Thanks to Seeking Alpha, we have a recap of a Barron’s story, “Why a Housing Recovery is Far Off.”
Aside from a stern warning in the Economist in 2005 about the US housing bubble, which declared the market to be 20% overvalued and added that when housing bubbles correct, prices often below “fair” value, in terms of their relationship to incomes and rental prices, only uber bears have projected that housing price drops might reach double digit levels.
The Barron’s forecast is not as dire as that of the Economist, but it’s the first mainstream financial publication to say it expects housing prices to fall more than 10 (and if housing prices don’t fall, it expects inventories to grow considerably):
Bulls see a housing bottom, but the glut caused by homebuilder overbuilding should prolong the downturn. From boom peak Q4 2005 to Q1 2007, new home inventory levels rose to 7.9 months from 4.7 months. Nominal mortgage rates aren’t historically high, but the Office of Federal Housing Enterprise says a 2005 mortgage cost 5.9%, when house prices rose 10.7%. House prices rose only 3% this year, so real mortgage rates are at 3.5%, a big change from -4.8%. Historically, real rates and home sales are tied in, so prices should fall 10-15% according to Barron’s’ calculations. If home prices are static, then sales could fall another 20%-25% — down 40% from 2005. Rising mortgage applications offer only illusory hope: Subprime borrowers apply everywhere for approval, and cancellations are up. Pending existing sales and National Homebuilders Association indexes are weakening, and if the downtrend continues, housing-related industries like construction, furniture and appliances will suffer. Personal spending in Q1 was precipitated by dramatically lower energy prices in Q4 2006. Oil prices are up again and retail reports are bad, even as employment and wages rise. Barron’s expects a longer, wider housing slump.