 of 1 percent quarterly gain during the third quarter of 2009 for the U.S. This increase follows an upward revised 2 percent pickup in the second quarter, marking the second consecutive quarter of price increase nationwide.

“The home-price gains of the past two quarters reflect improving existing home sales over that period,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Sales volume was up 15 percent between the first and third quarters of this year.”

Freddie Mac reported that the increases of the past two quarters erased about two-fifths of the declines registered during the final quarter of 2008 and the first quarter of 2009.

According to the Illinois Association of Realtors (IAR), the median existing home-sale price in the Chicago area was $190,000 in October 2009, down 15.6 percent from $225,000 in October of 2008. Home and condominium sales in the Chicago-area were positive for the fourth consecutive month, rising 33.3 percent to 7,286 homes sold in October of 2009, compared with 5,467 homes sold in October of 2008, reported the IAR.

“The lowest average fixed-rate mortgage rates in a half century, lower house prices, incentives to encourage first-time buyers, and loan modification efforts to stem foreclosures have worked together to support sales and reduce the inventory of unsold homes,” said Nothaft.

“Prices are still down relative to their peaks in most markets,” Nothaft said. “For example, values in the East North Central (which includes Illinois, Indiana, Michigan, Ohio and Wisconsin) are at 2004 levels.”

Despite the positive news from Freddie Mac on home price stability, economic experts believe is likely that home prices will continue rising and occasionally falling in the future depending on economic trends.

And, Yale economist Robert J. Shiller believes home prices currently are still too high on a historical basis as a result of the unprecedented 83-percent increase in home values that occurred between 1997 and 2006.

In the second edition of his book, “Irrational Exuberance,” published in 2006, Shiller’s “History of Home Values” index tracks the roller-coaster ride of sale prices of existing American housing as an investment from 1890 to 2006, factoring out the effects of inflation.

Schiller sets the benchmark price for a standard American house in 1890 at $100,000. The price is inflation-adjusted to today’s dollars. An equivalent standard house in the U.S. would have sold for $66,000 in 1920, when prices dropped as mass production techniques appeared.

Following another price dip during Great Depression, housing values spiked to an inflation-adjusted $110,000 (in today’s dollars) during the post-World War II housing boom.

After a relatively stable period of housing values in the 1950s and 1960s, Schiller’s index shows the price of the standard house spiked again to more than $120,000 (in today’s dollars) during a boom in the mid-1970s, and shot up to that level again in the mid-1980s after a deep recession. Home prices returned to levels consistent with the late 1950s following both of these housing-value spikes, according to Schiller.

However, home prices skyrocketed again in the early years of this decade, and by 2006 values peaked at the lofty equivalent of $199,000 (in today’s dollars), or 99 percent higher than 1890.

Based on projections of the Schiller price index, American home values could continue to decline for a few more years before stabilizing and hopefully beginning another boom period.