Further U.S. Home Price Declines Predicted in Second Half of 2011, Says Clear Capital

Further U.S. Home Price Declines Predicted in Second Half of 2011, Says Clear Capital

Residential News » Residential Real Estate Edition | By Michael Gerrity | July 8, 2011 8:00 AM ET

According to Clear Capital's monthly Home Data Index Market Report (HDI), U.S. home prices have decreased by 3.2 percent in the first six months of 2011 despite news of a second quarter uptick in home prices. This report also forecasts another 2.4 percent price decline in the second half of 2011.

"At the mid-point of the year, it's promising to see the overall market shake off the string of declines observed since late last year, especially in light of significant challenges for the industry," said Dr. Alex Villacorta, director of research and analytics at Clear Capital. "However, we have yet to see the burst in consumer demand to avoid posting a net loss in national prices for the year. This month's HDI Market Report provides the highest levels of current data (through June 2011), and relevant analysis of how local markets perform compared to trend data at the national level."

Report highlights include:

  • The U.S. quarterly home price gain of 0.9% in Q2 after nine months of decline provides encouragement against current economic and foreclosure trends.
  • The Midwest was particularly hard hit in the first half of 2011, with prices in Detroit for example falling nearly 20% ($12,000 dollars on average of a typical $62,500 home).
  • Halfway through 2011, the U.S. REO saturation rate remains at 31.4%, compared to the 33.1% reported at the end of Q1. This number, while historically very high, is clearly trending slightly downward with absorption of REO property.
  • Only five U.S. markets are forecast to produce home price gains in the second half of 2011 including: Washington, D.C., New York, Orlando, Dallas, and San Francisco.

"While most individual markets are also projected to post losses for the year, it is clear prices have begun to level off and are not exhibiting as much volatility as we've seen since the downturn began," added Villacorta.

Home Prices Faced Downward Pressure in First Half of 2011

The first half of 2011 continued the price declines experienced across much of the U.S. in 2010 as prices continued to face pressure from high unemployment and REO saturation rates above 31 percent. Home prices for the first half of this year have also been affected by a reversal of price gains from the 2009 and 2010 homebuyer ta¬¬x credits. The wild spikes in price trends experienced in 2010 have given way to more gradual trends in 2011. Declines of 3.2 percent through the first half of 2011 contributed to the overall 8.0 percent decline since June 2010.

Prices were also pushed downward 4.1percent in the first quarter of 2011 due to the slow winter home buying season creating the "double dip" in April 2011, and breaking through the previous low mark set in Q1 2009. Since then, U.S. price declines have seen modest gains, and while varying according to each local market, it is unlikely national home prices have reached a true and sustainable bottom.

The future outlook continues to point to a fragile housing market. However, the aforementioned quarterly increase of 0.9 percent is an encouraging sign that the markets are capable of positive price growth despite the first quarter lows and the continued economic and foreclosure pressures. Even with the recent gain in quarterly home prices, current price levels effectively match the levels seen in Q1 2009, and hover near the levels last seen in mid 2000.

With the potential for further economic shocks that can further damage consumer confidence, such as the financial crisis in Europe, and the discussion of debt ceilings in Washington, we expect national home prices to remain relatively flat with a slight downward change of -2.4 percent by the end of 2011.

National Home Price Trends: Second Half of 2011 Metro Market Forecast

National and regional forecasts for the remainder of the year provide indicators for general price trends but we also see differing price movements for local metropolitan statistical areas. Our analysis of the four major U.S. regions including the West, Midwest, Northeast, and South indicates all will likely remain in negative territory for the second half of the year, with the West and Midwest regions expected to continue to be the hardest hit.

At the local level, home prices in specific metropolitan areas, while volatile in the first half of 2011, are expected to show more stability as we look to the second half of the year.
Metro Markets (2011 First Half Observed, 2011 Second Half Forecast)

Highest Performing Markets to Continue to Stabilize

  • Ten of the highest performing metropolitan markets are forecasted to improve their performance over the first half of the year, and five markets (Washington, D.C., New York, Orlando, Dallas, and San Francisco) are likely to turn modest gains.
  • At the state level, California markets are showing potential for improvement as our analysis forecasts second half declines of less than 2.0%.

While price movements in the first half of the year were largely negative among metropolitan areas, the moderation of the projected price changes generally reflects a flattening market. Already, prices in five of these markets experienced a 1.0 percent or less price swing in the first six months of 2011, and the second half forecast calls for prices in nine markets to fall within this range.

Also of note, expect the Honolulu and Dallas markets to post some of the strongest improvements over the first half of the year, consistent with the above average health these markets have experienced through most of the housing downturn.

Second Half Home Price Forecast Dim After Winter of Near Record Lows

  • None of the forecasted lowest performing markets are expected to produce gains in 2011.
  • After spending much of 2011 atop the lowest performing major markets list with a price decline of 20%, look for Detroit to see prices fall an additional 4.2% on average by the end of the year.
  • Virginia Beach remains at risk and is forecast to see steeper declines for the remainder of 2011.

Nine of the 15 lowest performing markets are expected to maintain or slow their price declines compared to the first half of the year, but none of these markets are forecasted to produce net gains for 2011. Home prices in Cleveland, Richmond, Portland, and Cincinnati are expected to continue downward within one percentage point difference of the declines experienced the first half of 2011.

Less fortunate are the markets of Virginia Beach, Chicago, Denver and Philadelphia, which are expecting to drop more than one and a half percentage point, compared to first half of the year performance. Virginia Beach holds the position as the lowest projected performer.

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