|U.S. housing prices have risen every year since the end of the Depression, though prices failed to keep up with inflation in nine of the past 30 years. The latest study predicts the housing market may face a period of depressed prices.|
That's the bearish prediction of the UCLA Anderson Forecast for California and the U.S., and it has troubling implications for the consumer economy: Housing could be mired in a malaise for years to come.
"We're moving to a very low-volume period that's likely to be with us for a long time," said Edward Leamer, director of the UCLA business-school forecast. Speculative fever is over, but housing sales won't rebound until sellers reduce prices and buyers accept that a home could have no short-term appreciation, he said.
Bubble won't burst
The good news: The housing bubble won't burst like the stock-market bubble, where the Dow Jones Wilshire 5000 plunged 50.2% from March 2000 to October 2002. The stock market has since regained most of its losses.
Stocks historically have been more volatile than housing prices. Stock prices fell in nine of the past 30 years. In contrast, U.S. housing prices have risen every year since the end of the Depression, though prices failed to keep up with inflation in nine of the past 30 years.
Researcher Economy.com this month predicted the median price of a U.S. house next year will drop 3.6%. That's little more than one quarter's price jump in 2004-05, but it made for unsettling headlines.
21 metro areas
Economy.com sees double-digit drops looming in 21 metro areas, mostly overheated coastal markets, including 10 areas in California and three in Florida. That generally would erase less than a year of appreciation. Local and statewide drops are fairly common, typically driven by recession or regional shocks, such as defense cuts in California in the early '90s.
Housing prices have a built-in limiter on the downside: Homeowners loathe cutting prices and would rather stay put in hopes of market recovery. That helps explain why downturns take time to play out. Economy.com bets many metro areas won't hit bottom until 2008 or 2009.
The Fed could cut interest rates in '07, but that's unlikely to jumpstart housing as it did in 2001 given how the mood of the market has changed.
Buyers need to be convinced
Buyers need to be convinced "that they're not going to buy into a downtrend," said Delores Conway, who directs a real-estate economics forecast at the University of Southern California.
Consumers have unprecedented access to online information thanks to sites such as Zillow.com and TheHousingBubbleBlog.com. "There is more transparency, especially about prices. It should make the downturn happen faster," said Ben Jones, the blog's creator. But a bull market in housing appears a long way off.