Tuesday, September 30, 2014

The Housing Market's Lost Decade - Looking Ahead

While the American housing market has shown improvement since the collapse that began in 2006, it is still not back to its pre-Great Recession levels as shown on this graph:


In fact, according to Clear Capital, as shown on the red line, U.S. nominal housing prices are just back to 2005 levels, completely ignoring inflation.  This means that many homeowners today have no more equity in their homes than they did when they bought a decade ago.  Even two and a half years of real estate market recovery has not brought an end to the lost decade for many markets and the nation as a whole.

How unusual is this?  Over the past 30 years, on a rolling ten year period, housing prices have increased 55 percent on a nationwide basis.  That said, individual real estate markets have performed far differently with some markets showing no losses over the past decade and some markets showing that prices have not increased for more than 15 years, particularly those in the Midwest.

Let's look at the data on a national and regional basis from August 2013 to August 2014 and on a quarter-over-quarter basis:


The high distressed saturation in both the South and Midwest is of great concern and will continue to put downward pressure on price increases going forward.

Let's look at the 10 poorest performing markets over the last quarter:


Notice how in each case, on a year-over-year basis, the metropolitan area is under performing the national average price increase of 8 percent.  In fact, in the Hartford area, over the year between August 2013 and August 2014, the market has shown almost no increase in the price of homes.

What does Clear Capital see for the year ahead?  The growth rate of 8 percent over the last year is more than twice the average historical annual house price increase of 3.5 percent but it is not likely to continue.  Weakness in price appreciation is already taking place with August 2014 house price growth falling 0.4 percentage points from 8.4 percent in July 2014 which itself was down from 9.0 percent the month before.  This downward trend has Clear Capital projecting that through 2015, house prices will increase by only 1.8 percent, suggesting that the "lost decade" will continue for more than ten years.

Here is a chart showing Clear Capital's six month house price appreciation forecast by region:
  

Over the next six months, Clear Capital projects that the worst performing markets will be:


As if Detroit's real estate market hasn't been hit hard enough over the past decade!

With real wages doing this over the past six years...

 ...it is highly unlikely that America's strained housing market will show significant price appreciation over the coming years since so much of our economic health depends on the perception of household wealth.