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How Much More Will House Prices Fall?

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By : Petros Sivitanides    99 or more times read
In 2008, US house prices decreased nationwide at an average annual rate of 8.2% according to the Housing Price Index (HPI), which is published by the Federal Housing Finance Agency (FHFA) and tracks changes in single-family housing prices. This is the largest annual decline registered since 1991, when the index was first published. This index is known as the OFHEO index as it was initially published by the Office of Federal Housing Enterprise Oversight (OFHEO), one of FHFA's predecessor agencies.

As the economic environment continues to deteriorate, house prices in the US are expected to continue heading downwards. Within this context, a key question for property investors is how much more house prices will fall before they bottom out. This is a key question in evaluating a residential investment in today's environment and assessing whether it will provide the minimum rate of return, required by an investor over a given holding period. This question becomes even more critical for investors with short- to medium-term horizon.

According to the Wall Street Journal's (WSJ) latest survey of many economists and housing market experts, single-family house prices, as measured by the national HPI, are predicted to continue declining in 2009 by an additional 6.4%, following the 8.2% drop in 2008. In 2010, single-family house prices are predicted to register a minimal drop averaging 0.4%.

In terms of the economic forecast underlying this housing market forecast, the experts surveyed by the WSJ predict that GDP growth will turn positive at the minimal annualized rate of 0.4% in the third quarter of this year, after decreasing by 5.0% and 1.8% in the first and second quarters, respectively. The job market though, which has a direct impact on the demand for housing, is not expected to bottom out until after the middle of 2010. Although the survey does not address the question of what may happen to house prices in 2011, it is likely that there will be no further declines, if indeed by that time the economy and the job market are in a recovery mode.

The national forecast of house price declines provides useful clues about the direction, magnitude and the timing of housing price movements in the next 24 months, but it would be a mistake to apply the timing and magnitude of these changes to any particular local market. The reason is that there is a wide variation in house price changes across local markets. These wide variations are due to differences in the structure and dynamics of the local economies and real estate markets, as well as the different real estate market conditions that were prevailing in each locality when the crisis reached them. To get an idea of the significant variability in housing price changes across local markets consider that annual changes in the all-transactions HPI (which includes and appraisals) in 2008 ranged from -49.5% in Merced, CA, to +10.4% in Midland, TX.

In sum, according to the experts, single-family house prices at the national level are not expected to fall more than 7% on average in the next two years. However, single-family house price declines are likely to be considerably higher in many local markets. Thus, investors contemplating investing in single-family housing need to evaluate very carefully the prospects of further price declines in the specific localities they are targeting.
Dr. Petros Sivitanides, the author of Real Estate Investing for Double-Digit Returns, has a Ph.D. from M.I.T. and over 17 years of experience in real estate investment consulting, research and forecasting.

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