Economist A. Gary Shilling is predicting increased attractiveness for renting and a further 20% or greater drop in home prices. He explains the rationale behind his predictions in Part 1 and Part 2 of an article at Bloomberg.
Shilling sees inventory levels as the major culprit in further home price declines:
The federal government encouraged lenders and mortgage servicers to delay foreclosures as modifications were attempted. There was also the voluntary moratorium on foreclosures during the robo-signing flap. This pause continued while the five largest mortgage servicers — Ally Financial Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — worked on the recent settlement with the federal government and state attorneys general that called for $25 billion in mortgage writedowns and other aid to homeowners.
— The Logjam Breaks: With that settlement completed, mortgage servicers and lenders will probably step up foreclosures. When they do, the so-called real estate owned –the properties owned by lenders — will be dumped on the market with all deliberate speed.
The effect on prices will be dramatic. The National Association of Realtors’ survey for December 2011 found that foreclosure sales were at an average price discount of 22 percent, compared with 20 percent in December 2010. Short sales, in which the lender forgives the difference between the sale price and the mortgage principal, closed 13 percent below market value. As of the second quarter of 2011, RealtyTrac found that real-estate-owned sales were at a huge 40 percent discount while short sale discounts averaged 12 percent.
These discounts tend to drag down the prices of other existing houses and force homebuilders to sell properties below cost in order to compete.
The trigger of renewed foreclosures will probably initiate another big drop in house prices, returning them to the long-term trend identified by Robert Shiller of Yale University. This measure of median single-family-house prices is adjusted for general inflation and for the tendency of houses to get bigger over time and therefore more expensive.
With these two corrections, prices in 1990 were about the same as they were a century earlier. Then came the bubble, followed by collapse, but it still will take a 22 percent decline to return prices to the flat long-term trend that prevailed between 1890 and 2000. Because corrections often overshoot on the downside, our forecast of a further 20 percent decline may be conservative. That would bring the total peak-to-trough decline to 46 percent.
How long will homeowners feel the pain? Head over to Bloomberg for Shilling’s answer.