Signs Of Life In US Housing: Economists

Source : The Business Times, January 7, 2009

(SAN FRANCISCO) Karl Case, co-creator of the closely watched Case-Shiller housing price index, said that it is hard to predict when housing prices would finally hit bottom but said that there are a few signs of life.

'People who say, 'Oh, the bottom is coming in February,' are in la-la land,' Prof Case, an economics professor at Wellesley College, said during a panel on housing in the macro economy at the Allied Social Sciences Association's annual meeting here.

However, some of the biggest potential overshooting in home prices on the way down is in states such as Arizona and Florida, areas where major overbuilding took place during the boom. 'Where this glut is occurring is fortunately in places where people still want to go,' Prof Case said. He told Reuters that two other elements in the current data provided some hope of a market turnaround. 'People are showing up at the (foreclosure) auction sales and buying. The price declines are starting to gather in buyers,' he said. 'And a fair number of people are prepared to lower the price on their house until it's sold.'

That capitulation effect, breaking through the phenomenon of 'downward stickiness' on housing prices, started to show up more markedly last year, Prof Case and collaborator Robert Shiller, a Yale economics professor, said in a paper presented at the conference.

The association groups academic and professional organisations linked to the study of economics or finance.

Economists continue to search for ways to stem the tide of foreclosures that continues to subsume the US economy, or to prevent similar problems in the future.

Richard Curtin, an economist at the University of Michigan, was less hopeful of a fast rebound.

'We don't see any hint of a turnaround in housing markets in the next nine months to a year,' said Prof Curtin, director of the University's closely-followed consumer sentiment survey.

A trio of factors continue to dog housing, according to Prof Curtin: Americans' suspicion that home prices will continue to fall; higher credit standards now being applied to mortgage applications; and uncertainty about future income as layoffs run rampant and the jobless rate continues to rise.

Prof Curtin said that research by the University of Michigan supported the link between easy credit and this decade's housing boom.

At the peak of the housing market in 1977, a majority of home buyers, or 52 per cent, said that their main motivation was the idea that house prices would rise. By 2005, 75 per cent said that easy credit was the key motivation.

'The boom couldn't have occurred without granting mortgages to anyone,' Prof Curtin said. 'The 1970s was a pure price bubble; the 2000s was a pure credit bubble.'

Federal Reserve Board economists Wayne Passmore and Diana Hancock discussed their plan to create an 'option' at the time of a home purchase, allowing home buyers to buy back their mortgage at market value if prices dropped. The proposal was initially aired at a UCLA-Berkeley housing symposium in late October. -- Reuters