Last October, when everyone was jubilant about the housing "recovery," Gary Shilling of A. Gary Shilling & Co., predicted that house prices would fall another 20%.
In the five months since, house prices have resumed their decline.
In his most recent research note, Gary sticks by his "20%" decline prediction. We've included a summary and updated charts from his argument below.
(Gary is offering a special discount on his research service for Business Insider readers. To learn more, please visit Gary's web site or call 1-888-346-7444. Please mention Business Insider.)
Housing: Great Expectations vs. Reality
Last spring, many believed that not only was the housing collapse over but that a robust rebound was underway. Investors were crowding into foreclosed house sales and bidding up prices in California, often the bellwether state for new trends.
The tax credit of up to $8,000 for new homebuyers that expired in April spurred buyers and promised to kick-start housing activity nationwide. TheHomeAffordable Modification Program was trumpeted by the Administration to help 3 million to 4 million homeowners with underwater mortgages by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.
But then a funny—or not so funny—thing happened on the way to housing recovery...
Yes, with mortgage rates so low, houses look "cheap."
With low mortgage rates and collapsed house prices, the National Association of Realtors’ Housing Affordability Index has leaped to all-time highs.
But when you don't have a job, old measures of "affordability" no longer apply...
It’s also become clear that the NAR’s Housing Affordability Index in the earlier post-World War II years is not relevant to today’s conditions. Back then, unemployment rates were usually much lower than now (Chart 7, page 4) and the current threats of layoffs, wage and benefit cuts and being forced into part-time jobs were almost nonexistent. Who ventures into homeownership if he doesn’t know the size of his next paycheck or even if he’ll have one?
Also, with almost a quarter of all homeowners with mortgages under water with their mortgage principals exceeding the value of their houses, many can’t sell their existing abodes even if they wanted to buy other houses.
Unemployment is declining, but job growth has hardly been robust
Mortgages delinquent 30 days, many of which will probably end in foreclosure, have risen lately. They peaked in the first quarter of 2009 at 3.77%, then fell to 3.31% at the end of 2009, but have since risen to 3.51%, according to Tom Lawler.
He goes on to observe that 30-day delinquencies are linked to initial claims for unemployment insurance, which fell last year but subsequently leveled off and are now rising (Chart 15). Also, the delinquencies are rising as weak borrowers with modified loans again miss payments. Fitch Rating believes that 65% to 75% of mortgages modified under HAMP will redefault within 12 months.
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See Also:
- The World's 15 Biggest Economies And The Risks They Face
- The 10 Economic Risks Stoking Fear Around The World Right Now
- Here's Proof That February's Disastrous New Home Sales Number Was Just A Weather Issue
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